Goldman’s Smack

by Ramesh Ponnuru

David Goldman says I’m not listening to Ben Bernanke. Contrary to Bernanke’s predictions, he says, stocks have “tanked” and long-term interest rates have risen. Therefore QE2 has failed and I’m wrong to support it. The economists I’ve previously cited in support of QE2 are guilty of holding a “closed-economy model,” etc., as am I.

Almost none of this has anything to do with what I’ve said. As I wrote in my last post on this topic, I don’t agree with every argument that Bernanke has made for QE2. Specifically, I said that I have never expected it to reduce long-term interest rates. (I hope that long-term interest rates go up in response to the stronger recovery to which I think QE2 will contribute.) The goal is to address a monetary disequilibrium. Nominal GDP is still well below its pre-crisis trendline, and that’s something the Fed can and should rectify.

(Note to some readers: I am well aware of the arguments against having a Fed in the first place. I’m sympathetic to them! The Fed’s record is not particularly good–especially lately. It was too loose during the boom and then too tight in late 2008. As long as we have a Fed, though, I want its policies to be sensible; and I don’t think a loose policy is necessarily any more interventionist than a tight one. The fact of central banking is the key intervention, and it happened a long time ago.)

Incidentally, while I do not wish to speak for others, I am pretty sure that my second paragraph above accurately describes the views of Scott Sumner, David Beckworth, and Josh Hendrickson too. None of them were banking their support for QE2 on a reduction in long-term interest rates. None of them has a “closed economy model.” In fact, Sumner has placed a lot of emphasis on the European debt crisis as a contributor to the increased demand for dollars that has necessitated QE2.

Goldman’s critique may apply to a lot of people; just not the ones he has identified.