The New York Times reported last Thursday that Fed chairman Ben Bernanke is an advocate of monetary expansion, pumping billions more into the economy, but thinks that it may not be enough without more government stimulus. Economics writers are debating whether this strategy of "quantitative easing"—increasing the money supply by buying securities, not lowering interest rates or printing—can succeed without further federal spending. As the Fed begins action this week, here are the experts' latest thoughts on the pros and cons:
- The Problems with Quantitative Easing Former White House OMB head Peter Orszag thinks stimulus crucial, but is disappointed that, due to political pressures, "we're left relying on monetary policy ... which may create more problems than it solves." He says the process of quantitative easing, which lowers the "average maturity of government debt," has only "limited" benefits, since "the likely scale of the Fed's purchases" is small, and "a modest reduction in long-term interest rates will not have much effect on economic activity at a time when corporations are flush with cash and worried about the future." The biggest problem with the quantitative easing proposals, though, he says, is that it "could make the right policy mix less likely," since the government spending he thinks necessary would probably have to be linked to a "a medium-term deficit reduction package," which would be unlikely to pass "when interest rates on long-term government bonds are so low. "
- But It Works! In fact, "it's already working," protests The Economist's Ryan Avent. "Markets have already reacted to the expected easing." He's not buying Orszag's argument about quantitative easing doing damage by delaying fiscal stimulus, either: "it strikes me as extremely unrealistic," he responds, "to suggest that the main thing preventing responsible governance in Washington is the impact of Fed action on government interest rates, or that the situation would be at all better if the Fed were not doing what it's doing."
- The Market Does Like It, agrees Jim Welsh at Barry Ritholtz's blog The Big Picture. Quantitative easing expectations and the November elections, he says, are the two things pushing the market higher right now.
- 'Negative Side Effects Both at Home and Abroad' George Soros writes in the New York Review of Books that "quantitative easing is more likely to generate asset bubbles and currency turmoil than employment." He'd rather see the U.S. head for fiscal stimulus, in particular providing it "for investments but not consumption," negotiating an appreciated Chinese currency, and thus shrinking the trade deficit and protecting against deflation. Yes, the public appears opposed to further spending right now, he admits, but "the tolerance for public debt is highly dependent on the participants' perceptions and misconceptions." Translation: time for the politicians to get to work.
- Case Studies from History Both Princeton economist Paul Krugman and Cullen Roche at Pragmatic Capitalism argue that quantitative easing was a failure in Japan in recent years--we should be skeptical about its potential effects in this case. Yet Texas State University economist David Beckworth pushes back, contending that quantitative easing in fact worked quite well in dealing with the Great Depression.
- 'Bernanke's Credibility on Line' The efforts could "succeed ... finally [lowering] the stubbornly high jobless rate." Or, explains The Washington Post's Neil Irwin, they could fail--the Fed could "overshoot," creating bubbles, or undershoot, "leaving a clear impression that the mighty Fed is out of bullets--thus adding even more anxiety to an already dire situation."