As I noted last week, the Fed’s decision to print up $600B in order to purchase bonds is not without its risks — or its critics. One of those, Kevin Warsh, a Fed governor, takes to the pages of the Wall Street Journal to warn that we’ve been pursuing the wrong policies:
Policy makers should be skeptical of the long-term benefits of temporary fixes to do the hard work of resurrecting the world’s great economic power. Since early 2008, the fiscal authorities have sought to fill the hole left by the falloff in demand through large, temporary stimulus—checks in the mail to spur consumption, temporary housing rebates to raise demand, one-time cash-for-clunkers to move inventory, and temporary business tax credits to spur investment.
What we need, he cautions are pro-growth policies that include free trade and tax reform. “The U.S. and world economies urgently need stronger growth, and the adoption of pro-growth economic policies would strengthen incentives to invest in capital and labor over the horizon, paving the way for robust job-creation and higher living standards.” Then he aims at “Helicopter Ben” and his plan to dump more greenbacks into the world economy:
The Fed’s increased presence in the market for long-term Treasury securities poses nontrivial risks that bear watching. The prices assigned to Treasury securities—the risk-free rate—are the foundation from which the price of virtually every asset in the world is calculated. As the Fed’s balance sheet expands, it becomes more of a price maker than a price taker in the Treasury market. If market participants come to doubt these prices—or their reliance on these prices proves fleeting—risk premiums across asset classes and geographies could move unexpectedly.
Overseas—as a consequence of more-expansive U.S. monetary policy and other distortions in the international monetary system—we see an increasing tendency by policy makers to intervene in currency markets, administer unilateral measures, institute ad hoc capital controls, and resort to protectionist policies. Extraordinary measures tend to beget extraordinary countermeasures. Heightened tensions in currency and capital markets could result in a more protracted and difficult global recovery.
In plain English: we are going down the wrong road.
He’s in good company. The Germans, who have learned a thing or two about the risks of devaluing currency and resisted the Obama administration’s entreaties to spend with abandon, also are complaining about the Fed:
German officials, concerned that Washington could be pushing the global economy into a downward spiral, have launched an unusually open critique of U.S. economic policy and vowed to make their frustration known at this week’s Group of 20 summit.
Leading the attack is Finance Minister Wolfgang Schäuble, who said the U.S. Federal Reserve’s decision last week to pump an additional $600 billion into government securities won’t help the U.S. economy or its global partners.
The Fed’s decisions are “undermining the credibility of U.S. financial policy,” Mr. Schäuble said in an interview with Der Spiegel magazine published over the weekend, referring to the Fed’s move, known as “quantitative easing” and designed to spur demand and keep interest rates low. “It doesn’t add up when the Americans accuse the Chinese of currency manipulation and then, with the help of their central bank’s printing presses, artificially lower the value of the dollar.”
At an economics conference in Berlin Friday, Mr. Schäuble said the Fed’s action shows U.S. policy makers are “at a loss about what to do.”
The president is weakened at home and under assault overseas for the feckless economic policies that threaten to bring stagflation not only to the U.S. but also to our trading partners. It is ironic that the American political messiah who caused so many to swoon in Europe is now the object of their concern, and indeed disdain. Well, many Americans can relate.