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The Fed’s $600 Billion Bond Buy Lays an Egg Here and Abroad
Can the Fed persist in a policy that has stirred such scathing criticism?


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Michael Barone

I don’t claim to be an expert on monetary policy or international finance, but I’ve been astonished by the degree of disrespect expressed here and abroad toward the latest economic policies of President Barack Obama and Federal Reserve chairman Ben Bernanke.

The policies in question are the Obama administration’s attempts to convince other countries (especially China) to strengthen their currencies and the Fed’s renewed bout of quantitative easing (generally referred to as QE2), which involves buying $600 billion in Treasury bonds by next June.

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Both are widely interpreted as attempts to lower the value of the dollar to make American exports cheaper and to reduce the huge export earnings of countries as varied as China, Germany, and Brazil.

Not surprisingly, Chinese and German leaders are squawking loudly, complaining that the United States is attempting to use their strength to compensate for our weakness. Brazil’s finance minister, Guido Mantega, minced no words when he called the Fed’s action the beginning of “currency wars.”

Obama’s efforts to get an agreement at the G-20 conference were not successful. Seldom if ever has an American leader been pummeled with such criticism at an international economic conference.

During the 2008 campaign, we were told that foreigners would once again respect America if voters elected Obama. That wasn’t apparent in South Korea.

In Washington, too, there have been complaints coming from a surprising source. Shortly after Bernanke announced the Fed’s QE2 policy, Federal Reserve Board member Kevin Warsh wrote an article for the Wall Street Journal saying that there won’t be much easing and that the Fed can’t compensate for bad fiscal policy. “The Federal Reserve is not a workshop for broken fiscal, trade or regulatory policies,” he wrote.

Warsh has been regarded, by me and others more expert, as a solid Bernanke ally on the Fed, one given to justifying the chairman’s policies to the outside world, and he voted with Bernanke on QE2. But in the Journal, he wrote, “I consider the (Fed’s) action as necessarily limited, circumscribed and subject to regular review.” Translation: Ben, you haven’t got my vote for long.

Similarly, many were surprised to see World Bank president Robert Zoellick write in the Financial Times on November 9 calling attention to the risk of inflation. “Markets are using gold as an alternative monetary asset today,” he wrote.

He urged economic policymakers to consider “employing gold as a reference point of market expectations about inflation, deflation and future currency values.” Gold prices, as viewers of cable-news ads know, have been rising to near-record levels, so inflation is what Zoellick is worried about.

Zoellick is no fringe character. He worked for James Baker at Treasury and State and was George W. Bush’s special trade representative and deputy secretary of state.



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