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.
This week, a group of predominantly Republican economists, financers and writers wrote an open letter to Bernanke calling for ending QE2. "The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment." Searing words. It's highly unusual for such a group to put out such stinging criticism of a Fed chairman's policy.
In announcing QE2, Bernanke stressed the Fed's statutory obligation to hold down unemployment. That was inserted into the Fed's charge by Democrats in the 1970s but has clearly been considered of secondary importance by Chairmen Paul Volcker and Alan Greenspan to the Fed's primary duty to hold down inflation.
I suspect that Bernanke is less focused on reducing unemployment than he is on preventing deflation. His scholarly work has concentrated on the disastrous deflation that struck America and much of the world in the 1930s. As a Fed board member in 2003, he delivered a widely noticed speech warning of deflation and indicating how the Fed could fight it.
He once wrote, presumably whimsically, that if deflation was a great enough threat, the Fed chairman could go up in a helicopter and throw money down into the streets. But now it looks like a lot of people want to ground Helicopter Ben.
QE2 may have seemed a good match for the Obama administration policy of strengthening China's currency and in the process weakening the dollar. But it seems a poor match with the incoming Congress -- and with the heads of many of the world's other leading economic powers. Can the Fed persist in a policy that has stirred such scathing criticism?
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