bernanke fiddles while rome burns...
Posted by
x (aka dmuck)
Nov 20 '08, 02:37
|
"It appears to make clear that the Fed has not yet officially initiated quantitative easing; it is relegated to the status of �other policy tools.� Indeed, no target has been announced. Nothing to the effect of �we are going to make unsterilized purchases of Treasuries until the rate on the 10 year bond declines to x%.� Or �we are making $xx billion of unsterilized bond purchases each week until the policy objective xx is achieved.� Those are explicit quantitative easing policies. What we have now is an expansion of the balance sheet to accommodate liquidity measures. This may pave the way to quantitative easing, but still maintains the Fed Funds rate as the primary target.
But then why do they keep saying they have a policy of quantitative easing? This first crossed my radar when reviewing a recent interview with Dallas Federal Reserve President Richard Fisher. I discounted his reference to quantitative easing as Fisher is something of a colorful character who often talks before he thinks. But subsequent policymakers repeated the term. Earlier this week New York Fed President Gary Stern was quoted by Stephen Beckner:
Asked whether the doubling in size of the balance sheet represents "quantitative easing," Stern said "I don't think that's a bad statement. I think the world is a little more complicated than that, but I don't think that's a bad statement."
Federal Reserve Vice Chairman Donald Kohn was more somewhat more noncommittal today. Or not. Via Mark Thoma:
Meanwhile, Kohn added that the Fed has �already� engaged in forms of quantitative easing, and �we should be looking carefully� at the effect that could have �as a contingency plan should that still-remote possibility, but I think less remote than it was, occur.� ... He said the Fed hasn�t abandoned monetary policy in favor of quantitative easing, noting the Fed�s recent reduction in its target federal funds rate. �I don�t think we�ve given up on one in favor of the other,� Kohn said. He also said there�s no �arithmetic� reason why the Fed can�t �blow up� the size of its balance sheet, which has already swelled in recent weeks to over $2 trillion.
Apparently what Fed officials think is that they 1.) already engaged in quantitative easing, 2.) doing something like quantitative easing, or 3.) might be doing quantitative easing or interest rate targeting, but are not sure which. One can only conclude that Fed officials do not understand their own policies. Policy is adrift. Be afraid; be very afraid.
Mark Thoma also points us to Rebecca Wilder, who points us to former St. Louis Federal Reserve President William Poole. Poole suggests that the Fed has already committed to quantitative easing,
William Poole � accuses the Fed of not being transparent and shifting monetary policy without announcement. Although he does not speculate as to what the new policy is, he does state that by not announcing its new policy, the Fed is breaking the law.
According to Poole: �Something is happening at the Fed that has not been announced.�
Could the Fed really be hiding a policy shift in some bizarre attempt to generate an unanticipated positive shock? If so, yet another forest of trees was killed to disseminate research on the importance of transparency in policymaking, only to have that research ignored by the policymakers who wrote it.
Ironically, I would be somewhat comforted to learn that the Fed does have a coherent, albeit unannounced, policy change. The alternative is what I suspect � Bernanke cannot elucidate a coherent policy strategy to his organization because no such strategy exists. What does exist is a potpourri of policy responses that amounts to providing liquidity at all costs, the outcome of Bernanke�s research on the Great Depression. Beyond this, the Fed is stuck in a netherworld of dual policy targets � not ready to admit the loss of the interest rate target, not ready to adopt a formal policy of quantitative easing."
...
"I think it is high time some real critical attention was placed on Bernanke. How complicit was the Fed Chairman with designing and implementing a clearly failed policy? Yes, one could argue that the ball was in Treasury�s court. But didn�t Bernanke have a duty to make TARP work, after he begged Congress for the plan? And isn�t he the one person who could stand up and say �No, Paulson is screwing this up�? Paulson will not be Treasury Secretary in January, but Bernanke will still be Fed Chairman. Bernanke can and should step into what is so clearly a leadership void. What does he owe this administration at this point?
In short, we need policy leadership. Bernanke is positioned to provide it. But will he? As of now, policy is adrift. FOMC members don�t seem to agree on the role of effectiveness of the Federal Funds target. Some think they are already engaged in a policy of quantitative easing. Some think they may be in something that looks sort of like quantitative easing. Kohn seems to think they are following two policies. Ex-FOMC member Poole is certain that they are hiding a policy change. In the meantime, while Fed officials publically debate the intent of their own policies, investor confidence is collapsing. Bernanke needs to step forward and define policy. We need to pressure him into providing that leadership - or to step aside for someone else to do it."
|