Finally! For too long, Ben Bernanke and the Fed have been talking and acting as if our greatest risk were inflation, as if the dollar were a delicate flower and America were in danger of becoming Zimbabwe. With new monetary stimulus and bold rhetoric to accompany it, the Fed has made it clear that our greatest risk is stagnation, that the dollar is fine and America’s real danger is becoming Europe.
Ever since Bernanke’s whatever-it-takes lending spree after the financial collapse of 2008, the Fed has virtually ignored the second half of its dual mandate to stabilize prices and maximize employment. It has focused on the hypothetical risk of future inflation — even though the inflation rate was below its unofficial target of 2% — while doing little about a joblessness rate that has festered above 8%. The Fed’s QE3 purchases of mortgage-backed securities that Bernanke announced yesterday, along with a promise to keep buying as long as the economy needs support, are its most aggressive move since the chaos of the meltdown subsided.
In the past, Bernanke has suggested that fiscal stimulus from Congress would be a more effective response to the slack economy than monetary stimulus from the Fed, and he had a point. Congress can pour money directly into the wallets of consumers and the coffers of businesses through tax rebates, safety-net programs and public works; the Fed pumps money into banks that won’t lend unless there’s already demand in the economy. And with interest rates at historic lows, the U.S. government can essentially borrow the money to inject fiscal stimulus for free.
But Congress hasn’t acted. Specifically, congressional Republicans have refused to act. President Obama pushed a jobs bill that would have provided more stimulus through tax cuts, infrastructure projects and other spending, but it was dead on arrival in the GOP-controlled House. In fact, Republicans have called for immediate austerity, the strategy that has produced double-dip recessions in Spain and England. Obama has refused to go along with that, so the result has been stalemate: no stimulus, no antistimulus, just the same unacceptably weak recovery.
On Thursday, Bernanke made it clear that the Fed was acting because Congress would not and that the Fed would continue to provide support until the recovery strengthens. It’s about time. The tight-money inflation hawks who have been consistently predicting runs on the dollar have been consistently wrong. Sure, it’s possible that the Fed’s latest loosening could produce a bit of inflation; as I’ve written, that would be a good thing, encouraging consumer spending and business investment. And if inflation did start to spike to levels of concern, the Fed could always adopt a tighter policy, taking away the proverbial punch bowl.
That said, if the hawks tend to exaggerate the potential risks of monetary stimulus, doves tend to exaggerate the potential benefits. Liquidity is not the main problem with our economy right now. Firing up the printing presses — and making clear that they would continue to run indefinitely — would help juice the stock market and further stabilize the financial sector, but it won’t miraculously revive demand. Bernanke is right to try to keep us from becoming Europe, but we’ve still got problems of our own, and no amount of QE’ing will fix them.