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A Quibble Over QE2

The opinions expressed by columnists are their own and do not necessarily represent the views of

WASHINGTON -- The growing backlash against Fed Chairman Ben Bernanke's second quantitative easing, dubbed QE2, is raising long overdue complaints about its role in economic policymaking.

The Fed's sweeping second purchase of U.S. Treasury bonds to pump more money into the U.S. banking system doesn't seem to be working quite like QE1, which helped end the financial panic that threatened the economy's major financial institutions.

The aim of the $600 billion QE2 is to stimulate the anemic U.S. economy by purchasing Treasury securities to bring down long-term interest rates. But interest rates rose in response to the Fed's bond-buying initiative (the 10-year Treasury yields jumped to 2.95 percent Monday) and few -- outside of the Fed's Democratic cheerleaders -- expect it to unlock needed investment capital, increase economic growth or reduce the recession-level jobless rate. "Governments across the globe and even Fed officials have expressed concerns about the impact of the bond-buying effort and doubts about whether it will actually help the U.S. economy," writes Deborah Lynn Blumberg in the Wall Street Journal.

Obama took a beating at the G-20 economic summit in Seoul last week from critics who said he was in no position to criticize China for currency manipulation when the Fed was pumping hundreds of billions of dollars into the U.S. economy to lower the value of the dollar and improve export sales. Within the Fed itself, there is a growing division among the board of governors over Bernanke's policy.

"I am less optimistic than some that additional asset purchases will have significant, durable benefits for the real economy," Fed governor Kevin Warsh said in a speech last week that was the talk of the financial community and shook Wall Street.

Home mortgage interest rates are already low, thanks to the Fed's earlier intervention, but the housing industry remains weak, foreclosures continue to rise and fewer homebuyers are entering the market.

Much is being made by the news media in the spurt of retail hiring for the Christmas season, but these are temporary jobs that will end when the holidays are over. The private sector job market is still in critical condition heading into 2011 and is unlikely to improve anytime soon.

Increasingly, critics are questioning the Fed's widening role in the economy. Yes it should maintain pricing stability, low inflation and regulate the money supply, but monetary policy is not going to pull this over-regulated, over-taxed, under-invested economy out of the doldrums.

Rep. Mike Pence, Republican of Indiana, who has been part of the House GOP leadership, wants to end the Fed's multiple roles in fighting inflation and boosting employment. "I think we ought to get the Fed ... (out of) this dual mandate of full employment for the country," he said on CNBC Monday. This is the job of fiscal policy that should be carried out by the Congress' executive branch, and not as monetary policy set by the Fed.

Clearly the Democratic Congress' and the president's impotent spending stimulus policies have failed to get the economy running at full throttle. Instead, as growth has fallen to a mediocre 1.7 percent and unemployment is stuck at nearly 10 percent, they have turned to the Fed in a last-ditch bid to rescue them from their follies.

But the Fed's tools are woefully inadequate for this Herculean job. The rise in Treasury interest rates "appears to reflect, at least in part, investors' perceptions that the sharp criticism has made it less likely the Fed will extend its program of buying Treasury bonds to boost the economy," writes Fed watcher Neil Irwin in the Washington Post.

As criticism of the Fed's policies mount, "Bernanke is also finding himself with less latitude," Irwin says.

He has tried to stay out of the tax policy debates between Capitol Hill and the White House, but from time to time, he has suggested tax cuts are one way to grow the economy, and that's where Congress can exert the full range of its fiscal powers.

Think of the economy's weakness as acute anemia throughout its entire body. Treating only parts of the illness through a limited list of spending projects will not cure it. This is going to require a stronger, more pervasive medical treatment that reaches into every nook and cranny of the economy, and that is a federal tax system.

Step 1 in this treatment is making all of the 2001 and 2003 Bush tax cuts permanent so businesses, employers and investors know what their tax bite will be this year, next year and beyond.

Step 2 is to begin applying the brakes on spending to shrink the deficit and reduce the size of government.

Step 3: Lower the tax rates on corporations, small employers and capital gains to further boost business expansion and new job creation and make the U.S. more competitive in the global economy.

Businesses hate uncertainty, and that's about all they've gotten out of Washington lately. Economic certainty creates confidence in the future, something we sorely need.

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