QE3 (ie QEuntilitworks)

I have been meaning to write a quick post about this but haven't gotten the chance. I am really happy with the Federal Reserves decision to undertake QE3 - or what I am calling QEuntilitworks because of its open-ended asset purchases, which will continue until there is more progress in the economy. I am very glad the fed finally acted, and I am glad they are using some of their signaling power - basically saying they are willing to let inflation increase above what had previously been a 2% ceiling until things pick-up.

I want to say one more thing about this economic situation we are facing. In the more recent past, the debate among economists - between Friemdman's and Keynes's followers - was whether the best way to fight a recession was to use monetary (ie Federal Reserve) or fiscal (ie stimulus ie government spending) policy. And it seemed for a while that the monetarists were winning the argument (though even Republican presidents like George W. Bush implemented fiscal stimulus).

But during this crisis, Republicans have decided to go back in time and declare that we should do neither monetary nor fiscal policy - that we should let the recession play out. This puts them decades behind and much farther to the right of Milton Friedman.

But putting that aside, the debate over monetary versus fiscal policy has gotten really interesting during this recession. Although we have seen the bottom, we have also seen a slow recovery.

In other recessions, you might see Democrats push for fiscal stimulus while Republican push for monetary stimulus. And if Democrats can't get fiscal stimulus passed, at least monetary stimulus would be enacted by the Fed and the recovery would get going.

However, in this case (after Obama's large but not large enough stimulus failed to start a big recovery), the federal reserve felt it had run out of tools because they couldn't lower interest rates any further (the traditional tool to get growth going again). So Ben Bernake called on Congress to use fiscal stimulus - though in his vague I'm saying it, but not really, way.

So the Federal Reserve was stuck. They had two options. One: wait for Congress to agree to fiscal stimulus. Two: try riskier fed tools like more and more quantitative easing. They waited as long as they could and are now trying the risky option.

I do wish Bernake had been much more obvious in what he was calling for. The Federal Reserve is meant to be above politics so that it can act to help the economy even when politicians will not. But when they run out of tools, they should use their position as non-partisan actors and speak up clearly. He should have said, "The Federal Reserve is out of good, non-risky options. Therefore, we think Congress should pass and the president should sign a fiscal stimulus of X magnitude."

The fact is that we need the federal reserve to be above politics to help the overall economy. But there may be other times in the future when they are low on tools but where Congress has plenty of tools. In that case, they should make very clear and specific recommendations.

But since I don't see that happening here, I will say that I am at least glad that the Fed is willing to try the risky tools since Congress (ie Republicans) don't want to use their tools.