The Agenda

Ramesh Ponnuru and Ryan Avent on QE

Ramesh Ponnuru has written a post arguing that anti-QE conservatives are going overboard:


I suspect that intellectual inertia is affecting conservatives’ assessment of this issue as much as the merits. As in so many other areas of policy thinking, conservatives are still reacting to the experience of the late 1960s through the early 1980s–when monetary restraint was exactly what the economy needed. The last decade, in which excessively loose policy at least abetted a ruinous bubble, has reinforced the conservative preference for tight money. But that preference is not applicable at all times and in all circumstances, and it is no longer 1979.

Yet conservatives are talking about runaway inflation at a time when the consumer price index, which itself is generally considered to overestimate inflation, has been registering 1-2 percent inflation. The spread between inflation-indexed and unindexed bonds has also yielded a market prediction of inflation in that range. Opponents of QE2 say that the Fed should not be deliberately raising expectations of future inflation. Maybe they’re right. But let’s have some perspective. If the Fed delivers on the 2 percent average inflation it seems to want, we’ll still be below the average inflation rates of each of the last five decades.

And Ryan Avent writes:


I think it’s difficult to look at the world right now and not conclude that the risk of contractionary policy accidents is far, far higher than the risk of expansionary accidents. Europe offers one big example. The spring crisis derailed American growth through the summer, in part because the Fed didn’t get around to responding to falling growth expectations until the fall. Now, just as it’s treating the previous injury, Europe is flaring up again. And we’re observing the exact same movements in markets that we saw in April and May—a rising dollar, falling stocks, and so on. Europe is making the Fed’s job a lot harder. Meanwhile, Republican leaders—and Sarah Palin—are trying to tie the Fed’s hands. At the same time, European fiscal policy is tightening considerably, and Congressional gridlock may mean that America will embark on an accidentally rapid tightening path itself. And if matters in Europe get really out of hand and banks find themselves requiring additional Congressional support, well, it probably won’t be forthcoming.

Mr Bernanke is concerned about low inflation because it makes the recovery process more difficult. He’s also concerned about it because it doesn’t leave much of a cushion against new shocks. Are there risks to the Fed’s policy? Sure (though Mr Salmon is wrong, again, to say that the Fed hasn’t been clear about how its programmes can be unwound). But the lesson from previous crises of this nature is that disregarding disinflation is an extremely dangerous thing to do. Mr Bernanke has gotten the balance of risks right. Hopefully, he’ll have a the stomach to carry forward despite the barrage of ill-informed criticism he’s facing.

Josh Rosner offers an anti-QE perspective over at Economics 21. The debate rages on. 

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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