QE3: Fed acts to help economy

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QE3: Fed acts to help economy

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Bulworth

Economy • 9/13/12 10:11:11 am • Views: 385

One common element to this year’s GOPteabag campaign has been its insistence that the Fed not do anything to help the economy, particularly anything to increase employment, even though full employment happens to be one of the Fed’s two goals (the other being to keep inflation low).

finance.yahoo.com

I look forward to more #Romneyshambles as teabaggers everywhere fume and threaten the Fed. Maybe the village media can ask team Romneybot why it doesn’t want the Fed to do its job.

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lostlakehiker Thu, Sep 13, 2012 12:30:10pm

The discussion here takes it as axiomatic that when the Fed does something it describes as intended to help the economy, the action it takes does in fact help the economy.

The GOP, correctly or mistakenly, tends to the view that when the value of the dollar is uncertain going forward, because the Fed is unpredictable and may from time to time decide to issue however much extra money it thinks is needed to boost employment, this undermines long term prospects.

Consider, for instance, home mortgages. If inflation is high, then banks must charge a high interest rate just to cover the inflation. But potential buyers may be wary of borrowing at interest rates which would be punitive if inflation moderated. Nobody knows. The deal falls through.

We've been through this several times already. Issuing money to offset a rise in real GDP, or to offset a drop in the velocity of the money already circulating, is not inflationary. Issuing money when there is no corresponding increase in real GDP, and when the velocity of money has stabilized, drives up prices and disrupts commerce. And what if the velocity of money picks up? What shall then be done with all the money already issued? The fed can sponge it up again, but only at the price of creating further distortions and disruptions.

Milton Friedman, who did after all win a Nobel Prize in economics, explained in great detail the hazards of putting inflation control on the back burner.

Bulworth Thu, Sep 13, 2012 12:56:32pm

Inflation has been on the front burner. Addressing unemployment hasn't been on any burner.

wrenchwench Thu, Sep 13, 2012 4:53:06pm

The Fed is the reason our economy is recovering better than Europe's is. Ron Paul should move to Spain.

Bob Dillon Thu, Sep 13, 2012 10:40:01pm

Theoretically "this time it's different" because the program is open-ended, and the mortgage debt purchases can continue indefinitely.

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