It would appear that the GOP is referring to quantitative easing. And although Chris is our economics expert here, he and I did ask Joe Stiglitz about the wisdom of more QE when we met him in Paris. And Stiglitz and Chris both agreed that more QE was not the answer (I quote a large excerpt from that interview at the end of this post). Chris’ concern has been all along that QE just pushes more money to Wall Street and nowhere else. But if this is true, why would the GOP be opposed to helping the rich? Unless the GOP thinks that QE works, and they don’t want to risk anything that might help the economy before next year’s elections.
The Republican leadership is warning Federal Reserve officials meeting this week not to do anything to stimulate the economy, despite persistent high unemployment and grim forecasts for economic growth. A letter sent by House Speaker John Boehner (R-Ohio), House Majority Whip Eric Cantor (R-Va.), and Senate Majority Whip Jon Kyl (R-Ariz.) states, “Respectfully, we submit that the board should resist further extraordinary intervention in the U.S. economy, particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people.”
Republicans have successfully pursued contractionary fiscal policies that will harm the economy in the short term, successfully leveraging the threat of a government shutdown and economic armageddon over the debt ceiling to push the Obama administration to acquiesce to some pretty unfavorable terms. Since the GOP has control of the House, they can block just about any legislative solutions the president might propose. The only thing they can’t really control is what the Fed does—which is why they’re trying so hard to intimidate them out of doing anything at all.
I’m not shocked by much any more, but I am shocked by this: the leaders of one of the great parties in Congress calling on the Federal Reserve to tighten money in the throes of the most prolonged downturn since the Great Depression.
The markets see deflation and depression, not inflation. Yet ironically this non-existent and much dreaded inflation is exactly the remedy we need to lighten the load of consumer debt.
As is, we’re looking at a continued economic slump, more unemployment, and more deleveraging via continuing catastrophic consumer default on mortgages, car loans, credit cards, and student aid. And now the GOP leadership is urging that the Federal Reserve make the catastrophe worse? To what end?
I know what the detractors will say: to the end of defeating President Obama and replacing him with a Republican president. And if you’ve convinced yourself that Obama is the Second Coming of Malcolm X, Trotsky, and the all-conquering Caliph Omar all in one, then perhaps capsizing the US economy and plunging your fellow-citizens deeper into misery will seem a price worth paying to rid the country of him.
This is the hour for united action against the economic crisis, not partisan maneuvering.
Here’s an extended excerpt from our post about Stiglitz and QE:
Stiglitz: “Monetary policy will not get us out of the mess, and all this discussion about monetary policy is a distraction…. The Fed is very good at creating problems, not so good at resolving them. QE3 won’t help.”
Stiglitz goes on to explain why quantitative easing didn’t work (and I paraphrase what you’ll see in the video below):
1. QE didn’t lead to more lending, partly because we haven’t fixed the banking system.
2. Lower interest rates typically do not have much effect on investment in an environment like the one we’re in right now.
3. Slightly lower interest rates on bonds might have encouraged speculation in the stock market, driven up stock prices, which might induce people to consume more. But since it was pre-announced that the intervention would just be temporary, why would people go out and consume based on a knowingly volatile stock market? Only the foolish would have gone out and consumed based on a temporary boost in stock prices.
4. Competitive devaluation might have had some effect, namely lower interest rates leads to a lower US exchange rate, helping US competitiveness. Fed would never admit that this was the goal, but that was probably the only effect that was significant. But other countries responded in ways that limited the size of the positive impact. And benefits over medium term are probably negative.
5. All of this might pose the risk of higher prices back in the US – and what does the Fed do if growth remains low but inflation rises?