The Wall St. Journal today features a letter to the Fed signed by a number of prominent conservative economists and policy specialists attacking Ben Bernanke and the Fed for introducing a second round of quantitative easing. The critics claim that it is inflationary and counter-productive. They are wrong.
The current balance sheet of the Fed stands at almost 2.1 trillion dollars. These assets consist of Treasury bills,secured government debt instruments, federal and government sponsored enterprise mortgage backed securities, investments in foreign securities and other assets. The broadly defined money stock M2 stands at 8766 billion dollars. So the acquisition of 600 billion dollars of more government debt by the Fed financed solely from the broadening of M2 would amount to a 6.8 % increase over the coming months.Given that industrial capacity utilization currently stands at 74.7 % there is no threat of inflation.
Quantitative easing is designed to allow the Fed to create an accommodating monetary policy thereby keeping interest rates low and preventing interest rate crowding out while fiscal stimulus does its work. There is a need for substantial further fiscal stimulus but q.e. is also necessary and Bernanke is doing the right thing.
Stiglitz to Obama: You’re Mistaken on Quantitative Easing
ReplyDeletehttp://blogs.wsj.com/economics/2010/11/11/stiglitz-to-obama-youre-mistaken-on-quantitative-easing/
i have read Stiglitz's comments on Q.E. in the Wall street journal. i commented there on them in the readers' comments section as follows
ReplyDeleteHarold Chorney wrote:
Economic stimulus requires a boost to aggregate demand through greater investment than what would prevail in its absence.This investment in turn will only take place when entrepreneurs and corporations expect the present value of the stream of expected future earnings from their investment will exceed the cost of capital as measured by the rate of interest.
Hence,it is necessary when stimulating through fiscal policy to ensure that interest rates do not rise to choke off investment. That is what is meant by crowding out, a view associated with Treasury economists who resisted Keynes’s advocacy of government deficit financed stimulus to reverse the great depression. In the current circumstances Q.E. is an appropriate method to ensure that interest rates do not rise while the stimulus program is still working its way through the system.
Stiglitz is right to call for greater infrastructure spending as a stimulus to investment and for its own sake because of the social and economic benefits it will bring , but mistaken to argue against Q.E. and the benefits it brings through keeping interest rates lower than they would be be in its absence.