The Blog

Conservatives vs. the Fed

The monetary stimulus will do no more good--and could do more harm--than the fiscal stimulus.

8:12 AM, Nov 15, 2010 • By JOHN MCCORMACK
Widget tooltip
Single Page Print Larger Text Smaller Text Alerts

The boss joined a number of conservative economists and businessmen in signing an open letter to Ben Bernanke calling on the Fed chairman to reconsider and discontinue the Fed's policy of so-called "quantitative easing," or money printing. "The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment," they write. "We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy."

The Wall Street Journal reports on the fresh round of conservative criticism of money printing: 

The economists have been consulting Republican lawmakers, including incoming House Budget Committee Chairman Paul Ryan of Wisconsin, and began discussions with potential GOP presidential candidates over the weekend, according to a person involved.

The increasingly loud criticism of the Fed comes as some economic officials outside the U.S. are criticizing the central bank's move to effectively print money, which has the side effect of pushing down the dollar on world currency markets. President Barack Obama last week defended the Fed. The move to buy more bonds, known as quantitative easing, "was designed to grow the economy," not cheapen the dollar, he said.

The Fed, despite frequent criticism from both parties, has enjoyed considerable independence from politicians on monetary policy for the past three decades. Organizers of the new campaign predicted the Fed will increasingly find itself caught in the political crosshairs, though. A tea party-infused GOP is eager to heed voters' rejection of big-government programs, and conservatives say a new move by the Fed to essentially print more money make it ripe for scrutiny by the incoming Republican House majority and potentially an issue in Mr. Obama's 2012 re-election campaign.

Many Democrats are supportive of money printing as an attempt to decrease unemployment because another trillion dollars in fiscal stimulus is out of the question, monetary stimulus is the Keynsian's last resort. But conservatives argue that printing money is not likely to reduce unemployment and puts the economy on the road to ruinous inflation. "Printing money is no substitute for pro-growth fiscal policy," as Congressman Mike Pence tells the Wall Street Journal.  

Here's the full letter to Bernanke: 

Dear Mr. Chairman: 

We believe the Federal Reserve's large-scale asset purchase plan (so-called "quantitative easing") should be reconsidered and discontinued. 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.

We subscribe to your statement in The Washington Post on November 4 that "the Federal Reserve cannot solve all the economy's problems on its own." In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

The Fed's purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.

Respectfully,

Cliff Asness 
AQR Capital

Michael J. Boskin
Hoover Institution, Stanford University
Former Chairman, President’s Council of Economic Advisors

Richard X. Bove
Rochdale Securities

Charles W. Calomiris
Columbia University Graduate School of Business

Jim Chanos
Kynikos Associates

John F. Cogan
Hoover Institution, Stanford University
Former Associate Director, U.S. Office of Management and Budget

Niall Ferguson
Harvard University
Author, 
The Ascent of Money: A Financial History of the World

Recent Blog Posts