Nobelist Becker: Eliminate QE2

Because QE1 was such a resounding success, the Fed determined last week—with only one dissenting vote, from Kansas City Fed President Thomas Hoenig—that it's was time for a second round of "quantitative easing" (QE2). Peter Suderman outlined the case against QE2, in which the Fed creates money out of thin air for the purchase of Treasuries, here, and Reason Foundation economics wizard Anthony Randazzo warns of the manifold risks of the scheme here. Now comes a no-confidence vote from Nobel laureate Gary Becker:

One justification frequently given for further Fed open market operations is that it will increase bank lending through raising bank reserves ("high powered" money). The reluctance of banks to lend has clearly been a factor in the slow down in the US recovery. Yet the Fed's creation during the past couple of years of well over trillion dollars in additional reserves through open market operations has not induced rapid increases in bank lending. Instead, banks have accumulated huge amounts of excess reserves; that is, reserves above the amount they are required to keep as collateral for their deposit liabilities.

Randazzo explains why liquidity isn't the problem and why banks are sitting on sizable reserves here. Becker thinks that a potentially large increase in inflation (and the Fed wants a slight increase) isn't worth it.

Fed Chairman Bernanke wrote in an article in the Washington Post on November 4th that "The Federal Reserve cannot solve all the economy's problems on its own." The slowdown in the recovery of the American economy is not the result of Fed policy, and cannot be cured by yet another bout of open market operations. This is why the Fed should curtail, and better yet, eliminate its plans for QE2.

In other news, Reuters econ blogger James Pethokoukis balanced the budget in under a minute!