Scott Sumner has got an interesting post, charging the Fed Chairmen w/ dereliction of duty: "the Fed did not engage in any QE at all in the first half of 2009, indeed the monetary base fell at near record rates." (QE=Quantitative Easing, which means the Fed creates assets out of thin air and uses it to retire gov't debt.)
Well, he may actually be correct that the reason the recession has been so deep, and that the unemployment rate has climbed so high is that the Fed, and particularly Bernanke, are simply stupid people who’ve spent their careers “doing algebra”… Proof Bernanke has never been the sharpest tool in the shed can be seen from his title and paper “is growth exogenous?” — and I’m not making this up! OF COURSE growth is not exogenous! And, as I've posted before, the papers on the Great Depression I've read of Bernanke's were really mediocre at best.
So, two things — for fiscal stimulus to have been worthless, then you must believe that the entire downturn should have been 100% avoidable, had the Fed started QE policies last fall rather than this spring. I'm not sure I actually believe this, but I don't actually know the record on QE -- so I figured I'd try to find out!
Here's an article from last November: "Total credit extended by the central bank has surged from an average of $885 billion in the week ending August 27 to $2.198 trillion in the week ending November 12."
The article also states: "Quantitative easing has begun."
And this quote is linked to in a post on Naked Capitalism , also last fall: "The US Federal Reserve’s policy is about avoiding a type-one error – underestimating the threat of a depression – at all costs. I was quite surprised last week – though perhaps should not have been – when I learnt that the Fed had quietly adopted a policy of “quantitative easing”."
But then, this March , the Fed once again announced it was starting QE.
But then we have Sumner: "I think you may be right about the Fed’s motives, but if so it shows that QE was always a sham. The Fed was never serious about boosting the base, which means QE was never tried. So while I admit you may be right, it still makes my post worthy of attention doesn’t it? After all, most of the pundits back in March treated the QE like it was an attempt to boost the MB. Nobody predicted the base would have its biggest decline (in the first half of 2009) since 1937."
So, I'm a bit perplexed -- after all, Bernanke is one who has argued that the Great Depression could have been prevented with more quantitative easing, and that Japan's "Lost Decade" could also have been prevented with more quantitative easing, and now that the US is still firmly ensconced in our 18th month now of recession, he's apparently favoring the Fed 1930s/Japan1990s approach to deflation-fighting...
But, perhaps Sumner just doesn't know what he's talking about. It's a bit crazy for him to say that the fiscal stimulus was actually "counterproductive" -- you'd have to believe, first, that Bernanke has been negligent, and second, you must believe that raising taxes and cutting inner city education spending are good to do in a recession, and that the road from San Fran to Tahoe doesn’t need to be repaved.
On the 2nd point, I’m hardly a dispassionate observer — I got a flat on that road which sucks shit (representative of California’s infrastructure and shitty schools), and I’m equally certain that cutting school funding for inner city schools is a f*cking terrible way to balance a budget. New York city increased Met fares for disabled people, and florida increased taxes on retirement homes. South Carolina cut food stamps. Sumner’s argument that a little extra QE would cancel out all these cuts sounds like utter nonsense to my ears.
And the thing to realize about the first point is that there are two ways to fight a recession. One is fiscal policy, one is monetary policy. One way to fight it would be to use only monetary policy. Another would be to use only fiscal policy and hold monetary policy constant. With 9.5% unemployment and rising, with GDP dipping at a 6% annual rate in Q1 (and contracting at 10%+ in many other countries), with a recession which has lasted 18 months and counting, the argument that “Ha! Fiscal policy was not necessary b/c Monetary policy alone would have prevented the recession!” is a bit strange… And, after all, there are costs associated with both as Krugman explained back in March.
In conclusion, just b/c the Fed is staffed w/ psuedoscientists rather than rocket scientists doesn’t mean fiscal policy is worthless… And I still need to read more about what the Fed has and has not done...
Update: For Fun, Stock Market as Barometer of Policy Success
23 minutes ago