Wednesday, October 27, 2010

Is QE2 A Good Idea?: The Fed's impending blunder – Telegraph Blogs


First Bill Gross of Pimco, then Jeremy Grantham of GMO, and now today Ambrose Evans-Pritchard of the London Telegraph.

All are saying that the Fed - whose heroic actions two years ago saved the world financial system - is wrong to embark on a second round of quantitative easing (a.k.a. QE2).

I have a lot of respect for all three gentlemen, so it is worthwhile paying attention.

The bottom line, it seems to me, is that economic growth in the U.S. remains tepid, and unemployment is too high. The standard Keynesian solution of more fiscal stimulus seems politically impossible, so the government is looking to the Fed as the least painful way to boost the economy.

(After all, if the Fed acts, you never have to show leadership and do what is right for the long term health of the U.S. - but I digress).

Would QE2 be a mistake?

As Mr. Evans-Pritchard's column indicates, in order to be effective, QE2 will have to be massive, in the order of trillions of dollars. If the Fed does a half-step stimulus, it probably will not be effective, and so it will be open to huge criticism by Washington and the rest of the country.

So I'm not sure what the final answer is, but here an excerpt from from today's column:

But we are no longer in a systemic financial crisis, and the Fed’s motives have become subtly corrupted. Having argued during the boom that it was not the business of central banks to stop asset bubbles – and specifically that any fall-out could “safely” be cleaned up later – Bernanke now seems to determined to validate this absurd doctrine, bending all the sinews of the US economic and financial system to this end. One error leads to the next...

Simon Ward from Henderson Global Investors said his measure of velocity is rising at a robust rate of 8.7pc. “QE1 was justified during the crisis because monetary velocity was collapsing at that time. But now that velocity is recovering further QE is not needed. In fact it is potentially very dangerous,” he said.

Exactly

The Fed's impending blunder – Telegraph Blogs