World reaction to Bernanke's plan mixed
As Federal Reserve Chairman Ben S. Bernanke faces renewed criticism from fellow economic policymakers around the world and from Wall Street, he sought to defend the Fed's actions to shore up the economy in an opinion piece in The Washington Post on Thursday.
The Fed on Wednesday said it intends to embark on a bold but risky plan of buying an additional $600 billion of longer-term Treasury securities by mid-2011. Bernanke said in his opinion piece that in the past this approach has eased financial conditions and "looks to be effective again."
He pointed out that:
Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.
World stock markets on Thursday cheered the Fed's plan -- Japan's Nikkei surged more than 2 percent -- but not everyone was supportive.
Goldman Sachs economists said Bernanke's opinion piece was a "forceful justification" of the quantitative easing program, while Bulgarian Finance Minister Simeon Djankov argued the plan was likely to backfire.
The plan is also likely to upset more than a few members of the new Congress who have been worried about the Fed's independent role and that its actions are causing the dollar to fall further.
As blogger Felix Salmon noted:
Bernanke gets into very dangerous territory indeed: He explicitly says that he's trying to boost stock prices. Surely if we've learned anything from Greenspan's mistakes it's that the Fed shouldn't be trying to support stock prices, and that attempts to do so are liable to end in tears.
Ariana Eunjung Cha
| November 4, 2010; 10:52 AM ET
Categories: Federal Reserve
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