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Why isn't monetary policy discredited?


In February 2009, President Obama signed a $787 billion stimulus bill into law. In March 2009, Federal Reserve Chairman Ben Bernanke announced a $1.2 trillion quantitative easing plan. Together, the two policies probably arrested the economy's slide and helped it begin a frustratingly slow recovery, but they did not stop unemployment from reaching 10 percent or persuade banks to aggressively lend or corporations to aggressively invest.

This has left stimulus politically discredited, while quantitative easing -- and unconventional monetary policy more broadly -- has survived unscathed and maybe even been bolstered. Bernanke was reconfirmed with 70 votes in the Senate, and the Federal Reserve is likely to go for another round of quantitative easing in January. Most praise Bernanke for stopping the economy from falling into the abyss, even if his policies haven't returned us to full employment.

The difference, I'd suggest, is that it's not in anyone's political interest to discredit Bernanke and the Federal Reserve. If Bernanke is considered bad at his job, Republicans are not necessarily likely to pick up more seats in the 2010 election. If Obama is considered bad at his job, Republicans are very likely to pick up seats in 2010. And that's how our economic-policy conversation operates. Unfortunately, this has severe consequences for our economic policies, as it means we're left relying on the Federal Reserve when further action by Congress would probably be preferable.

Photo credit: Karen Bleier/AFP/Getty Images.

By Ezra Klein  | October 19, 2010; 4:20 PM ET
Categories:  Federal Reserve  
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Well, also the MEDIA seems to not want to talk about quantitative easing either.

I read about it all the time in Forbes and NPR's Planet Money but your average schmoe has no idea it even happened. Trust me, I am more angry at quantitative easing than the stimulus though they both failed. All quantitative easing is is ensuring that Wall St banksters get their bonuses that Bernanke prints out of thin air while the value of the dollar for the average person plummets.

Posted by: louisp3 | October 19, 2010 5:32 PM | Report abuse

"Why isn't (our not OUR'S)monetary policy discredited?"

Great Question Ezra, thank you for being the Host. Simple answer: the whole FED system of guaran(*amnd)teeing only limited failure always guaran(*amnd)tees failure at some level. Let's just call it Diss Credit Monetary Policy...

SpendNomore is OUR POlicy

Posted by: SpendNomore | October 19, 2010 6:25 PM | Report abuse

If there is a net political benefit to saying something, you can bet it will be said. Incentives matter.

Posted by: StevenDS | October 19, 2010 7:41 PM | Report abuse

The Fed is SUPPOSED to worry about unemployment but it really doesn't as you can see. I know you're not ready for another long lecture from me, so I'll make this brief. the Fed is monetizing the debt, come he** or high water. they'll call it everything under the sun, but that's the point of this. Inflation is ridiculously low, Treasury yields are unbelievably low, so they can afford to debase the currency to lighten the debt load. Anything else you read is smoke and mirrors. No one favors another stimulus because it would ADD to the debt load.

Why do you think the Chinese raised rates out of the blue today? It was an effort to stop the free fall of the dollar which hurts their holdings in Treasuries. End of story.

Posted by: 54465446 | October 19, 2010 10:16 PM | Report abuse

It's so simple.
QE devalues everyone's money. Deficit spending makes us poorer in the future, and seems to be highly composed of transfer payments and poor uses of money.

QE is good stimulus because it lowers real wages. Fiscal stimulus causes wages to rise. If a primary shift in the world economy is an imbalance in the price of labor, QE corrects it, fiscal stimulus makes it worse.

Posted by: staticvars | October 19, 2010 10:38 PM | Report abuse

Gamesmith94134: What Today's Nobel Says About the US Unemployment Crisis
I am not a pessimist on our economy, and I try not to put these economists down in the resolution to the unemployment. I am just thinking they did not focus on the cause of the anemic or stagnant unemployment to the European or American. It was not the mismatch on resume or non-availability on job opening.
First, it is their attitude that they just all tired or snare at the position that either do not look like their last resolute on surviving. Since there is always a dim light at end of the tunnel, if their rebellion can make their government turn their heads.
Secondly, many governments calculate the damage control and use teases on the counterpart; instead of facing the problems individually; and neither the public nor the business trust their government after each solution has been proven as the never-ending tests on the fight of a canary in the tunnel of hell and each failed.
Thirdly, the government's attempt to use the carrots to lurk companies to expand with less so called incentives as they desire; and after many calls on the temporarily act contradict the result as expected like TARP, HAMP, QE, liquidity trap, foreclosure and so on. Their concerns on the double-dip recession or change on another policy could drag them into turmoil. Just hold on to the bag before stag-inflation returns or victimized by the tax scheme; run if you have to if you are on the shaky ground especially your company is filled with or for contracts with your government or others. Self-insurance was never being excessive to corporate culture or CEOs.
In summing up the above, uncertainty both saturated in the minds on the governments, business and the citizens; it is just like Chilean miners trapped in depth with less on escape. This was the roller coaster they rode on that returning to the same spot where it began. Perhaps, the basics on the question really fall on “Are we at the bottom of it yet?”, “Has the trade war started?” or “Is the Dollar really devalued or Euro and Yen regain strength after modification on deficit?” Each are looking at above and sides and their knee-jerking experience gave out the ground they stand on; suspense to amaze in the grips on unemployment or development, each are waiting on other's move and all are idle. Am I the next canary that flies?
After the G-20, meeting, they came, they saw and they are gone. It is disappointing they could not find a common ground that we are hitting the bottom now that no one is certain whether inflation and deflation would hit at destiny or they will co-exist at the same time and you must guess. So, are you going to stick your head out to smell the gas? Did the Nobel Prize economist smell the gas yet?
I just hope they would return and confirm.

Posted by: 94134gamesmith | October 20, 2010 12:59 AM | Report abuse

Gamesmith94134: Why isn't monetary policy discredit?
There is no bankruptcy of America in my watch. Quantittativve Easing is to print money at no cost; depression after election and this is an order.
Is it a one-hand clapping? May be not, it is the hand laughing at the chopstick. One has American meal with 1% growth, 9% unemployment and 1.3 trillion deficits. The other has Chinese 9% growth, 3% unemployment and 2.75 trillions surplus. Are they in the same boat? Equivalence? Japanification now. I-phone is worth two-week pay for American; and it is also a six-months salary for Chinese. I do not expect many Chinese can afford it; but I do see many American go 99 cents Store that sell Chinese. Play more game on tariff or fee on merchandize from China; I bet less can afford Walmart.
American mutates interest rate to avoid default debt; Chinese raise interest rates to detour inflation. American Treasury advances bonus for friends on Wall Street; Chinese Government look over its people on main street.
Read Microeconomics first before Macroeconomics
Don’t forget to wash your hand after meal.
May the Buddha bless you?

Posted by: 94134gamesmith | October 20, 2010 1:05 AM | Report abuse

In 1989 Poland was where America is today (and worse). Poland had debt to GDP of 65%, and hyperinflation of 639%. Poland's top economist proposed the Balcerowicz plan of shock therapy - slashing spending, making government efficient, paying off debt. What happened? Confidence soared. By 1992 (only 3 years later) 600,000 companies had been created providing 1.5million jobs. Poland's economy continued to soar and was the ONLY economy in all of Europe which grew GDP during the recent downturn. There was no downturn in Poland. America take notice.

Posted by: betterdays1 | October 20, 2010 4:45 AM | Report abuse

If you are planning a mortgage refinance then you should search online for "123 Mortgage Refinance" before you decide they found 3.25% refinance with bad credit history and also did instant analysis of my mortgage.

Posted by: russellkurt20 | October 20, 2010 6:28 AM | Report abuse

The simple facts are that (a) quantitative easing doesn't pack much punch and (b) the more you use quantitative easing the weaker its punch becomes. In short, Bernanke doesn't actually have a magic wand in his tool box. Don't blame him for not doing something he can't actually do.

Posted by: ostap666 | October 20, 2010 8:45 AM | Report abuse

Because both sides of the aisle want easy money to fuel their spending, whether it's in the form of stimulus, defense spending, or tax cuts...

Monetary policy and the Fed's regulatory nonfeasance are the two big reasons for the mess the economy is in. If the Fed had taken a more active role to rein in the housing bubble, it wouldn't have taken on such a large role in the economy, one that we have difficulty replacing now.

Posted by: leshoro | October 20, 2010 9:44 AM | Report abuse

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