It may seem like pushing on a string, this latest round of "quantitative easing" announced by the Federal Reserve last month. With the Federal funds rate already just above zero, and the economy still anemic, what more can the U.S. central bank do to jump-start a more robust recovery?
Flood the system with more money is about all it can do in the hopes that the move will push other interest rates downward without igniting an inflationary spiral. The reason the Fed announced this second round of quantitative easing, or "QE2," as wags have dubbed it, is because it has a twofold statutory mission: It must both ensure a sound money supply and promote maximum employment.
Clearly, the latter goal remains uppermost in Federal Reserve Chairman Ben Bernanke's current thinking and that of most of the members of the Federal Reserve Board of Governors. But while the move to pump another $600 billion into the money supply has cheered the financial markets, it has also caused alarm both domestically and internationally. Other countries claim that the U.S. is deliberately manipulating the value of the dollar, and at home, conservative critics are calling for the Fed's mission to be reduced to just ensuring sound money.
What these responses also demonstrate is that, contrary to Richard Nixon's assertion in the 1970s, we are not "all Keynesians now." In the century-long struggle of ideas between John Maynard Keynes and F.A. Hayek, Hayek appears to be enjoying something of a revival, as critics argue that the traditional Keynesian moves to stimulate aggregate demand in a recession have failed spectacularly.
It's Hayek's philosophy that underlies the move to strip "maintaining maximum employment" from the Fed's mission. Keep the currency sound and stable, they argue, and let the economy work its way out from under the excess public and private debt it has piled up. The trouble with this approach, fiscally sound though it may be, is political: Doing so would push unemployment and underemployment even higher than they are now, and the voting public appears to be in no mood for that to happen. Since the voters' dumping of the Democrats in the midterm elections has taken the other Keynesian option off the table, it looks like in the short run at least, the Fed may have to keep pushing on that string.
Agree? Disagree? Share your thoughts here.
Stimulate your career with a better job - start with the listings on FinancialJobBank.com.
Flood the system with more money is about all it can do in the hopes that the move will push other interest rates downward without igniting an inflationary spiral. The reason the Fed announced this second round of quantitative easing, or "QE2," as wags have dubbed it, is because it has a twofold statutory mission: It must both ensure a sound money supply and promote maximum employment.
Clearly, the latter goal remains uppermost in Federal Reserve Chairman Ben Bernanke's current thinking and that of most of the members of the Federal Reserve Board of Governors. But while the move to pump another $600 billion into the money supply has cheered the financial markets, it has also caused alarm both domestically and internationally. Other countries claim that the U.S. is deliberately manipulating the value of the dollar, and at home, conservative critics are calling for the Fed's mission to be reduced to just ensuring sound money.
What these responses also demonstrate is that, contrary to Richard Nixon's assertion in the 1970s, we are not "all Keynesians now." In the century-long struggle of ideas between John Maynard Keynes and F.A. Hayek, Hayek appears to be enjoying something of a revival, as critics argue that the traditional Keynesian moves to stimulate aggregate demand in a recession have failed spectacularly.
It's Hayek's philosophy that underlies the move to strip "maintaining maximum employment" from the Fed's mission. Keep the currency sound and stable, they argue, and let the economy work its way out from under the excess public and private debt it has piled up. The trouble with this approach, fiscally sound though it may be, is political: Doing so would push unemployment and underemployment even higher than they are now, and the voting public appears to be in no mood for that to happen. Since the voters' dumping of the Democrats in the midterm elections has taken the other Keynesian option off the table, it looks like in the short run at least, the Fed may have to keep pushing on that string.
Agree? Disagree? Share your thoughts here.
Stimulate your career with a better job - start with the listings on FinancialJobBank.com.
By Sandy Smith
Sandy Smith is an award-winning writer and editor who has spent most of his career in public relations and corporate communications. His work has appeared in The Philadelphia Inquirer, the Philadelphia CityPaper, PGN, and a number of Web sites. Philly-area residents may also recognize him as "MarketStEl" of discussion-board fame. He has been a part of the great reserve army of freelance writers since January 2009 and is actively seeking opportunities wherever they may lie.
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