Bernanke's road to hell
Bernanke, the Federal Reserve chief, drew headlines this weekend with his impassioned defense of the Fed's Nov. 3 decision to buy $600 billion of Treasury securities over eight months in its second go at so-called quantitative easing. The mild-mannered Bernanke evidently was so exasperated by criticism of the Fed's plans that he resorted to a mild profanity.
"There's a sense out there that, quote, quantitative easing, or asset purchases, is some completely foreign, new, strange kind of thing, we have no idea what the hell is going to happen, and it's an unanticipated and unpredictable policy," Bernanke said at an Atlanta Fed conference in Jekyll Island, Ga. "Quite the contrary: this is just monetary policy. Monetary policy involves the swapping of assets — essentially, the acquisition of Treasuries and swapping those for other kinds of assets."
No one doubts that what the Fed is doing is monetary policy. But are the Fed's many critics really out of line, as Bernanke implies, for wondering what the hell is going happen?
Bernanke, after all, suggested just last month that policymakers felt they were a bit in the dark as they grappled with just this question.
One disadvantage of asset purchases relative to conventional monetary policy is that we have much less experience in judging the economic effects of this policy instrument, which makes it challenging to determine the appropriate quantity and pace of purchases and to communicate this policy response to the public.
To be sure, Bernanke raised that point in his Oct. 15 speech for the purpose of batting down the notion that the Fed was proceeding willy-nilly down a dark path.
He said weighing questions about the Fed's lack of experience "have dictated that the FOMC proceed with some caution in deciding whether to engage in further purchases of longer-term securities."
The Federal Open Market Committee's caution is such that it said in its statement last week it was open to changing the asset purchase plan should unforeseen circumstances arise.
"The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability," the FOMC said.
So no, QE2 isn't, in Bernanke's words, completely foreign, new or strange. Its effects on the markets certainly haven't been unanticipated.
But don't forget that the Fed is trying it when the economy looks broken, politics are getting angrier and financial markets are going nuts.
Anyone doubting the unpredictability of that volatile mix should have his head examined.