The Big Uneasy
December 6, 2010
by James Surowiecki
The German and Chinese governments, Republican congressmen, the liberal economist Joseph Stiglitz, and Sarah Palin don’t agree on much. But they’re united in their opposition to the Federal Reserve’s second round of quantitative easing—or, as it’s known, QE2. According to various of the Fed’s critics, QE2—which involves the Fed’s buying six hundred billion dollars in government bonds over the next eight months—could start a global currency war, weaken the dollar, spark inflation, and create price bubbles in asset classes around the world. Next thing you know, dogs and cats will be living together.
This huge uproar might make you think that QE2 represents some radical shift in the Fed’s mission. It doesn’t. The Fed’s job is to manage the country’s money supply, and it ordinarily does so by manipulating short-term interest rates, lowering rates when it wants to give the economy a push and raising rates when the economy seems to be overheating and needs to be cooled down. At the moment, though, short-term rates are already near zero and can’t be cut further. So instead the Fed is buying longer-term government bonds.
The hope is that this will help keep long-term interest rates low, pump more money into the economy, and make investments other than government bonds (where investors have been parking their money) more appealing. The Fed used this tool during the worst of the financial crisis, and it helped arrest the economy’s precipitous decline. Now the Fed is using it once again because, though the economy has recovered, it’s still weak—unemployment is near ten per cent, and vast amounts of productive capacity are idling. In the circumstances, the Fed’s job is to use monetary policy to try to boost demand. And quantitative easing is how you do that when you can’t cut interest rates any more.
So why the backlash? In part, it’s a political matter. China and Germany don’t like QE2 because they’re worried that it might drive down the value of the dollar, making their products more expensive in the U.S. and American exports cheaper around the world. That would be good for American companies and help create American jobs. But the Germans and the Chinese like the status quo.
The Republican opposition seems propelled by a reflexive hostility to anything that might help Barack Obama (as an improving economy would). If, as the Republican Senate minority leader, Mitch McConnell, put it, the Republicans’ top priority is to insure that Obama is a one-term President, the Fed’s actions aren’t exactly welcome. Certainly it’s hard to imagine that Sarah Palin would be Tweeting against Ben Bernanke if a Republican were sitting in the Oval Office.
Read entire article @ http://www.newyorker.com/talk/financial/2010/12/06/101206ta_talk_surowiecki#ixzz17NhT7U1r
