November 15, 2010
Federal Reserve Chairman Ben Bernanke and his Treasury buy-back plan, QE2, are facing a fresh political firestorm — this time from a group of economists. In an “open letter” to Bernanke today, 23 Republican-leaning economists and former government officials outlined their opposition to the Fed’s decision to provide a second round of quantitative easing, nicknamed QE2.
“We believe the Federal Reserve's large-scale asset purchase plan (so-called "quantitative easing") should be reconsidered and discontinued,” the group wrote. “We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment.”
Signatories to the letter include Douglas Holtz-Eakin, former director of the Congressional Budget Office; Michael J. Boskin, former chairman of George H.W. Bush’s Council of Economic Advisors; and David Malpass, former deputy assistant Treasury secretary under President Ronald Reagan.
The group continued: “We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.”
Since the Fed’s announced its plan earlier this month to buy $600 billion worth of Treasury bonds in hopes of spurring the weak economy, it has garnered critics from far and wide, including former Fed Chairman Alan Greenspan and leaders of foreign nations at the recent G-20 summit meeting in Seoul. In a statement this afternoon, the Fed defended its decision, arguing that its policy would support an economic recovery and force down long-term interest rates and adding that it will “regularly review … its program and is prepared to make adjustments as necessary.”
"The Federal Reserve has Congressionally-mandated objectives to help promote both increased employment and price stability,” the statement said. “In light of persistently weak job creation and declining inflation, the Federal Open Market Committee's recent actions reflect those mandates … The Federal Reserve is committed to both parts of its dual mandate and will take all measures to keep inflation low and stable as well as promote growth in employment. In particular, the Fed has made all necessary preparations and is confident that it has the tools to unwind these policies at the appropriate time.”
A Fed spokesperson also noted Bernanke’s recent comments “that the Federal Reserve does not believe it can solve the economy's problems on its own. That will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators, and the private sector." Holtz-Eakin said in an interview with The Fiscal Times that while the Fed may be well intentioned, he worries about the costs it will impose, the pressure it will place on the U.S. dollar and that it will create inflation. “There is very little economic benefit to doing this,” he said.
“We need international economic success, and now is not the time to raise tensions around the globe,” said the former CBO director. Holtz-Eakin suggested the Fed shouldn’t use all its options to boost an economic recovery now. The Fed should use this type of action in the event of further economic decline, such as a double-dip recession, he said. U.S. trade partners have criticized the Fed’s large scale asset purchase program, claiming it will endanger the global economy, further weaken the dollar and lead to high inflation. Part of the program includes printing enough money to buy an average of $75 billion in Treasury bonds each month for eight months.
One economist who came to Bernanke’s rescue Monday: Alan Blinder. The Princeton University professor and former vice chairman of the Federal Reserve wrote in an op-ed in The Wall Street Journal, that while this is not the policy he would have chosen, “the planned QE2 is far better than doing nothing. It is not a shot in the dark, not a radical departure from conventional monetary policy, and certainly not a form of currency manipulation.” Blinder wants “the Fed to purchase private securities and to reduce the interest rate it pays on reserves, even turning it negative.”