Is the Ben Bernank Stupid Like a Fox?
The Independent Institute's Jeffrey Rogers Hummel says Quantitative Easing 2 may be a ruse.
In an email to Robert Wenzel, the San Jose State economics professor and sometime advocate of defaulting on the national debt looks at Fed Chairman Ben Bernanke's claim that he is not engaging in quantitative easing at all. Hummel concludes that Bernanke in his wooly way may be telling the truth:
If you look at the Fed's balance sheet, over the two weeks since the FOMC meeting, it has acquired about $30 billion of additional Treasuries. But that has been offset by a $13 billion fall in its holdings of mortgage-backed securities plus more modest declines in other assets including foreign currencies and Maiden Lane, so that there has been almost no net effect on the balance sheet or the monetary base.
And now Bernanke denies that the term QE applies. As I argue in my "Bernanke vs. Friedman" paper, Bernanke's first alleged quantitative easing turned out to be no such thing, given that the Fed expanded its balance sheet (and the base) by explicitly borrowing a big chunk of the money and implicitly borrowing the remainder through paying interest on reserves. Bernanke appears to be attempting something similar again–centrally allocating credit and manipulating the structure of interest rates WITHOUT affecting the money stock.
So why hasn't he been more straight-forward about this? One, because he wants to increase inflationary expectations, and all the talk about QE2 will help do that without any actual QE. Two….he is really trying to induce more private lending by banks.
Yes, it could all blow up in his face. But right now, I don't see much danger of inflation.
A goal of increasing "inflationary expectations" could go a long way toward explaining the Fed's curious policy of paying interest on reserves that are already at record high levels. But this seems to be a policy of limited usefulness, as the lack of bank lending and anemic velocity of money indicate.
Elsewhere, University of Oregon economics professor Mark Thoma makes the case that QE2 will probably not cause inflation, and probably won't do much to spur lending or economic activity either.
I don't know why there is so much confidence that price inflation is not already happening. If you survey countries that are pegged to or heavily dependent on the dollar, you'll see that quite a few of them are experiencing substantial inflation. A double secret WalMart survey says prices in the good ol' U.S.A. have been headed up for most of this year. I know I'm paying substantially more for food and gas than I was a year ago. Then again, I live in a place where people pay a million dollars for houses on 1,200-square-foot lots. And anyway food and gas are excluded from most of the fancy measures of dollar devaluation that as far as I can see are all designed to reach a careful conclusion: There's no inflation; you're just paying more for everything.
