An Additional Thought on QE2
Here is a simpler explanation of QE2: The same people who always get us out of recessions, eg private business people, will eventually get us out of this one. However, the government has an incredible stake in trying to convince everyone that they actually drive the economy. Therefore, it is important for the feds to be able to claim credit for any recovery. Since some sort of natural recovery from the recession is likely in 2011 (and per Mark Perry may already be in progress) the government needs some program that it can credit for the recovery. Since Congress will not pass Obama's (or Krugman's) desired son-of-stimulus bill, then the Fed must step up to create a plausible high-profile program.
jj:
Coyote, I love your blog but this is the least-informed post I've ever read here. It's wrong both economically and politically: the Fed will indeed fix the economy, and Obama won't get any credit for it.
Economically:
The Fed caused most of the recession by failing at their job in 2007/8; QE is a weak attempt to fix the problem they created. The Fed's job is to keep the money supply at the correct level, and QE is merely part of that.
Aside: I intentionally use the vague term "correct level" to head off a lot of arguments. In my view the money supply M should vary with 1/V (velocity) such that M*V=some predictable number, to simplify as much as possible. But you can disagree with that and still think the fed screwed up in 2007/8, and they're only making up for it now.
Politically:
November 17, 2010, 8:43 amObama will not be able to take credit for the Fed's actions. He did not design or approve QE. He has no direct influence over the Fed, nor has he claimed any. Of course if the economy improves he'll get the halo effect, but not by pointing to QE as one of his programs.
Ignoramus:
What's wrong with this simple explanation:
Geithner is short over $1 trillion for his 2011 payroll. So he's walking down 19th Street NW to get nearly $1 trillion from Bernanke in exchange for Treasury IOUs.
Officially, Bernanke is saying that QE2 is necessary to bring down long rates to create a better environment for hiring. Instead it looks to me that there aren't enough buyers right now for Treasury IOUs -- foreign governments already have their fill. If Bernanke doesn't buy, then Geithner would instead have to go to the USA domestic markets to sell these IOUs -- which would push real long rates much higher -- which will push us into Double Dip.
What am I missing? If I'm not wrong, won't Geithner have to do this again in 2012, 2013, ... 20nn?
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November 17, 2010, 8:58 amI don't agree with jj, Obama has half the populace thinking this is all Bush's fault. They'll believe that Obama is responsible for any recovery.
jsalvati:
Indeed jj is correct. I like this blog too, but I don't think you know much about monetary economics. There's no shame in that; it's easy to be confused, and it's very poorly taught even to economists. I've been working on a set of introductory posts, and I'll be sure to link them here when I've finished.
The basic idea is that both the money supply and the demand to hold money are important. Right now all evidence points to a tremendous increase in the demand for money since the start of the crisis. This means that either the price level has to drop significantly below its trend path (about 8% I think) or the Fed has to increase the money supply. Increasing the supply of money is a far better option; in fact, it would have been nice if the Fed had done their job in 2008.
One of Obama's biggest errors has been to totally ignore monetary policy. It took him FIFTEEN MONTHS to appoint several Fed board positions.
November 17, 2010, 9:11 amCaptain Obviousness:
There is only one real reason for QE: keeping the biggest banks afloat. The bigguns like BAC, JPM, WFC, Citi, etc. are still sitting on garbage assets that they haven't taken write-downs to market on yet. QE is a sham to funnel money to the banks (since the primary dealers inexplicably get to be middlemen for the Fed's purchases of newly issued treasuries) so they can fill the holes in their balance sheets once they mark garbage assets to market. QE is just the Greenspan Put reincarnate. The most powerful banks get to take profits and pay bonuses when their investments pay off; when their investments blow up they run to the Fed and say the world will end if they don't get free money. I don't understand why banks are not allowed to fail in this country, it's completely ridiculous the stranglehold the financial elite have on economic policy.
November 17, 2010, 11:20 amWill:
Good luck getting us out of the recession when banks would rather park excess reserves at the Fed then lend to you.
More simply: Good luck getting us out of the recession without using money. QE, of course, is just an attempt to increase the money supply.
November 17, 2010, 11:29 amtomw:
Bernanke is playing with nitroglycerin. Not dynamite, not TNT, but he doesn't think there is any chance he could miscalculate and pop our economy into hyper inflation. Yeah, right.
November 17, 2010, 8:34 pmSpeaking as Captain Oblivious, I'd say that money is sitting on the sidelines, that employees are not being hired, totally because of incoherent policy from Washington. They are to blame, and it will not be 'cured' until they get their hands off the scale and out of the cookie jar. Quit messin' would be my advice. Announce that you are going to do NOTHING for the next 24 months...
What a bunch of ignorant %$(!#'s that could not even run a lemonade stand.
Oy.
tom