Bernanke’s Open Letter on QE2 Receiving Continued Criticism

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Bernanke’s Open Letter on QE2 Receiving Continued Criticism Posted: 19 Jan 2011 04:00 AM PST It doesn't matter if Federal Reserve Chairman Ben Bernanke saw it coming, there simply is no shortage of criticism about the second phase of quantitative easing (QE2). Barely a month after the Fed announced that it would implement QE2, Brazil, China and Germany publicly raised concerns about its possible effects on the global economy. Photo: Alex E. Proimos Then there was the open letter sent to Bernanke. Political strategists, economists and investors signed the letter, which expresses disapproval of QE2. The open letter claims that the purchase of $600 billion from the U.S. Treasury risk "currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment." As of right now, the Fed plans to buy the $600 billion in U.S. Treasury securities during the next eight months. Each of the eight purchases will be for $75 billion. Charles Plosser, president of Philadelphia's Fed, said that QE2 could change in the process. As the Fed makes the purchases and monitors its effects, the original plan could change. Nevertheless, the letter's signatories—including Bill Kristol of The Weekly Standard, John B. Taylor formally of the Bush Administration and Douglas Holtz-Eakin who directed the Congressional Budget Office—posit serious consequences to QE2. The letter's primary criticism asserts that QE2 will inflate the dollar too much, making it weaker. The letter warns that "another round of asset purchases … will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy." Here, the letter likely refers to the possibility that QE2 could increase the risk of currency and/or trade wars. Should such international conflict ensue, the Fed would have another problem to tackle. With QE2, the Fed intends to lower the unemployment rate in the long-term. By injecting money into central banks, businesses should theoretically have access to that capital. The letter's signatories want a different approach. The letter proposes changes in "tax, spending and regulatory policies must take precedence in a national growth program" instead of a stimulus like QE2. Overall, the letter calls for an immediate end to QE2. While this open letter cautions the Fed against inflating the dollar the possibility of deflation in the U.S. remains a possibility, which became a reality for Japan after its quantitative easing phase from 2001 to 2006. It's too early to tell if the open letter's conclusions will be play out, but they're certainly representative of the ongoing debate over QE2. Kevin is the writer of Startup Biz Blog, where he writes about startups, small business, and occasionally business/personal finance.

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