David Beckworth makes the conservative case for QE2 over on the homepage, and Mark Calabria demurs here in the Corner.
Calabria is worried about the soundness of Beckworth’s core assumption: that the increase in monetary supply and lack of subsequent inflation indicates that Americans are hoarding — or in Beckworth’s phraseology, spiking the demand for — cash, because they’re worried about the future. Under this assumption, QE2 would get that cash moving by increasing the monetary supply and raising inflation expectations. In short, Calabria thinks that treating low aggregate demand as the central problem with the economy is to misread the causes and consequences of the recession, and warns that an inflationary crisis is likely to come not with a steady whimper, but a bang. He also argues that, unlike during the early Great Depression, there has been no real contraction of the money supply. That capital is still in the system, but near-zero interest rates are keeping it parked in cash holdings, since there is little incentive for Americans to put their money in interest-bearing investments.
My degrees are in philosophy and political science, so I have no idea whether Beckworth or Calabria has the best of it on the economics of QE2. Which is why I appreciated this op-ed by Stanford economist John Taylor and Rep. Paul Ryan (R., Wisc.). Taylor and Ryan take the position advocated by Rep. Mike Pence (R., Ind.) and others that the Fed needs to be removed from the equation altogether, by rescinding its “maximum employment” mandate, and moving toward rules-based and away from discretionary monetary policy-making.
. . . [I]n the 1970s, Congress endangered the Fed’s independence by tasking it with a dual mission: that of promoting “maximum employment,” in addition to maintaining “stable prices.” This dual mandate placed the central bank in the middle of heated political debates over economic and fiscal issues.
The Fed’s latest unconventional program — commonly called quantitative easing 2, or “QE2″ — follows last year’s unusual interventions (now known as “QE1″), in which the Fed bought not only large amounts of Treasury securities but also securities backed by private mortgages.
Quantitative easing is part of a recent Fed trend toward discretionary and away from rules-based monetary actions. The consequences of this trend are clear: The Fed’s decision to hold interest rates too low for too long from 2002 to 2004 exacerbated the formation of the housing bubble. And while the Fed did help to arrest the ensuing panic in the fall of 2008, its subsequent interventions have done more long-run harm than good.
QE1 failed to strengthen the economy, which has remained in a high-unemployment, low-growth slump, and there is no convincing evidence that QE2 will help either. On the contrary, QE2 will create more economic uncertainty, stemming mainly from reasonable doubts over whether the Fed will know exactly when and how to contract its balance sheet after such an unprecedented expansion.
The prescription:
Congress should reform the Federal Reserve Act, particularly the section of the act that establishes the Fed’s dual mandate. The Fed should be tasked with the single goal of long-run price stability within a clear framework of overall economic stability. Such a reform would not prevent the Fed from providing liquidity, serving as lender of last resort, or cutting interest rates in a financial crisis or a recession.
[. . . ]
Congress should also amend the act so that it once again requires the Fed chairman to report on, and be accountable for, the Fed’s strategy for monetary policy in writing and in public hearings before Congress. These reporting and accountability requirements were removed from the Act in 2000. They should be restored and strengthened.
In particular, the Fed should explicitly publish and follow a monetary rule as its means to achieve price stability. Such a rule should include, among other things: greater simplicity; a description of interest-rate responses to economic developments including how the Fed will achieve those responses through money growth; and greater attention to commodity prices, including food and energy, as opposed to a myopic overemphasis on core inflation.
Within the context of crisis conditions, the Fed should have the discretion to deviate from its strategy of rule. However, it should have to promptly report to Congress and to the public on the reasons for the deviation.
You can read the whole thing here.