The Fed’s latest foray into quantitative easing prompts a Republican backlash

Being no economist, I know however for a fact that the recipe of printing / coining money has been tried in thorough times all the way throughout mankind's journey, from the Antiquity to today. I have not read about one single instance where it did produce good results in the medium / long term.

If this new massive printing works well - something that will only be known in at least a few years from now - it will set a benchmark in History.

Bernanke must keep supporting the bond market or the Federal Reserves Balance Sheet would collapse and with its only 2% equity so will the whole system. How and when does he expect to sell the inferior debt he is buying financed by deposits from the U.S. Treasury? Who is determining the price of the assets he is buying and from whom? Who is marking the Fed's assets to market? Who is independently auditing the Fed's books? Quangocrats?
Who is protecting the U.S. taxpayers from conflicts of interest as government bond dealers are making an awful lot of money dealing with the U.S. Treasury and the Fed?

As one who prefers to keep the Fed independent that doesn't give them the power, especially considering that virtually no Board members have any business experience, to do anything they wish without transparency and accountability. I fear that when the moment comes to liquidate the assets on the Fed's balance sheet we will be in worse condition than September of 2008. We have just transferred toxic debt form private banks to the taxpayers and the inexperienced Bernanke team is just existing on hope not reality.

Being independent doesn't mean being allowed to be secretive, opaque, irresponsible and stupid.

The Fed continues to follow the quantity theory of money. It has made countless wrong decisions. QE1 did not work and QE2 is unlikely to work as they are now pushing on the string.

It is time for unconventional action. In other words a slow increase in interest rates to get people saving, to rebuild capital and drive out the inefficiencies and debt. The economy needs to re-balance and the Fed under Bernanke just prolong the agony.

I hope The Economist will forgive me for being one of the "Wild Eyed", but the ruination of the U.S. economy through irresponsible monetary manipulation is not in the interest of retirees or those who aspire to retire in the next decade or so. It's about time the Fed, the Administration, and all you "Experts" admit that there are serious downsides to these failed attempts at Economic Alchemy.

Applegator

America got into this mess because irresponsible politicians have been crying "no new taxes" for a generation. The result is that America is under-taxed relative to other major western democracies, and under-taxed relative to the level of spending American voters feel themselves entitled to receive. None of that is the fault of the Fed.

America got into the mess its in because it has a consumer psychology of instant gratification: I want everything, now, whether I have worked and saved for it or not. None of that is the fault of the Fed.

America got into the mess it is in because it has a system of taxation that structurally favours borrowing and debt over savings. People who scrimp and save subsidize those who are financially reckless - the worst culprit in that regard being mortgage interest tax deductibility up to $1m. It favours cheap and easy consumer credit to people who are poor credit risks. It fuels an unsustainable trade deficit. This has been great for the profits of lending institutions, but really bad for America. None of that is the fault of the Fed.

America got into this mess because it has allowed the institutions of its democracy to be undermined by unlimited campaign spending, by gerrymandering, by the senate filibuster rules, and by a great many other foolish measures. None of that is the fault of the Fed.

American inflation has been dangerously low. The bursting of the housing bubble has been very strongly deflationary. When interest rates are, effectively, zero, the economy should be tearing along. But when interest rates are zero and unemployment is 10% it means that people's expectations are so deflationary that they want to hold onto their cash for an even rainier day.

Yet, with unemployment at 10% and interest rates at zero the economy is still running a huge trade deficit. That makes no sense at all. It implies that American labour is still heavily overpriced relative to other countries. The normal way that gets fixed is by allowing currencies to float. For example, in the previous generation the Japanese Yen went from over Y300/$1 to Y82/$1. The Swiss France went from CHF 4.5/$1 to CHF 1/$1.

Since China won't allow its currency to rise (or, to be fair, is allowing it to rise very slowly in a too-little-too-late manner) America needs to find a different way to alter its terms of trade.
Pumping dollars into the system is one way of doing it. It would be far better for China to let its currency float. But if China won't do that, then watering down the currency is a better option than deflation.

A reasonable target for inflation is 2%. If America's GDP is roughly $15T, then $600B amounts to 4%. For a country that has been just way to close for comfort to deflation since 2007, that is not unreasonable. If the Chinese don't like that, then they need to follow more sensible policies themselves, too.

With this new wave of Republican candidates, sit back people and watch America become a "Brazil" of sorts.

The problem is not what the Fed would like to do. The problem is that monetary easing can't do it. If Congress were willing to do its job, Bernanke wouldn't have to try anything that might help.

...Fed yield rising post QE shows that market and Fed are not in unison and this is grave as market acts and reacts on perception .....

If Bernanke caved to the Republican demands, I'm willing to bet that yields will go higher, and the US will go into an indefinite period of deflation.

But that's just me, applying textbook theory (no, I'm not an American)

Is USA heading the Japan highway? With debt piling and economy crawling there needs to be a lot more deeper thinking.The asset bubble burst and the debris has not stopped falling for over two years now.With US Dollar treated as global measure for determining and reporting values there ought to be some seriousness in handling the US economy.Billions have been spent on wars for nearly a decade and manufacturing seems to be a one way street, support for the war.
It is very understandable that the main street is now very upset with band-aid fixes by the Fed.Measures like quantitative easing are not supposed to happen in the world's largest economy.What is needed is pump priming the small and medium businesses while making the banks and financial institutions perform their role with purpose and direction.

Good piece. Says it all, for me. The opposition to the Fed is ideological, not founded in economics. The objections to QE are full of logical fallacies. The prime objection is that it will cause inflation. But as this article points out, core inflation is currently running at the lowest rate in more than 50 years. The stated purpose of QE is actually to create some inflation, more precisely to stop the economy from sliding into deflation. If inflation accelerates, this will show that QE is working, and the Fed will then be able to tighten. If it doesn't work, then why the need to fret about inflation? QE may not work, but that's no reason for not trying it.

From where I stand, it seems to me that the Fed is the recipient of much misplaced anger over the financial crisis and its consequences. Republicans are exploiting this anger and their opposition to QE is disingenuous. Bernanke is a Republican and the policies he is undertaking are exactly those indicated by the economics textbooks, by the god of monetarism himself Milton Friedman. If I was of a cynical frame of mind (god forbid), I might be tempted to think that the Republicans don't want the economy to recover and would actually like to see it worsen in the next two years, if that means they have a better chance of gettng rid of Obama.

Public opposition to QE seems to stem from a kind of superstitioucs Calvinistic morality that says people have been naughty (by taking on too much debt and consuming too much) and must therefore be punished. Any policies that appear to obviate this pain are instinctively mistrusted as voodoo medicine that must have disastrous consequences. But economics doesn't work like this. This was the lesson of the Great Depression, which the US - after decades and decades of saying "never again" - appears to have been forgotten in a flash. Deflation and liquidity traps deliver an unlimited spiral of pain and there is no upside, no reward, in heaven or otherwise.

QE or not QE? That is the question.

Whether one calls it quantitative easing or debt monetization or printing money, it all comes down to DDD (deliberate dollar devaluation). Increasing liquidity at this point will only show diminishing returns, but re-inflating assets and making US exports more competitive may pay off in the short run as long as commodity prices and inflation remain under some measure of control.

Obama has not helped the cause either, as he failed miserably in his almost comical attempt to get leaders of 20 major economies to endorse a U.S. push to get China to let its currency rise, keeping alive a dispute that has raised the specter of a global trade war amid criticism that cheap Chinese exports are costing American jobs. Obama also failed to conclude a free trade agreement this week with South Korea.
The G-20 essentially laughed in Obama's face, and rightly so considering that the Fed is going forward with QE2 and printing more dollars as we speak. Yes, Bernanke is supposedly independent of the President, but he still speaks for the country. Did Obama actually think nobody would notice or call him on this? It is becoming clearer by the day that he really has no basic understanding of economics.

To those who believe that "food prices are up only 1.4% from a year earlier", I have a great bridge to sell you. (call me -- I'm in New York).

Oh, and unemployment is only 10% too... depending on how we're measuring it today.
Who knows, we may measure it as 8% tomorrow and call it a victory

That would be a great article, btw -- for The Economist to use ONE common measuring standard and to show unemployment through US history. Recommend if you'd like to see that.

This is the Economist? I thought my mouse had slipped and surfed me over to the Huffington Post. Some people 'theorize' that all this government spending inhibits growth? Its no theory. The last four years have proven beyond a shadow of a doubt that the policies of deficits and huge intrusive government wreck the economy, inhibit growth and eventually cause revenues to crash. An article that claims that there is no inflation 'except for food and energy' is saying that because prices are slashed at the Jaguar showroom because of poor sales that that offsets the rising electric bills and food costs which are more like ten percent than one percent. People are hurting from the stupid, failed policies of the last four years but the elitists cant figure out that it might be their constant urge to direct the economy that might be at fault. BTW, Ron Paul, who chronically gets one or two percent of the votes in the Republican primaries, is no 'hero' of the Tea Party, another glowing inaccuracy in this completely off-base apologia for Obamunism.

According to The Economist, "[t]his second round of quantitative easing (QE), the Fed hopes, will nudge down long-term interest rates, thus stimulating spending and fending off the threat of deflation."

kxbxo wrote "America got into the mess its in because it has a consumer psychology of instant gratification: I want everything, now, whether I have worked and saved for it or not. None of that is the fault of the Fed."

The Fed is at fault for failing to recognize a change in consumer psychology. The reckless spending has stopped, and consumers are paying down debts and/or saving more (with an eye towards a weak jobs market, stock market volatility, and financial security in retirement).

The problem with QE2 is that it punishes savings (kxbxo appears to agree that the government should stop subsidizing the spendthrifts, and leave the savers alone). Overconsumption got us into the current economic mess; however, the Federal Reserve is luring the People into repeating the same personal financial mistakes as those made from 2003 to 2008.

As Prudent Man, CFA points out, the Fed is buying into and propping up an asset bubble. What will happen when the bond bubble bursts? How will the Fed mop up excess liquidity? If the Fed is unable to sell overpriced assets (is the Fed bound to mark-to-market accounting rules?), then who will bail out the Fed? If the Fed discounts its assets, then who gets stuck with the losses?

If long-term interest rates (as well as commodity and equity prices - which The Economist conveniently overlooks) are going up, then the market might have already begun pricing in inflation. Bearing in mind that in 2007 Ben Bernanke was asleep at the monetary policy switch, is the Fed now lagging behind the curve?

Pointing out that Ben Bernanke is a Republican, the lesson of this article is: How dare post-Boomer generation lawmakers ask questions about a Fed policy that might leave the People holding the bag!

I really pity the generations to come. They are the one who will be suffering from all that...*sighs*

"...the only thing the Fed can really affect is inflation."

Wait, what? I understand the Phillips Curve only holds in the short-term, but the whole point of countercyclical policy (whether fiscal or monetary) is to fight cyclical -- or short-term -- unemployment. After all, the Monetarists convinced the Keynesians that fiscal policy didn't work well to counter the business cycle (due to factors such as long and variable lags) and that monetary policy was more appropriate. Economists talk about fiscal policy nowadays only because interest rates are zero, but this isn't a typical recession.

It is one thing to advocate a gold standard, or a rule-based monetary policy, or inflation targets. It is something else entirely to claim that monetary policy does not and cannot affect unemployment.

The name or personal views of whoever heads the Fed really do matter very little – she or he will do as her/his board of directors dictates. The Fed is a privately owned institution, and will only act in the best interest of it’s own shareholders: The major American banks. "The Fed" consists of numerous regional institutions within the US, all owned by local banks, and is represented at national level by a New York-based institution that in turn is owned exclusively by the regional Fed’s. (refer to the institutions' own websites before you dismiss this as conspiracy theory).

"The Fed" represents the American banks, and is there to save them from harm. The greatest threat to banks is caused by deflation, while they can earn nicely even in inflationary periods. And deflation would be the natural consequence of any financial bubble bursting. Consumers, the average Joe citizen, have the opposite interest: Falling prices do only harm speculators, while helping savers and fixed income earners. Whatever the Fed is going to do, the agenda will not be focused on the financial well-being of American citizen. This all thanks to a political structure that was put in place by interested banks in the early 20th century under the guise of maintaining an “independent monetary policy” to avoid any further market crashes and bank runs – judge for yourself how beneficial this scheme has been for the average punter.

“Monetary easing” is going to leave America's middle class financially gutted by inflation and taxed to the hilt, while enriching a small elite, represented by the Fed's shareholders. The Fed's chairman is appointed -not democratically elected- by politicians who have certain party donors a lot to thank for. “The Fed” is independent from political Masters in the sense that it is able to dictate US monetary politics, rather than being controlled by democratically elected politicians. It is not one of several independent players in a political balancing game, it owns the entire game.

Americans seem to be blind to the fact that their presumed saviour has a hidden agenda and is anything but independent in the way a publicly-owned central monetary institution would be. I commiserate with those powerless people who will continue to suffer.

Monetary Policy explained :

http://www.youtube.com/watch?v=PTUY16CkS-k