What Would Fed Critics Do Instead? A Survey

November 17th, 2010 at 1:59 pm | 23 Comments |

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On November 15th, the New York based think tank e21 released an “Open Letter to Ben Bernanke” criticizing the Federal Reserve’s intention of engaging in a policy of quantitative easing by purchasing $600 billion worth of U.S. government securities. While the letter argued against the policy, it did not vocalize alternative solutions, except arguing that “improvements in tax, spending and regulatory policies must take precedence in a national growth program.”

While Sarah Palin was among the earliest critics of the policy, the e21 letter has shown that this level of concern is present among some conservative economists as well. FrumForum has been contacting the co-signers of the letter to find out what policies they would propose instead of monetary expansion to deal with the economic situation. The majority of responses have focused on fiscal solutions that are ultimately political in nature. The current responses also do not show a consensus on monetary policy.

Douglas Holtz-Eakin, President of the American Action Forum, told FrumForum that quantitative easing will not reduce unemployment or inflation, and so fails the test of meeting the Fed’s dual mandate. He argued instead for a “pro-growth fiscal policy”, endorsing the tax reforms of the Bowles-Simpson deficit commission, and arguing that big out year deficits be taken “off the table”. He suggested that the increase in Republicans in the House could make these policies “politically feasible.”

In an email to FrumForum, Nicole Gelinas of the Manhattan Institute argued against the Fed taking action to help the economy, “The Fed should not try to be heroic in the absence of functional politics (on both sides).”

Speaking for herself, Gelinas called for solutions that bypassed the monetary policy apparatus. She called for regulators to “do their jobs when it comes to making sure that financial institutions are operating prudently and soundly” with a focus on getting foreclosures on defaulted homes. She criticized the 2009 stimulus for sending money to state governments without requesting them to cut their budgets, and called for “real financial rules and regulations” that could provide “consistent market discipline” to the financial sectors, citing previous pieces she had written on the topic.

She argued that this would deal directly with unemployment:

Get rid of the bad debt, allow house prices to hit bottom, help harness future state and local government liabilities, invest in infrastructure, and create some semblance of market disciple for the financial industry, and you’re on your way to an end to the unemployment crisis.

Gregory Hess of Claremont McKenna College struck a similar stance that fiscal policy was the primary driver of the economic downturn, and that there was no role for monetary stimulus, “QE2 by the Federal Reserve will likely cause volatility in long term asset markets.”

His focus returned to the similar fiscal notes that Holtz-Eakin took, targeting the increase in government and the tax code:

The reasons that banks do not want to lend and firms are hesitant to expand their activities is because of the rising size of government (which portends higher tax rates), the expiration of the tax cuts under President Bush, and the lingering air of economic uncertainty. These all inhibit growth.

Hess gave no direct comment on the issue of unemployment.

On the topic of interest rates, two of the co-signers that FrumForum contacted provided two different answers.

Charles W. Calomiris of the Columbia University Graduate School of Business told FrumForum in an email that he favored keeping interest rates were they currently were:

There are many reasonable alternative views on how to target monetary policy. I favor Ben McCallum’s proposal to target nominal GDP growth at about 5%. Since we were on track with that target before QE II, at least for the moment, I would neither be raising or lowering interest rates.

Though he also stated that he would be in favor of a looser monetary policy if the evidence could convince him the circumstances warranted it:

If there were evidence of a need for further loosening to raise the growth of nominal GDP to that target rate, then some quantitative easing might be a reasonable proposal.

In contrast, Ronald I. McKinnon of Stanford University argued for a gradual increase of short-term interest rates, to reduce the threat of inflation in the long run.  His concern was that the current regime promoted “a flood of hot money” into markets in Asia and Latin America.

In a piece on e21’s site, David Malpass argues that the crux of the debate is that quantitative easing represents an expansion of “big government”:

[U]nless Fed asset purchases are in some way necessary to the economy’s survival, the assumed harm from an expansion of government, which is at the core of our principles of limited government, argue against Fed asset purchases.

FrumForum is still contacting the other letters cosigners and waiting for them to weigh in on what they believe should be undertaken to improve the economy if indeed the purchase of $600 billion treasury bonds threatens the core principles of limited government.

Shawn F. Summers contributed to this piece.

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23 Comments so far ↓

  • Kevin B

    Newsflash: Critics of the Fed will ALWAYS claim that what the Fed is doing (whatever that happens to be) is the wrong solution.

  • balconesfault

    My God … reading through this synopsis, the only thing I see is that if you took the recommendations of any one of these economists, you could likely get at least half of the rest of them ready to sign an Open Letter about how those recommendations will harm the economy.

  • armstp

    The Fed has got it right so far. They have stabilized the financial system over the last two years. No small task given the freefall that it was in.

    You would think that now the 2010 elections were over that these conservatives would stop on their nonsense. I guess Republicans/conservatives will continue to trash the government to stop economic progress, so they are better positioned for 2012 or at least to continue to muddy the water about what good work the government has done in stabilizing the financial system and getting the economy started again.

    Here is a comment out today from Pimco, the largest bond fund in the world. A firm that knows a thing or two about the Fed, the economy and financial markets.

    “A Kind Word for Ben”

    “It brings me great angst to observe professional critics – many of them acquaintances and friends of mine – rhetorically beating Fed Chairman Ben Bernanke about the head and shoulders for launching QE2. At the same time, the fact that Sarah Palin has joined the chorus brings me great joy. If what Ben is doing offends both the learned and the unlearned, then he is clearly acting unconventionally relative to orthodoxy. And this is good, very good.”

    “The fact that Mr. Bernanke is willing to take the heat – domestically and internationally, from friend and foe alike – to launch QE2 is testimony to the strength of his convictions as to the purpose of his office. ”

    “Nonetheless, QE2 was launched, with planned purchases of some $75 billion per month of longer-term Treasuries through the middle of next year, subject to review along the way and presumably, continuation and expansion beyond, if needed.

    It was a courageous decision, no doubt also contentious, which we will learn more about in two weeks time, when the minutes of last week’s FOMC meeting are released. It was a decision made in the context of a benefits-costs calculus, as foretold by Chairman Bernanke at Jackson Hole in late August.12 By a 10–1 majority, the FOMC decided that the likely benefits outweighed the likely costs. ”

    “The Fed makes policy consistent with its legislative mandate handed down by the democratically-elected government of the United States. And that’s what the Fed is pursuing: mandate-consistent levels for inflation and the unemployment rate. This is as it should be.

    The rest of the world should simply accept this outcome as reality, and adjust – or not adjust – their own domestically-oriented objectives and policies accordingly. Is there room for multi-lateral dialogue, perhaps even some degree of coordination, as various jurisdictions grapple with heterogeneous economic and financial exigencies? Absolutely. But that does not imply that the Fed should abdicate its responsibilities to pursue the mandate given to it by the American people. Pursuing that mandate is precisely what the Bernanke-led FOMC is doing.”


  • sinz54


    Your observation reminds me of Arthur Motley’s famous observation:

    “If all the nation’s economists were laid end to end, they would point in all directions.”

  • sinz54

    I would like to clear the air on this “infrastructure” panacea.

    As things stand now, there is no assurance that any new “infrastructure” projects wouldn’t end up like the endless quagmires and boondoggles of the never-built Westway highway in New York City, the Second Avenue subway in New York City whose construction is finally underway after 60 years (!!!) of planning, the Big Dig in Boston, the always planned but never built nuclear waste repository at Yucca NV, or the Freedom Tower in New York City.

    That is, projects that take forever to get under way, because of EPA foot-dragging, peculiar Davis-Bacon labor requirements, a zillion different stakeholders each with their own peculiar ideas, and especially NIMBY. Projects that literally take decades to complete, long after any recession or economic stimulus have ended.

    Even liberals at the American Prospect are beginning to realize that this presents a real obstacle to Obama’s attempts to use infrastructure development for stimulus purposes anymore:

    The real culprit wasn’t underfunding or lack of political will. It was poor implementation. The White House hasn’t made the massive push that’s required to overcome the normal inertia of government. And matters are complicated by the checks that liberals created to keep the government from building roads, rails, and other infrastructure by executive fiat.

    “I kept hearing that we had lots of projects that were shovel-ready,” says one administration official. “But they weren’t. We have think tanks that make a compelling case for Keynesian stimulus. What we need, it turns out, is a think tank that tells us how to actually do a stimulus — how we can get the dollars out there now” to reduce unemployment….

    What happened? Big government — spending, that is — ran into good government — regulation, competitive bidding, environmental safeguards, the works. “To be shovel-ready is much more complicated now than it was in 1933,” says Laura Chick, the former Los Angeles city controller (and a liberal Democrat) whom Gov. Arnold Schwarzenegger appointed as the state’s inspector general of stimulus spending. “Environmental-impact reviews, historic-preservation safeguards, unionization of government workers — these are good things, but they’ve changed the way government can operate. Plus which, the federal government said, ‘We’ll give you a ton of money, and we want you to spend it faster — and better.’ There are no exemptions from regulations that came with the stimulus funds. They didn’t waive the requirement for competitive bidding; they stressed competitive bidding.”

    She continues, “You can’t just build a new bridge. You’ve got to do environmental-impact reports, you have to open up the decision to community input, you face potential lawsuits. I’m not saying concern for environmental impacts should go away, but it makes it harder to deal with an economic crisis.”

    Chick rolls off a litany of speed bumps. The federal government wanted community-based organizations in poor urban communities to undertake home-weatherization projects. But many organizations couldn’t pay the federally mandated prevailing wages for construction work or meet the increased reporting standards that Washington mandated. Weatherization work in Los Angeles almost ground to a halt.

    There is an answer to this:

    Obama could ask Congress to “fast track” infrastructure development: Give the EPA exactly four months, no longer, to review each environmental impact statement. After that they shut up and get out of the way.

    Infrastructure projects could be approved by a bipartisan commission based on econometric and engineering models of how those projects would benefit the nation as a whole, removing the ability of Congresspersons to vote for useless pork for their own districts.

    Davis-Bacon requirements for hiring organized labor only could be waived, so that the long-term unemployed (those unemployed for a year or longer) could be hired first.

  • CD-Host

    Noah thanks for doing the footwork in putting this together. Wow. Calomiris’ comment about a targeted GDP growth was interesting I would have liked to ask a follow up question.

    Anyway this paragraph from the e21 letter Critics of the Fed’s $600 billion asset purchase program can draw parallels to the $800 billion 2009 fiscal stimulus program – both are major expansions of government that are far-removed from job creation. Dr. Blinder’s article turns this into a straw man, arguing that critics of Fed asset purchases are as clearly wrong as critics of government spending. He says government spending can’t kill jobs under present circumstances because there’s slack in the economy. Again, this is the crux of the debate – expansions of government, whether fiscal or monetary policy, discourage private sector jobs by undermining business confidence about future taxes, the stability of the dollar, and market interference by the government.

    I’d like see some evidence for this assumption that business confidence about a lack of market interference discourages investment. Somalia doesn’t seem to be swarming with investment.

  • pnumi2

    A smorgasbord of unintelligible, frivolous, and worthless solutions. The poison of tax cuts seen as the antidote for the poisonous tax cuts that got us into this hellish mess.

    Starting off with Sarah Palin, connoisseur of economic theory, who probably doesn’t even remember what she was coached to say about the administration’s economic policy now that she’s developing her new show, “Dancing with the Palins.”

    Guess what Douglas Holtz-Eakin has to say? He’s refined “Deficits Don’t” Matter” into the impressive “Big Out Year Deficits Be Taken Off The Table.” It’s got an attractive ring to it, no?

    Nicole Gelinas: “Allow house prices to hit bottom.” Nice.

    Gregory Hess: “Banks do not want to lend… because of the expiration of the tax cuts.”

    Charles W. Calomiris: ‘I would neither be raising or lowering interest rates.” With rates where they are today, lowering them would be putting lipstick on a pig and raising them would be sending what we pay in interest on the National Debt ad astra.

    Which is exactly what Ronald I. McKinnon wants to do. “(H)e argued for a gradual increase in short-term interest rates…”

    Last but not least, David Malpass , “(U)nless Fed asset purchases (QE2) are in some way NECESSARY TO THE ECONOMY’S SURVIVAL…” forget them (emphasis mine). Well, yeah!

    What planet are these Republican economists living on? Their argument today is nothing more than the recriminations of criminal attempting to shift the blame of a crime onto some one else. Namely the Democrats and their wasteful. But pay no attention to the fact that wasteful spending had been going on for scores of years and it was only when “Deficits Don’t Matter” rose to Republican promoted prominence that the Sh*t started to drop on the twirling blades of the fan.

    Who doesn’t think we are in this seemingly hopeless situation because of the Republican economists (from the very same flock who contributed to this piece) who rode into Washington in 1981 proclaiming “Deficits Don’t Matter”, the way Galileo Galilei proclaimed the movement of the Earth around the Sun?

    “If it be now, ’tis not to come;
    if it be not to come, it will be now;
    if it be not now, yet it will come.
    The readiness is all.”

    I look forward in the next two years to hearing the Republican revised version of the meaning of life, how to turn lead into gold and tax cuts into surpluses.

  • armstp


    These Republican economic comments fit right in with the rights view on science. Creationism, no global warming, the earth is really flat, etc. etc. etc.

    The only way to explain how “intelligent” people can go so wrong is that it is really not about reality, it never has been, it is only about political spin. I think this is to the core of what Frum is rebelling against. All Frum is saying is can we get away from the political spin and think about governing and solving real problems. And that is why I come to this website. Frum cuts through some of the BS, but not all, as he still has plenty of his on right-wing BS.

  • JimBob

    No country remains great by trashing its own currency. Competitive devaluations never work and Bernanke is a menace. Easy money creates one bubble after another.

  • armstp


    The cheap Yuan has worked pretty well for China. However, I do not think the focus is on the currency with QE2, but on both getting credit through the banks to those who need it and to sucking up treasuries to push investors into alternative investments (stocks, bonds, etc) to also provide more liquidity in the market place.

    I am sure the Treasury is well aware of any bubble creation and will manage the program accordingly. However, we are so far away from any kind of bubble at this point, that it is a joke to even suggest it.

    You ain’t going to get no bubble at 9.6% unemployment and the country will hardly be considered great at 9.6% unemployment.

  • pnumi2


    You are right about today’s Republicanism and FrumForum. That’s why I come here, too. The conversations are intellegent and well thought out and rarely devolve into the name calling that lurks in all of us.

    Initally, I came here for the Modify button as well. I still can’t believe it was removed without a word, a we’re sorry, etc. But, after all, these are Republicans and the niceties of life were never very high on their totem pole.

    There is something in human nature that decrees that man, no matter how intelligent and principled, in order to survive, has to follow a leader and a set of beliefs. The poor Republicans have no other leader but Sarah Palin and no other belief beside “I’ll tell everyone I’m for tax cuts because it’s good for the economy, when I just want that extra money in my pocket, you stupe.”

    Just think how beautiful life would be if the Republicans were all hummingbirds and koi. And shut up about economics.

  • JimBob

    The treasury is not aware of any bubbles. If they were they would know there’s a huge bubble in bonds . The United States the greatest economy in the world is acting like a 3rd world country. Trashing the dollar. It is disgraceful. We need to stop trying to boost the economy via monetary policy and just leave it alone. The only thing we should be doing is extending the tax cuts, reforming entitlements and getting out of the wars in the Middle East. Then our economy will recover like it always has before.

  • pnumi2


    I’d be very surprised if there were bubble in treasuries and that the Treasury didn’t know it. Perhaps what you’re seeing is what’s called a ‘flight to safety.’ Investors who believe like you that “our economy will recover like it always has.”

    There are other investors today who believe that the ‘flight to safety’ is the ‘flight to liquidity’. They’re more worried than you about the ease of the recovery before us.

    Insofar as the ‘huge bubble in bonds’, remember the Fed is about to purchase $600 billion of them.

    If you mean corporate bonds, all bonds have dates by which the corporation has to buy them back from you at par. And if our economy recovers like it always has –no problem.

  • armstp

    Bubble in bonds? Yeah that is the latest story line from some on Wall Street, but I do not see it. Please explain? For corporate bonds default spreads are still not even at the same level they were at in 2007. 10-year treasuries at under 3.0% and with average say high yield bonds at yields at over 7% there is about a 450 bps spread or default spread over treasuries. That spread has been as low as less than 300 bps. At 450 bps it is about at its historic average. Not sure where I see the over pricing or bubble as you say, particularly as the corporate bond default rate is heading to a historic low again or 3%.

    With no inflation and none on the horizon a less 3% yield for a 10-year treasury is not unusual.

    Again where is the bond bubble? The credit cycle looks pretty normal. So far all those who have shorted bonds have gotten slaughtered.

    The only way you can say the bonds are way overvalued is if you think there is a massive wave of inflation coming and at 9.6% unemployment it ain’t going to happen.

    Now given the run that bonds have had over the last two years, relatively speaking equities might be more attractive right now, but that is something entirely different and not a signal that there is a bond bubble. You are beginning to hear that, but that does not mean the bonds are way overvalued, it more likely just means that stocks remain undervalued, particularly as the economy and earnings continue to improve. The bond market is more likely just an over bought asset class and not a bubble.

    And the only way a bond bubble can explode is if rates rise quickly. Massive economic recovery will cause rates to rise. Massive recovery on short notice seems unlikely in the near future.

    Just my view. Lots of views out there.

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  • drdredel

    Get rid of the bad debt, allow house prices to hit bottom, help harness future state and local government liabilities…
    Get rid of the bad debt?
    How? just send everyone who owes a note saying “nevermind”, and let the creditors know they can suck it?

    Is this the Harry Potter solution? What exactly does that line mean?!

  • pnumi2


    The only thing I know about this ‘bond bubble’ is what I’ve seen in JimBob and your posts.

    I don’t even know if Wall Street is saying, “There’s a ‘bond bubble. Get in while you can.”
    Or” There’s a terrible ‘bond bubble’ brewing. You better sell out right away.”

    If it’s the former Wall Street is selling its inventory. The latter they’re buying.

    Most likely it is the latter and the ‘bubble’ is in treasuries which Wall Street is buying to increase their inventory and sell at a profit to the Fed and its $600 billion.

  • adrianflores

    Nicole Gelinas of the Manhattan Institute said to, “get rid of bad debt.” What debt is good? If we are speaking literally I believe all debt is bad. I find it very unreasonable to believe the government would take on getting rid of debt. Especially because the consumer society this country was built as was based on debt allowing people to spend money they didn’t have. (For Example, GM was one of the first to allow consumers to purchase cars on loan.)

    BUT, I would like all my debt to be cleared, that would compel me to spend and save appropriately.

  • jasonburke

    David Malpass: former chief economist at Bear Sterns, worked there for 15 years. The man needs to have his head examined. The Bear “High-Grade Structured Credit Enhanced Leveraged Fund” was anything but high grade, this fund was way over leveraged, and full of sub prime (liar loans, no income no job loans, ARMs, etc) mortgages and the like. While the Austrian school likes to blame government monetary policy and regulations for limiting the creative destruction, while at Bear Sterns, Mr. Malpass participated in over leveraging that resulted in a massive collapse and eventually contributed to the overall credit freeze. How much did he make for these bad decisions?

  • DFL

    Bernanke should testify that anything he does at the Fed is ultimately pointless unless the USA gets its debt under control. He should detail a program that offers pain for everyone- Social Security eligibility raised to 70 by 2025, severe Medicare cuts that would demand larger co-pays, large military cuts that would require a defense appropriate to a heavily indebted nation, a 5 % national sales tax, a raise in the top income tax rate to 40 % for those making $ 1 million, the gradual end of state and local tax write-offs, the termination of two or three Cabinet Departments and dozens of sub-departments. Bernanke should give Obama and Congress six months to come up with such a plan or face his resignation.

  • think4yourself

    In regards to Nicole Gelinas “Get rid of bad debt, let house prices hit bottom.”. There is an argument to be made for that line of thought. If foreclosures are being artificially restrained by modifications that don’t work, all we are doing is delaying the inevitable. People stay longer in houses that they cannot afford which stretches out the foreclosure process rather than completes it sooner (rip a bandaid off slow or fast). I’m not arguing that it is fair or good for the individuals involved (even though in the long run it may be good for them as they are now saddled with properties that may take 5-10 years to be worth what they owe that they cannot now afford the payments on).

    In regards to Gregory Hess that banks are not lending and companies are not growing because of the rising size of gov’t is ridiculous. Banks haven’t been lending because at zero percent borrowing on their part, they make more money not lending while they clean out their portfolio’s of non-performing loans (as the gov’t is instituting more stress tests to determine the bank’s financial health which is a function of cash on hand versus questionable loans). Companies have not been expanding due to uncertainty of customers purchasing their products and has little or nothing to do with the size of gov’t or tax policy.

    As an aside, I was this weekend at a banking conference and one of the lenders there said that in the last 12-18 months, most of the business lending requests have been for funding for projects to try and “save” the companies (i.e. desperate or speculative projects), which the bank considered risky and would not lend to. However, they are starting to see requests that they consider investment projects (expand core business) which they consider worthwhile to lend to – as long as the customer’s already had verifable, overwhelming financial strength to pay the lending back (meaning the banks are still very risk adverse).

  • larry

    Cicero in a letter to Atticus ( I think): “Here I am, the champion of the creditors, and I’m up to my neck in debt.” If the bankers can take in Cicero, they can take in anybody.

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