Even the Fed isn’t sure that the Fed’s new $600 billion policy makes sense.
The Federal Reserve’s dramatic new intervention into the U.S. economy—a $600 billion purchase of Treasury bonds that was immediately branded with the nautical nickname of QE2—had barely gotten underway in November 2010 before the Fed itself began sending signals that it had a public-relations disaster on its hands. In a speech to European central bankers in Frankfurt only two weeks after the policy was announced, Fed chairman Ben Bernanke said he didn’t like using the term “quantitative easing”—much less “QE2” —because it didn’t precisely describe what the central bank was trying to do by running the printing presses overtime.
Technically, Bernanke had a point. “Quantitative easing” usually describes rare efforts by a central bank to pump money into the private banking system in hopes that the banks will then lend out the new funds to business. But that isn’t the main goal of QE2, nor of the Fed’s previous $2 trillion bond-buying effort (the original “QE”) that began in November 2008.
What Team Bernanke is trying to accomplish with its “large-scale asset purchases”—the chairman’s preferred but extraordinarily boring term—is far more complicated and economically elegant. It’s a quintuple-cushion bank shot that seeks to promote job and wage growth. By purchasing Treasuries from banks, the new plan intends to (1) lower long-term interest rates, which would in turn (2) raise the attractiveness and price of other assets such as stocks, which would then (3) boost household wealth, followed by (4) increased consumer spending, which would (5) finally lift employment by nearly a million jobs over the next two years.
All wonky reasons aside, Bernanke surely sought to put distance between his policy and the nickname QE2, because the moniker was the instant wellspring for snarky comments about sinking ships and hidden icebergs among all those skeptical that it could have a positive impact on a $13 trillion economy slowly crawling its way out of the wreckage of the 2007-09 financial implosion. Alas for Bernanke, rumors that this policy was going to be implemented began swirling around the markets in early September 2010, and he had a chance to gauge its effectiveness to some degree by the market and macroeconomic response to it even in its infancy. The portents were not good. Long-term interest rates remained flat. And while stocks were up 10 percent or so, most of that gain seemed to be due to the anticipation of the Republican triumph in the midterm elections. Following the vote on November 2, and the implementation of the new policy a few days later, stocks barely moved.
More important, the Fed has implicitly conceded that LSAP, or QE2, or whatever, isn’t going to make much of a difference for Americans suffering most profoundly from the economy’s woes. Its most recent economic forecast features sobering news on American employment. It foresees the nation’s unemployment rate remaining above 9 percent for the next year before declining to 8 percent at the end of 2012 and to 7.4 percent at the end of 2013—some four and a half years after the official end of the Great Recession. As recently as February 2008, the jobless rate was below 5 percent.
Should the Fed forecast conform to reality, QE2 will almost surely look to voters and their representatives like yet another example of government intervention into the economy that proved a spectacular failure. It will mirror the reaction to Barack Obama’s trillion-dollar stimulus, which two-thirds of Americans think was a bust despite the persistent White House argument that the downturn would have been far worse without it. A nation that has just experienced a generation-long economic boom will give scant applause to policies it judges unsuccessful in generating a full-scale return to prosperity. And the central bank will see its already battered reputation bloodied even further.
The Fed really can’t afford any further erosion in its standing. Not only has the central bank taken a host of unprecedented steps during the past two years, many economists—even some Fed members—blame it for the financial crisis altogether. As Kansas City Fed president Tom Hoenig recently told the Wall Street Journal: “When all these very important decisions were made in 2003 to bring interest rates to 1 percent, it was because unemployment was 6.5 percent and thought to be too high. As a consequence of that—not immediately but in time—we now have 9.6 percent unemployment.”
Even worse is the growing perception that the Fed has begun to work too closely with elected officials and executive-branch leaders. Independent central banks, of which the Fed is history’s foremost example, do a better job at keeping prices stable than central banks that appear to be taking cues from political bosses, rather like film directors getting notes from studio executives. Bernanke & Co. appear to be as vulnerable to political meddling as any Fed since the Nixon administration, which leaned on Chairman Arthur Burns to loosen monetary policy before the 1972 presidential election.
Typically, politicians want central banks to run the printing presses to boost economic growth. They fear unemployment more than inflation. In Washington, opinion is split along lines reflected in the Fed’s dual mandate, which is to keep prices steady and employment high. Democrats want the bank to do even more to create jobs, while Republicans would prefer it focus only on inflation. Members of the new GOP-controlled House, especially those with a libertarian bent or Tea Party support, may show Bernanke little deference when he comes to testify before them next year. The House Financial Services subcommittee that oversees the Fed will be run by Representative Ron Paul, who recently wrote on his website that “central banking is inherently incompatible with our Constitution and a free market economy.”
And it isn’t just Republicans who want to fuss with the Fed. Representative Barney Frank, the outgoing chairman of the House Financial Services committee, wants to exclude regional Fed bank presidents like Hoenig (there are 12 of them) from voting on monetary policy because they tend to be more inflation-averse than the presidential appointees who serve on the Fed board in Washington.
So the political heat shield around the Fed, built over a generation on the foundation of then-Chairman Paul Volcker’s steel-nerved determination to end the inflationary spiral in the early 1980s, is thinning quickly. Bernanke realizes this, which is why he’s been far more media-friendly than his predecessor, Alan Greenspan, and may even begin doing press conferences to explain Fed actions. The key Fed action in the near future will come when it chooses to begin shrinking the massive holdings on its balance sheet. Even before QE2, the Fed had $2.3 trillion of assets on that sheet, two and a half times what it owned before the financial crisis. Most of those assets are Treasury bonds, debt issued by Fannie Mae and Freddie Mac, or mortgage-backed securities issued by the two real-estate behemoths. The Fed simply cannot hold on to these assets, because at some point economic confidence will be high enough and business-loan demand robust enough that all those reserves the Fed created by buying bonds from banks will flood back into the economy, thus risking an inflation surge in which too much money is chasing too few goods.
Yet the Fed’s decision to shrink the balance sheet—which will grow even larger due to the purchase of bonds as part of QE2—will almost certainly come at a time when the economy still looks less than robust and inflation appears quiescent. Interest rates will rise as a result. There will be tremendous political pressure on the Fed from Washington and the American public to delay implementing this exit strategy. Even assuming that the Fed is nimble and skilled enough to time its move before inflation and even expectations of inflation rise—thus making sure it doesn’t contribute to the growth of inflation—its own political gamesmanship could lead it to stay its hand. And the longer the Fed waits, the more dramatic the eventual tightening phase will have to be to counter the flood of cash, putting a further drag on economic growth. The Fed also risks dramatically worsening the U.S. debt situation if higher inflation raises federal borrowing costs.
In an “Open Letter to Ben Bernanke” that appeared in the November 15 Wall Street Journal, a group of 23 economists and investors urged an end to the bond-buying program, charging that it risks “currency debasement and inflation, and we do not think [it] will achieve the Fed’s objective of promoting employment.” That had to sting. It’s one thing for a populist politician like Sarah Palin to offer this sort of critique in a Facebook posting. It’s quite another when one of the letter signers is Stanford University’s John Taylor1, who is on the very short list to serve as Bernanke’s successor if a Republican takes the White House in 2012.
The views expressed in the open letter actually reflect a considerable body of opinion inside the Fed itself. We learned this in the minutes from the November 2-3 meeting of the Federal Open Market Committee (the group of board members and regional Fed presidents that actually sets monetary policy). As the minutes note:
Some participants, however, anticipated that additional purchases of longer-term securities would have only a limited effect on the pace of the recovery…. Some participants noted concerns that additional expansion of the Federal Reserve’s balance sheet could put unwanted downward pressure on the dollar’s value in foreign exchange markets. Several participants saw a risk that a further increase in the size of the Federal Reserve’s asset portfolio, with an accompanying increase in the supply of excess reserves and in the monetary base, could cause an undesirably large increase in inflation.
Yes, key members of the Fed actually agree with Sarah Palin—not to mention the signers of the open letter, and a slew of foreign financial ministers.
Bernanke’s basic response, both in a recent Washington Post op-ed and in that speech to European central bankers, can be summed up this way: “Look, there is certainly no risk of inflation in the short term. If anything, the economy is tilted more toward deflation. Great Depression? Japan in the 90s? Ever hear of them? When the economy does pick up, the Fed will begin draining excess cash, no matter what crazy Ron Paul says about us wanting to control the world. And don’t forget that, unlike every other central banker on the planet, the American-elected politicians who have established the Fed’s mandate have ordered me to worry about prices and jobs both. If you hadn’t noticed, the U.S. labor market is a shambles. My bond buys will create 700,000 jobs over two years with little downside risk at a time when ideas for more fiscal stimulus are DOA in Congress. Anybody with a better plan, you know where to find me. One more thing: Germany and China, quit kvetching about the dollar. We’re not going to eat your exports. So anytime you want to boost domestic demand for your products, that would be super.”
So, in Bernanke’s view, QE2 will have a fair bit of upside (avoid deflation, create jobs) with little downside (some slight chance the Fed will be a tad tardy in withdrawing its stimulus).
The chairman’s calculations might be skewed by his own obsession with the possibility of deflation. Bernanke is the foremost academic expert of his generation on the causes of the Great Depression, which in his view might better have been dubbed the Great Deflation. A tremendous credit contraction and wave of bank failures led to a vicious downward spiral where prices fell by an average of 10 percent a year from 1930 through 1933. That is what he fears most and wishes to prevent. He is also well aware that less severe deflations, like that in Japan during the 1990s, can still trap an economy for years.
The problem for this analysis and the anti-deflationary prescription Bernanke is writing is that there are few signs of deflation at the moment. Although not a Reaganesque boom by any means, the economy is growing and jobs are being added. The Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation—using a model with a number of variables, including the rate on inflation-protected securities—is 1.5 percent. That’s not far off the unofficial Fed inflation target of 2 percent. (An inflation target is the rate a central bank considers optimal; the Fed doesn’t have one explicitly, but others do.) There is also little sign of deflation in real-time price data, where the only category still showing declines is housing.
For Bernanke, reducing unemployment constitutes the far less important second front in his economic war on deflation. If he is wrong about what he most fears, he might be the banking equivalent of those generals and military strategists who came of age during the Cold War and kept waiting for Russians to come charging through the Fulda Gap—and thereby missed the rise of militant Islam.
For most Americans, increasing employment should be the primary responsibility of all government officials. Of some 8.4 million U.S. jobs lost between the peak of the expansion and the end of 2009, only about 900,000 have been restored as of this writing. In fact, the Fed’s efforts to push interest rates even lower may result in many jobs being created overseas rather than in the United States, in an unanticipated consequence that economists call “leakage.” For example, the Phoenix-based Southern Copper raised $1.5 billion in an April debt offering. But the company is going to use that capital for its mines in Mexico and Peru, not in the U.S. In October, Walmart sold $5 billion in debt in its biggest bond offering in more than a decade. And although the company didn’t specify how it would employ the money, analysts speculated it would be used to fuel expansion in overseas markets.
Such corporate behavior hasn’t escaped the notice of Richard Fisher, president of the Dallas Fed. He recently said that in his “darkest moments, I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places…. Far too many of the large corporations I survey that are committing to fixed investment report that the most effective way to deploy cheap money raised in the current bond markets…is to invest it abroad where taxes are lower and governments are more eager to please.”
Even if the temptation to use cheaply borrowed domestic money in foreign climes could be avoided or prevented, there’s reason to doubt whether QE2 can actually create 700,000 jobs in the U.S. during the next two years. After the 2000-01 recession, unemployment decreased right along with an increase in the pace of job openings. But this downturn has been different. Starting in June 2008, unemployment rose much faster than would have been predicted by the decline in job openings. Research from the Minneapolis Fed points out that job openings rose by 20 percent from July 2009 through June 2010. But the unemployment rate was actually a tick higher a year later.
The explanation, says Minneapolis Fed president Narayana Kocherlakota, is that all those unemployed construction workers and mortgage lenders don’t have the skills employers need. He concludes that if the job market were operating as efficiently as usual, unemployment might be as many as three percentage points lower than its current level. Even if Kocherlakota is far off, continually enlarging the Fed balance sheet is hardly a sustainable way to boost employment in what the Fed itself admits will be a long, hard slog back to acceptable levels.
So, despite Bernanke’s conviction, the new policy represents a huge risk by further undermining Fed credibility and independence and thus limiting its ability to contain inflation. And that risk is being taken for little potential benefit—waving away a few wisps of deflation and perhaps temporarily knocking off a few tenths from the unemployment rate. No matter what it is called, QE2 or LDAP, it may be remembered as Bernanke’s Folly.
1 See Taylor’s piece, co-authored with John F. Cogan, in this issue on page 23—Ed.
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The Problem with Printing Money
Must-Reads from Magazine
A Trump of their own.
There were many arguments for opposing Donald Trump’s bid for the presidency, but the retort usually boiled down to a single glib sentence: “But he fights.”
Donald Trump could accuse John McCain of bringing dishonor upon the country and George W. Bush of being complicit in the September 11th attacks. He could make racist or misogynistic comments and even call Republican primary voters “stupid”; none of it mattered. “We right-thinking people have tried dignity,” read one typical example of this period’s pro-Trump apologia. “And the results were always the same.”
If you can get over the moral bankruptcy and selective memory inherent in this posture, it has its own compelling logic. Driving an eighteen-wheel truck through the standards of decorum that govern political discourse is certainly liberating. If there is no threshold at which the means discredit the ends, then everything is permitted. That kind of freedom has bipartisan appeal.
Democrats who once lamented the death of decency at Trump’s hands were apparently only troubled by their party’s disparity in this new rhetorical arms race. The opposition party seems perfectly happy to see standards torn down so long as their side is doing the demolition.
This week, with passions surrounding Brett Kavanaugh’s nomination to the Supreme Court reaching a crescendo, Hawaii Senator Mazie Hirono demonstrated that Democrats, too, are easily seduced by emotionally gratifying partisan outbursts. “They’ve extended a finger,” Hirono said of how Judiciary Committee Republicans have behaved toward Dr. Christine Blasey Ford since she was revealed as the woman accusing Kavanaugh of sexual misconduct as a minor. “That’s how I look at it.”
That’s an odd way to characterize the committee chairman’s offers to allow Dr. Blasey Ford the opportunity to have her story told before Congress in whatever setting she felt most comfortable. Those offers ranged from a public hearing to a private hearing to a staff interview, either publicly or behind closed doors, to even arranging for staffers to interview her at her home in California. Hirono was not similarly enraged by the fact that it was her fellow Democrats who violated Blasey Ford’s confidentiality and leaked her name to the press, forcing her to go public. But the appeal of pugnacity for its own sake isn’t rooted in consistency.
Hirono went on to demonstrate her churlish bona fides in the manner that most satisfies voters who find that kind of unthinking animus compelling: rank bigotry.
“Guess who’s perpetuating all these kinds of actions? It’s the men in this country,” Hirono continued. “Just shut up and step up. Do the right thing.” The antagonistic generalization of an entire demographic group designed to exacerbate a sense of grievance among members of another demographic group is condemnable when it’s Trump doing the generalizing and exacerbating. In Hirono’s case, it occasioned a glamorous profile piece in the Washington Post.
Hirono was feted for achieving “hero” status on the left and for channeling “the anger of the party’s base.” Her style was described as “blunt” amid an exploration of her political maturation and background as the U.S. Senate’s only immigrant. “I’ve been fighting these fights for a—I was going to say f-ing long time,” Hirono told the Post. The senator added that, despite a lack of evidence or testimony from the accuser, she believes Blasey Ford’s account of the assault over Kavanaugh’s denials and previewed her intention to “make more attention-grabbing comments” soon. Presumably, those remarks will be more “attention-grabbing” than even rank misandry.
This is a perfect encapsulation of the appeal of the fighter. It isn’t what the fight achieves but the reaction it inspires that has the most allure. But those who confuse being provocative with being effective risk falling into a trap. Trump’s defenders did not mourn the standards of decency through which Trump punched a massive hole, but the alt-right and their noxious fellow travelers also came out of that breach. The left, too, has its share of violent, aggressively mendacious, and anti-intellectual elements. They’ve already taken advantage of reduced barriers to entry into legitimate national politics. Lowering them further only benefits charlatans, hucksters, and the maladjusted.
What’s more, the “fire in the belly,” as Hillary Clinton’s former press secretary Brian Fallon euphemistically describes Hirono’s chauvinistic agitation, is frequently counterproductive. Her comments channel the liberal id, but they don’t make Republicans more willing to compromise. What Donald Trump’s supporters call “telling it like it is” is often just being a jerk. No other Republican but Trump would have callously called into question Blasey Ford’s accounting of events, for example. Indeed, even the most reckless of Republicans have avoided questioning Blasey Ford’s recollection, but not Trump. He just says what’s in his gut, but his gut has made the Republican mission of confirming Kavanaugh to the Court before the start of its new term on October 1 that much more difficult. The number of times that Trump’s loose talk prevented Republicans from advancing the ball should give pause to those who believe power is the only factor that matters.
It’s unlikely that these appeals will reach those for whom provocation for provocation’s sake is a virtue. “But he fights” is not an argument. It’s a sentiment. Hirono’s bluster might not advance Democratic prospects, but it makes Brian Fallon feel like Democrats share his anxieties. And, for some, that’s all that matters. That tells you a lot about where the Democratic Party is today, and where the country will be in 2020.
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A lesson from Finland.
High-ranking politicians are entitled to freedom of speech and conscience. That shouldn’t be a controversial statement, but it often is, especially in European countries where the range of acceptable views is narrow–and narrowing. Just ask Finnish Foreign Minister Timo Soini, who spent the summer fighting off an investigation into his participation at an anti-abortion vigil in Canada. On Friday, Soini survived a no-confidence vote in Parliament over the issue.
“In general, I’m worried that Christianity is being squeezed,” he told me in a phone interview Friday, hours after his colleagues voted 100 to 60 to allow him to keep his post. “There is a tendency to squeeze Christianity out of the public square.”
Soini had long been associated with the anti-immigration, Euroskeptic Finns Party, though last year he defected and formed a new conservative group, known as Blue Reform. Before coming to power, Soini could sometimes be heard railing against “market liberals” and “NATO hawks.” But when I interviewed him in Helsinki in 2015, soon after he was appointed foreign minister, he told me his country wouldn’t hesitate to join NATO if Russian aggression continued to escalate. He’s also a vociferous supporter of Israel.
Through all the shifts of ideology and fortune, one point has remained fixed in his worldview: Soini is a devout Catholic, having converted from Lutheranism as a young man in the 1980s, and he firmly believes in the dignity of human life from conception to natural death. “I have been in politics for many years,” he said. “Everyone knows my pro-life stance.” The trouble is that “many people want me to have my views only in private.”
Hence his ordeal of the past few months. It all began in May when Soini was in Ottawa for a meeting of the Arctic Council, of which Finland is a member. At the church he attended for Mass, he spotted a flyer for an anti-abortion vigil, to be held the following evening. He attended the vigil as a private citizen: “I wasn’t performing as a minister but in my personal capacity. This happened in my spare time.”
A colleague posted a photo of the event on his private Twitter page, however, which is how local media in Finland got wind of his presence at the rally. The complaints soon poured into the office of the chancellor of justice, who supervises the legal conduct of government ministers. A four-month investigation followed. Soini didn’t break any laws, the chancellor concluded, but he should have been more circumspect when abroad, even in his spare time.
Soini wasn’t entirely oblivious to the fact that he was treading on sensitive ground. A top diplomat can never quite operate like a private citizen, much as a private citizen can’t act like a diplomat (someone tell John Kerry). Still, does anyone imagine that Soini would land in such hot water if he had attended a vigil for action on climate change? Or one in favor of abortion rights?
“No, no, no. I wouldn’t say so … The Finnish official line is that I should be careful because abortion is legal in Finland and Canada.” So the outrage is issue-specific and, to be precise, worldview-specific. In Nordic countries, especially, the political culture is consensus-based to a fault, and the consensus is that the outcome of the 1960s sexual revolution will never be up for debate. Next door in Sweden, midwives are blacklisted from the profession for espousing anti-abortion views. Ditto for Norwegian doctors who refuse to dispense IUDs and abortifacients on conscience grounds.
The consensus expects ministers to bring their views into line or keep their mouths shut. “This is of course clearly politics,” Soini told me. “I think I have freedom of conscience. I haven’t done anything wrong. This is me practicing my religion.” And the free exercise of religion means having the right to espouse the moral teachings of one’s faith—or it means nothing.
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Banality and evil.
A week ago, I wondered what was going on in Sunspot, New Mexico. The FBI had swept into this mountain-top solar observatory, complete with Black Hawk helicopters, evacuated everyone, and closed the place down with no explanation whatever. Local police were politely told to butt out. It was like the first scene in a 1950’s Hollywood sci-fi movie, probably starring Walter Pidgeon.
Well, now we know, at least according to the New York Post.
If you’re hoping for little green men saying, “Take me to your leader,” you’re in for a disappointment. It seems the observatory head had discovered a laptop with child pornography on it that belonged to the janitor. The janitor then made veiled threats and in came the Black Hawks.
In sum, an all-too-earthly explanation with a little law-enforcement overkill thrown in.
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The demands of the politicized life.
John Cheney-Lippold, an associate professor of American Culture at the University of Michigan, has been the subject of withering criticism of late, but I’m grateful to him. Yes, he shouldn’t have refused to write a recommendation for a student merely because the semester abroad program she was applying to was in Israel. But at least he exposed what the boycott movement is about, aspects of which I suspect some of its blither endorsers are unaware.
We are routinely told, as we were by the American Studies Association, that boycott actions against Israel are “limited to institutions and their official representatives.” But Cheney-Lippold reminds us that the boycott, even if read in this narrow way, obligates professors to refuse to assist their own students when those students seek to participate in study abroad programs in Israel. Dan Avnon, an Israeli academic, learned years ago that the same goes for Israel faculty members seeking to participate in exchange programs sponsored by Israeli universities. They, too, must be turned away regardless of their position on the Israeli-Palestinian conflict.
When the American Studies Association boycott of Israel was announced, over two hundred college presidents or provosts properly and publicly rejected it. But even they might not have imagined that the boycott was more than a symbolic gesture. Thanks to Professor Cheney-Lippold, they now know that it involves actions that disserve their students. Yes, Cheney-Lippold now says he was mistaken when he wrote that “many university departments have pledged an academic boycott against Israel.” But he is hardly a lone wolf in hyper-politicized disciplines like American Studies, Asian-American Studies, and Women’s Studies, whose professional associations have taken stands in favor of boycotting Israel. Administrators looking at bids to expand such programs should take note of their admirably open opposition to the exchange of ideas.
Cheney-Lippold, like other boycott defenders, points to the supposed 2005 “call of Palestinian civil society” to justify his singling out of Israel. “I support,” he says in comments to the student newspaper, “communities who organize themselves and ask for international support to achieve equal rights, freedom and to prevent violations of international law.” Set aside the absurdity of this reasoning (“Why am I not boycotting China on behalf of Tibet? Because China has been much more effective in stifling civil society!”). Focus instead on what Cheney- Lippold could have found out by Googling. The first endorser of the call of “civil society” is the Council of National and Islamic Forces (NIF) in Palestine, which includes Hamas, the Popular Front for the Liberation of Palestine, and other groups that trade not only in violent resistance but in violence that directly targets noncombatants.
That’s remained par for the course for the boycott movement. In October 2015, in the midst of the series of stabbings deemed “the knife intifada,” the U.S. Campaign for the Academic and Cultural Boycott of Israel shared a call for an International Day with the “new generation of Palestinians” then “rising up against Israel’s brutal, decades-old system of occupation.” To be sure, they did not directly endorse attacks on civilians, but they did issue their statement of solidarity with “Palestinian popular resistance” one day after four attacks that left three Israelis–all civilians–dead.
The boycott movement, in other words, can sign on to a solidarity movement that includes the targeting of civilians for death, but cannot sign letters of recommendation for their own undergraduates if those undergraduates seek to learn in Israel. That tells us all we need to know about the boycott movement. It was nice of Cheney-Lippold to tell us.