Bernanke's Rationale Looks Too Rosy

Felix Salmon isn't thrilled with Fed chief's op-ed
By John Johnson,  Newser Staff
Posted Nov 4, 2010 12:25 PM CDT
Federal Reserve Chairman Ben Bernanke attends the grand opening of the Junior Achievement Finance Park in Fairfax, Va., on Tuesday, Oct. 19, 2010.   (AP Photo/Jacquelyn Martin)
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(Newser) – The Fed's controversial plan to buy $600 billion worth of Treasuries to stimulate growth has brought the phrase "quantitative easing" out from the obscurity of financial blogs. Will it work? Two columns today on the subject from Ben Bernanke himself in the Washington Post and Felix Salmon at Reuters:

  • Bernanke: The Fed chief offers three examples of how the move will help: It will lower mortgage rates and thus help prospective homebuyers or those who want to refinance; it will encourage business investment by lowering corporate bond rates; and it will raise stock prices, which will in turn boost consumer wealth, confidence, and spending "in a virtuous circle."

  • Salmon: Sorry, but lower rates will have a "decidedly marginal" effect on the housing market and business investment. As for boosting stock prices, "surely if we’ve learned anything from Greenspan’s mistakes it’s that the Fed shouldn’t be trying to support stock prices, and that attempts to do so are liable to end in tears." He doesn't like that Bernanke addressed (and largely dismissed) only the threat of inflation, without mentioning other potential costs such as "currency-related difficulties" for investors. All in all, he wishes Bernanke had called a press conference to answer questions rather than writing an op-ed.

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