Tuesday, November 09, 2010

Strange bedfellows doth economics make, QE2 edition

Here, we have Fox News backing Obama (that's backing, not bagging), and Sarah Palin bagging the US Federal Reserve Chairman (that's bagging, not backing). And other sorts joining in higgledy-piggledy.

Fox News: Obama Cranks Up Currency Heat on China as Gold, Oil Prices Soar
President Obama found himself in India Monday on the defensive over the Federal Reserve's decision last week to print more money -- a move Fed Chairman Ben Bernanke insists will stimulate an economy stuck in neutral.

Obama's comments came in the face of stepped up criticism from China, Russia and Germany over the Fed's decision. "We can't continue to sustain a situation in which some countries are maintaining massive [trade] surpluses, others massive deficits, and there never is the kind of adjustments with respect to currency that would lead to a more balanced growth pattern."

And here's Sarah, in The Guardian: Palin takes potshot at $600bn QE2
Tea Party darling Sarah Palin joins Chinese and Germans in criticising resumption of quantitative easing, telling Fed chairman Ben Bernanke to 'cease and desist'

"If it doesn't work, what do we do then? Print even more money? What's the end-game here? Where will all this money printing on an unprecedented scale take us? ... All this pump-priming will come at a serious price," Palin will say, according to snippets of the speech obtained by National Review.

"Everyone who ever goes out shopping for groceries knows that prices have risen significantly over the past year or so. Pump-priming would push them even higher," Palin adds.

The Wall Street Journal, which has mainly appreciated the Fed's lift of "asset prices", is even starting to feel a little less robust, but still pugnacious, in its endorsement: Fed Global Backlash Grows
China and Russia Join Germany in Scolding; Obama Defends Move as Pro-Growth

The Fed is independent, and the White House by longstanding tradition has strained to avoid any appearance of collusion or conflict. Mr. Obama said the administration doesn't comment on particular actions of the U.S. central bank, before adding: "I will say that the Fed's mandate, my mandate, is to grow our economy. And that's not just good for the United States, that's good for the world as a whole."

The prospects of the Fed flooding the financial system with money helped drive gold above $1,400 an ounce on Monday.

Other assets, such as U.S. stocks and oil, drifted back slightly on Monday after getting a big boost from the Fed's announcement last week.

Underpinning the debate is a growing sense that the international currency system, which has been based on floating exchange rates for most players for more than 30 years, is wearing out. China's policy of keeping its currency artificially low has long caused tensions that have increased of late, as other countries try to export their economies back to health. Now critics are lumping the Fed's policy, known as quantitative easing, into the same category.

In his first public comments since Mr. Schäuble's outburst, Mr. Obama seemed set to keep the heat on both Germany and China. "We can't continue to sustain a situation in which some countries are maintaining massive [trade] surpluses, others massive deficits, and there never is the kind of adjustments with respect to currency that would lead to a more balanced growth pattern."

Meanwhile, some sleeping in the big featherbed at the Fed are starting to toss and turn.

Fed Governor Warsh Slams QE: "The Federal Reserve Is Not A Repair Shop"
Excerpts from his speech:
The Fed's increased presence in the market for long-term Treasury securities poses nontrivial risks. The Treasury market is special. It plays a unique role in the global financial system. It is a corollary to the dollar's role as the world's reserve currency.

The prices assigned to Treasury securities--the risk-free rate--are the foundation from which the price of virtually every asset in the world is calculated.

As the Fed's balance sheet expands, it becomes more of a price maker than a price taker in the Treasury market. And if market participants come to doubt these prices--or their reliance on these prices proves fleeting--risk premiums across asset classes and geographies could move unexpectedly. The shock that hit the financial markets in 2008 upon the imminent failures of Fannie Mae and Freddie Mac gives some indication of the harm that can be done when assets perceived to be relatively riskless turn out not to be.

In the United States, the Fed's expanded participation in the long-term Treasury market also runs the more subtle risk of obfuscating price signals about total U.S. indebtedness. Long-term economic growth necessitates putting the U.S. fiscal trajectory on a sounder footing. The fiscal authorities need as clear an early warning system as possible, not a handy excuse to delay.

And overseas--as a consequence of more-expansive U.S. monetary policy and distortions in the international monetary system--we see an increasing tendency by policymakers to intervene in currency markets, administer unilateral measures, institute ad hoc capital controls, and resort to protectionist policies. Extraordinary measures tend to beget extraordinary countermeasures. Second-order effects can have first-order consequences. Heightened tensions in currency and capital markets could result in a more protracted and difficult global recovery. These, too, are developments that the FOMC must monitor carefully.

The Federal Reserve is not a repair shop for broken fiscal, trade, or regulatory policies. Given what ails us, additional monetary policy measures are, at best, poor substitutes for more powerful pro-growth policies. The Fed can lose its hard-earned credibility--and monetary policy can lose its considerable sway--if its policies overpromise or underdeliver. We should be leery of drawing inapt lessons from the crisis to the current policy conjuncture. Lender-of-last-resort authority cannot readily be converted into fighter-of-first resort power.

By my way of thinking, the risk-reward ratio for Fed action peaks in times of crisis when it has a full toolbox and markets are functioning poorly. But when non-traditional tools are needed to loosen policy and markets are functioning more or less normally--even with output and employment below trend--the risk-reward ratio for policy action is decidedly less favorable. In my view, these risks increase with the size of the Federal Reserve's balance sheet.

I am less optimistic than some that additional asset purchases will have significant, durable benefits for the real economy. Of course, benefits may well be more substantial than I anticipate. Lower risk-free rates and higher equity prices--if sustained--could strengthen household and business balance sheets, and raise confidence in the strength of the economy. Modestly higher rates of inflation could increase nominal growth, and ostensibly place the economy on a stronger trajectory.

But, expanding the Fed's balance sheet is not a free option. There are significant risks that bear careful monitoring by the FOMC. If the recent weakness in the dollar, run-up in commodity prices, and other forward-looking indicators are sustained and passed along into final prices, the Fed's price stability objective might no longer be a compelling policy rationale. In such a case--even with the unemployment rate still high--the FOMC would have cause to consider the path of policy.

And the Pollyanna (or disingenuous) headline of the day goes to the NYT: Fed Action Gets an Unexpected Endorsement From India
“A strong, robust, fast-growing United States is in the interests of the world,” said Prime Minister Manmohan Singh. “And therefore, anything that would stimulate the underlying growth and policies of entrepreneurship in the United States would help the cause of global prosperity.”

Mr. Singh, an economist by training, made his comments during a joint news conference here with President Barack Obama. The prime minister’s support could help the United States deflect criticism of Washington’s economic policies at the upcoming Group of 20 meeting in Seoul later this week, which both Mr. Obama and Mr. Singh will attend.

Unexpected?

Really?

Consider this story in Time: Obama Plays Well in India. What Will He Get in Return?
U.S. President Barack Obama and Indian Prime Minister Manmohan Singh have met seven times since March 2009, and they seem to be getting comfortable. On Sunday in Mumbai, Obama tried his hand at Indian folk dancing during a Diwali celebration at a local school. The usually sober, scripted Singh, meanwhile, jauntily fielded questions at a joint news conference on Monday. "We're not afraid of the K word," he said in response to a question about Kashmir. And he bluntly defended his country's much-maligned outsourcing industry: "India is not in the business of stealing jobs from the United States of America."

A few hours after Singh's Yankee plainspokenness, Obama delivered a speech to India's Parliament with a subtlety and political skill worthy of the nation's great statesmen. Obama flattered India's pride in its past, recalling Swami Vivekananda's visit to Chicago in 1893; he showed Gandhian humility, saying, "I might not be standing here before you today" had it not been for Mohandas Karamchand Gandhi's influence on the U.S. civil rights movement.

Obama then exceeded the Indian government's expectations for the trip and delivered the two most important items on India's wish list: he endorsed India's bid for a permanent seat on the U.N. Security Council and used strong language toward Pakistan, saying he would "insist to Pakistan's leaders that terrorist safe havens within their borders are unacceptable."

Read more: http://www.time.com/time/world/article/0,8599,2030114,00.html#ixzz14kmRldHX
The article then went on to discuss several items of "what the U.S. can look for in return". It was not complete. It did not include an "unexpected" endorsement of QE2.

Still, it is an interesting piece, and includes links to some really touching photos, like this one:

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