Don’t flip out over QEII (repeating myself)

I'm not sure it will work, because it won't fix the housing market, may not restore the demands for wealth-elastic goods in a sustainable manner, may not restore the normal flow of credit to small businesses, may not lower subjective estimated risk premia, and may not fix the general disconnect between expectations and reality.  The effects on long-term interest rates are murky.  No one — and I mean no one — has a coherent story about how nominal stickiness of wages lies at the heart of our current dilemma.

Still, QEII may do some good.  Money matters, even if we don't always understand how or why, and excessively tight money has never done market-oriented economics any favors.  Think of QEII as a make-up for some earlier monetary policy mistakes.  Some of the relevant alternatives include a trade war with China or direct government employment of the unemployed and with what endgame?  QEII is not some terrifying burst of potential hyperinflation.  The TIPS market is forecasting in the range of two percent inflation and it's gone up — what — sixty basis points since August?  That's hardly the end of the Republic.  During the Reagan recovery, inflation never fell below four percent.  I've thought through "trigger models" of rapidly escalating inflation, but they don't scare me much.  The Fed simply needs to be ready to unload its heavy balance sheet without delay.

I do take seriously some of the more speculative criticisms, namely that QEII may set off bubbles in some emerging markets, or that it may break the euro (and that the euro would not otherwise break of its own accord).  Still, those hypotheses are far from established and it is difficult to believe that say three percent U.S. price inflation should bring international doom.  These factors also need to be weighed against the international and political economy costs of continued American economic stagnation.

I'm unhappy with claims that "we're not doing enough" and that therefore this is no test of the idea of monetary stimulus.  This is what QEII looks like, filtered through the American system of political checks and balances.  And if it looks small, compared to the size of our problems, well, monetary policy almost always looks small compared to its potential effects.  I'm willing to consider this a dispositive test and I am very curious to see the results.


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