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The Fed Has Credibility?

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Monday, 01 November 2010 04:44

A Washington Post article discussing the risks associated with another round of quantitative easing raised the possibility that the Fed could lose its credibility if the program does not lead to the intended growth. It implies that the loss of credibility would be a major harm.

It is worth noting that the whole economic collapse came about because of the Fed's failure to notice and/or do anything about an $8 trillion housing bubble. Given this enormous failure, it is not clear how much credibility it currently enjoys among people who follow the economy.

The article also raises the risk that a precipitous fall in the dollar, "could be disastrous." It is difficult to see a scenario in which even the steepest falls in the dollar would be disastrous for the United States. U.S. exporters would suddenly become hyper-competitive (we still export $1 trillion a year in goods and services), while domestically produced goods would drive imports from the shelves. This scenario would likely be disastrous for our trading partners, which is why they would almost certainly intervene in currency markets to prevent the dollar from having a steep and sudden tumble.

Comments (7)Add Comment
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written by foosion, November 01, 2010 6:25
The argument seems to be that the Fed isn't really trying to fix things, so its failure doesn't damage its credibility. Only if it tried and failed would its credibility be damaged.

The Fed is mandated by law to maximize employment and to keep prices stable (interpreted as about 2% inflation). By its own admission it has failed to do so (see the last FOMC statement). Violating the law is not usually interpreted as a credibility builder.

The Fed isn't even doing the things Bernanke said Japan must do to fix its economy. His criticisms are now criticisms of his own lack of action.

Plus the housing bubble stuff.
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written by skeptonomist, November 01, 2010 9:07
The Fed has already bought about $2T of long-term securities, mostly MBS's. Since the value of the MBS's was highly uncertain, this certainly stabilized the economy, in effect by having the Fed/Treasury complex assume the bad debt. The Fed's credibility is therefore probably high among those, such as big banks, which were directly benefitted by this and other bailout actions - they have good reason to think that the Fed will protect them. But with respect to increasing the real money supply and raising the inflation rate QE1 seems to have had little effect - the "money" created by the purchases is sitting in bank reserves. Even if the Fed changes its objective and buys more Treasuries this time, there is no reason to think that this will have an effect on inflation.
QE2 -- How will the intervention play out?
written by Ron Alley, November 01, 2010 11:45
The probability is that QE2 will have little real effect. However, it seems to be about the only politically viable option available to the Federal Reserve.

The question is just how will QE2 be carried out. One tactic would be for Federal Reserve to purchase only, or predominately, long-term Treasury issues. Another tactic would be for it to buy only short-term Treasury issues.

I really don't understand enough about economic to predict the effects of each option. But my instincts tell me that the choice may be quite significant. If one option favors the banks over the rest of us, then both the Federal Reserve and President Obama may have significant problems with credibility in 2012.
Summer Slowdown was due to the Dollar Increase
written by Paul, November 01, 2010 2:20
The Greek financial crisis caused a sharp increase in the value of the dollar vs. the euro which caused our GDP increase to be halved. Now that the dollar/euro values have returned to levels in April, we have seen a faster increase in GDP. Obviously, a lower dollar would reduce unemployment faster and that might be the Fed policy agenda.
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written by soloduff, November 01, 2010 5:48
The author of the article seems not to have noticed that the "disaster" has already hit. Helicopter Ben is just showering fake $ on the disaster area, secure in the neoclassical economic scientific knowledge that $ makes everything better. Their "surprise" at how their illusion of control will work out is the only thing I look forward to in America's (and the world's) future. It is a festival for misanthropy . . . .
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written by daryyy, December 09, 2010 9:21
Most people think time is like a river that flows swift and sure in one direction, but I have seen the face of time, and I can tell you - they are wrong.colon cleanse
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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