Chicago Fed Pres on QEs

Jeff  Carter
Posted: Aug 31, 2011 12:01 AM

Chicago Federal Reserve President Charlie Evans was interviewed by Steve Liesman on CNBC yesterday morning. I thought it was a really good interview, with some tough questions. Better yet, some revealing answers. (Apologize for the ads, nothing I can do about them)

Before I critique the Fed, I must say that there are some Federal Reserve policies I applaud. Easy money in times of stress are the right strategy. Prodding the elected officials to enact budget cuts, and to write good short term fiscal policy is a good idea. I like the transparency they have pursued, and wish they would be even more transparent. Having a Federal Reserve Bank and system is good for America.

However, they have made some missteps. QE1+2 is one of them. It’s like a dangerous drug that you get hooked on. Heroin for bankers. We are losing our way.

And on QE2

I think his statements contrasted with other Fed president statements show why the Fed has decided to extend the September meeting to two days. There is rancor among the ranks, and Bernanke would like to come out of that meeting united.

I disagree with Evans assertion that QE2 didn’t have an effect on commodity prices. Clearly, it did. QE2 devalued the dollar, in effect pushing up the price for commodities. Evans sees Chinese demand as the cause of higher prices. It’s hard to tell him he is incorrect, since worldwide demand for commodities does push up the price. Plus, we also had some horrible weather in 2010 for growing, which also contributed to price inflation.

But the two other drivers, especially for oil prices, were artificial. One is the abysmal Obama energy policy. He has limited exploration and production of oil, nuclear, coal and gas. Instead they are focusing on green energy which has none of the benefits of traditional energy, and much higher costs. Obama isn’t moving the supply curve. This increases the price. QE2 had a substantial effect on oil prices.

In August 2010, after the Jackson Hole speech by Bernanke, all commodities went on a tear higher. I think the Fed would look at outside events: Arab uprising, Japanese earthquake, and other dislocations. But QE2 had an upward effect.

The liquidity trap is real. Monetary policy really can’t fix it. To free the dam, we must enact good fiscal policy in the short run. That means reframing how we look at the problem.

Macroeconomics is an inexact science. Like stock analysts, macroeconomists are almost never wrong. They can point to this or that. However, I think the results of historical math proves out the way to frame the problem. Keynesian macroeconomics is not the way to address it. Good macroeconomics starts by viewing the world through the classical model. Policy should stem from that.

The classical economists that I have read are virtually all against a QE type policy. We have tried it twice and failed both times to get the results we desire. Further, Japan has pursued it for decades, and still not gotten the promised economic growth the policy hypothesizes.

If there are principled economists, Keynesian vs Classical, on the Federal Reserve Board it will be very difficult for Bernanke to bridge the chasm.

It is mission critical that the next administration is populated by hard core classical economists. The last few years are a textbook case on how Keynesian principles do not work.

If we are going to deficit spend to stimulate the economy, we ought to do it through tax reduction,not more spending. There is a big behavioral difference how the two policies play out.

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