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A Significant Letter

The Wall Street Journal has an article this morning about an open letter sent to Federal Reserve Chairman Ben Bernanke, a letter signed by leading economists and investors.

The letter says this:

We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued.  We do not believe such a plan is necessary or advisable under current circumstances.  The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.

We subscribe to your statement in the Washington Post on November 4 that “the Federal Reserve cannot solve all the economy’s problems on its own.”  In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.

Given the list of influential individuals signing this letter, it is sure to set the financial world (and therefore the political world) abuzz. That is all to the good. We need a vigorous debate about the Fed’s plan to buy $600 billion in additional U.S. Treasury bonds. It will, after all, have the effect of monetizing the debt and devaluing the dollar, and it risks triggering inflation. And oh, by the way, it won’t create jobs.

It is exactly the wrong policy at exactly the wrong time.

Defenders of the Fed’s policy will undoubtedly argue that this letter (which was largely organized and coordinated by the economic website e21, which I’m delighted to be affiliated with) amounts to a political attack on the independence of the Fed. That assertion is silly. Are we to believe that in a free society, the Fed and its policies are somehow immune to criticism – that when the Chairman speaks, no contrary voices are allowed to be heard?

The letter to Chairman Bernanke doesn’t argue that the Fed doesn’t have the right or the power to pursue its policy; it is simply questioning the wisdom of those policies. And its policies are manifestly unwise. It will deliver another body blow to an economy that is already weak and reeling.

This debate reminds me nothing so much as the economic debates that took place in 1981, at the dawn of the Reagan presidency, when issues that were thought to be somewhat esoteric (like monetary policy) were at the heart of our economic and political conversations. We learned then that the right monetary policy can make a huge contribution to economic growth. And we are leaning now that the wrong monetary policy can do the opposite.


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