“I don’t think the (Fed’s) QE policies are so benign for inflation since 40% of my former retirement income has been rerouted to support the life styles of Messrs. Bernanke and Goolsbee’s friends. With my income so deflated, I’m spending a much higher percentage of my income for my essentials (not unlike you’d expect from wild inflation).”, Larry Noertker, Letter to the WSJ Editor, January 20, 2014
We Hear Fed’s ‘Mission Accomplished’ but It’s Not Over
No monetary policy can be reckoned a success until we have accounted for all of its costs.Jan. 20, 2014 4:33 p.m. ET
Austan Goolsbee, former chairman of President Obama’s Council of Economic Advisers, is on dubious ground in declaring Fed Chairman Ben Bernanke’s QE era a success and the QE critics wrong (“Bravo for Bernanke and the QE Era,” op-ed, Jan. 11). There are always tradeoffs and harm from price controls, and quantitative easing has been the most ambitious and far-reaching price-control policy ever attempted. QE’s massive bond purchases and money creation eroded market confidence and sidelined capital for many who attributed a phony recovery and an artificial economy to QE. Mohammed El Erian, the CEO of Pimco, the world’s largest bond fund manager, points out that Fed creation of money in $4 trillion of QE bond purchases added a mere quarter of 1% (0.25%) to GDP growth—a lousy tradeoff considering the heightened risks of inflation from QE money expansion and the risks of Fed insolvency from the attendant precipitous fall in bond prices.
In spite of the rise in asset prices of stocks and real estate from QE policies, it may turn out that far less new wealth was actually created if those prices deflate when QE liquidity is withdrawn.
QE has been accompanied by the worst post-recession recovery on record since the Great Depression in terms of GDP growth and a 40-year low in the labor-force participation rate. By maintaining interest rates at abnormally low levels, QE masks the real cost of the growing entitlement state while it also helped bailout and re-elect President Obama, resulting in a continuation of failed fiscal policies and the postponement of the day of reckoning on national debt and entitlement reform, which are essential for sustainable economic recovery.
Scott S. PowellDiscovery Institute Seattle
What Mr. Goolsbee fails to note is that the Fed has largely engaged in credit allocation, not pure monetary policy. Money growth has been moderate because banks have elected to hold most of the new base money the Fed has created as excess reserves. QE and low rates have benefited big business and big government while harming smaller businesses and depriving savers of billions of dollars in interest income.
The Bernanke Fed has allowed Congress to dodge hard decisions, expanded the size and scope of government, allocated credit to politically favored groups and fueled assets bubbles by encouraging risk-taking. As Ray Dalio of Bridgewater Associates notes, only a small percentage of the gain in U.S. stock prices in 2013 can be attributed to growth in real earnings; most of the increase came from investors searching for yield.
Mr. Bernanke’s “creativity” may have been applauded in Philadelphia at the American Economic Association meeting, but his legacy will be decided as the Fed exits its unconventional policy and the markets price in the costs of bringing rates back to normal.
James A. DornCato Institute Washington
No monetary policy can be reckoned a success until we have accounted for all of its costs. Those costs won’t be fully known until the Fed has completely unwound its unprecedented monetary easing—if it can.
Let me quote from a statement by Benjamin Strong, chief architect of the monetary policies of the 1920s: “A gradual unwinding of the situation [easy money] is quite possible and is the best bet. . . . The problem now is so to shape our policy as to avoid a calamitous break in the stock market. . . . The very existence of the Federal Reserve System is a safeguard against anything like a calamity growing out of money rates. Not only have we the power to deal with such an emergency instantly by flooding the street with money, but I think the country is well aware of this.” The statement is dated Aug. 8, 1928.
I don’t think the QE policies are so benign for inflation since 40% of my former retirement income has been rerouted to support the life styles of Messrs. Bernanke and Goolsbee’s friends. With my income so deflated, I’m spending a much higher percentage of my income for my essentials (not unlike you’d expect from wild inflation).
I’d just like to know what moral high ground these geniuses occupy when they decide that stealing my retirement savings to support the kind of spending by other people that I never practiced myself.
Mr. Goolsbee fails to consider that the antigrowth, job-killing policies emanating from the Obama administration negate any significant upward price pressures from the demand side.
The real test will come if and when economic growth accelerates and the banking system starts aggressively lending its huge stockpile of excess reserves. This could happen after the 2014 elections, assuming a strong majority of the electorate demand changes in the current tax and regulatory policies that have crippled job growth. The Fed would then be faced with a dilemma it has never before encountered: Given the huge level of excess reserves created by QE3, how can bank lending be kept in check without using a prosperity-killing spike in interest rates?
Em. Prof. Robert F. StaufferRoanoke College Salem, Va.
Mr. Goolsbee’s celebratory review of the Bernanke era smacks of the now infamous “Mission Accomplished” Iraq-era pronouncement.
J. PaceSan Diego, Calif. Copyright 2013 Dow Jones & Company, Inc. All Rights Reserved This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com