QE2: Not Everyone Thinks It’s a Loser

 

Federal Reserve Bank Chairman Ben Bernanke has been taking a lot of grief since the latest round of quantitative easing – including a recent open letter in which conservative economists called on him to reconsider and discontinue the policy.

 

Bernanke lost little time in pushing back against critics of QE2, which is intended to pump $600 billion into the economy.  Just before Thanksgiving, Bernanke warned in a speechat the European Central Bank that “insufficiently supportive policies in advanced economies could undermine the recovery not only in those economies, but for the world as a whole.”  Bernanke said the Fed’s QE2 policy should be combined with “a fiscal program that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits.” 

 

That rousing defense hasn’t stopped some members of Congress from taking shots across the Fed’s bow.  Rep. Mike Pence (R-Ind.), who is considering a run for the GOP presidential nomination, has introduced a bill that would end the Fed’s dual mandate of promoting full employment and low inflation by requiring it to focus solely on price stability.  According to Pence, the job of promoting economic growth and job creation rests with Congress and the Obama Administration, through fiscal (not monetary) policy. 

 

Not everybody is so eager to rein in the Fed.  While many conservatives in Congress and academia panned QE2, conservative Harvard economist Greg Mankiw dissents.  He calls QE2 a “modestly good idea” and a “small but risky step in the right direction.”  Mankiw, former chair of the Council of Economic Advisers to President George W. Bush, says he’s more worried right now about Japanese-style deflation and stagnation than excessive inflation, and he thinks QE2 will help expand aggregate demand – albeit not very much.

 

Mankiw does acknowledge the downsides of a riskier Fed portfolio: “By borrowing short and investing long, the Fed is in some ways becoming the hedge fund of last resort.”  But he says he “trust[s] the team at the Fed enough” to manage the risks.