It didn't take long for the Federal Reserve to come under fire for its resumption of asset purchases, aka "QE2", announced at the Federal Open Market Committee meeting on November 3. The decision had the unusual side effect of uniting Sarah Palin and World Bank president Robert Zoellick, the former calling on Fed chairman Ben Bernanke to "Cease and Desist" and the latter raising the possibility of including gold in a future global monetary arrangement. But the controversy truly caught fire on November 15, when the plucky Economics21 published an open letter to Bernanke, signed by economists, businessmen, and public intellectuals, in which the signatories declared that "We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment."

The Keynesian party-line enforcement squad, led by Paul Krugman of the New York Times, responded with its usual mix of intellectual arrogance and ad hominem invective. The more mild-mannered Alan Blinder of Princeton, meanwhile, published an op-ed in the Wall Street Journal defending Bernanke, in which he conceded that "what the Fed proposes is neither foolproof nor perfect," but "QE2 is better than doing nothing."

Today, economist David Malpass responds to Blinder's op-ed at E21's website:

Dr. Blinder chose not to argue that Fed asset purchases are vital to the survival of the economic recovery or the financial system. In effect, he’s created a low bar for defending Fed asset purchases – they may not be very helpful but it’s OK to try them. I think there should be a higher bar -- unless 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.

The victor in the war over QE2, of course, won't be decided until we have a better idea of the policy's real-world consequences. Will the sinking dollar provoke a currency war or will it lead to export-driven growth? Will large-scale inflation arrive? Will the policy even succeed in its stated aims of lowering interest rates further and thereby promoting growth and job creation?

We'll have to wait and see. In the meantime, the dollar is sliding, inflation is showing up in some places (commodities, in Asia) but not in others (home prices), and the headline on is, "Bond Market Defies Fed: Interest Rates Rise Despite Launch of Treasury Buying as Investors Take Profits." Welcome, friends, to the new normal.

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