Thursday, November 4, 2010

"Economists React: Chairman Bernanke’s Brave New World"

Goodness, this collection of comments is amazing.
From Real Time Economics:
Economists and others weigh in on the Fed’s decision to purchase an additional $600 billion of Treasurys, a second round of a policy known as quantitative easing and referred to as QE2.
The Federal Open Market Committee decided to act more aggressively and engage in further quantitative easing. The central bank will create money electronically, using the proceeds to purchase longer-term Treasuries. The expectation is that this will lower longer-term interest rates and boost expected inflation, bringing down real interest rates. This, in turn, will lower the cost of capital and boost investment, promoting economic growth. –Augustine Faucher, Moody’s
Pace of recovery slow. Housing starts depressed. Underlying inflation low relative to long-run goal.Therefore buy insurance. –John Silvia, Wells Fargo

The general justification for the additional monetary stimulus was provided by Chairman Bernanke already in late August. Back then he cited “increased deflation risks“ and “a further significant weakening in the economic outlook” as the conditions that would trigger such a move. According to today’s press release these two conditions seem now to be fulfilled. The statement explicitly said that relative to the Fed’s mandate “the unemployment rate is elevated, and measures of underlying inflation are somewhat low.” –Harm Bandholz, Unicredit

No one really knows how effective the QE2 will be on the economy. There is so much liquidity in the economy that additional liquidity may not do much for the economy. The U.S. banking system has over $1 trillion of excess reserves deposited at the central bank earning the interest rate of 0.25%. You can lead a horse to water, but can’t make it to drink. –Sung Won Sohn, Smith School of Business and Economics

The Fed is panicked over deflation and is prepared to expand the balance sheet until their panic subsides. The Treasury curve will steepen, risk spreads inside of 10 years will blow out (as Treasury yields are artificially depressed), and inflation concerns are going to build, especially if the economic data continue to exhibit an improved tone, as they have in recent days. Welcome to Chairman Bernanke’s Brave New World. –Stephen Stanley, Pierpoint Securities
...Around a dozen MORE, from Krugman to Schiff!