The Fed’s $600 Billion Move: Monetary Debauchery?

BY Paul Solman  November 8, 2010 at 11:52 AM EST

Fed Chairman Ben Bernanke; Getty Images file photo

Forgive me for not answering a question today, but for posting a note about the Fed.

Making Sense

Its decision last week: to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.

Why? Ben Bernanke explained in an article in The Washington Post:

> The Federal Reserve’s objectives — its dual mandates, set by Congress — are to promote a high level of employment and low, stable inflation. Unfortunately, the job market remains quite weak; the national unemployment rate is nearly 10 percent, a large number of people can find only part-time work, and a substantial fraction of the unemployed have been out of work six months or longer. The heavy costs of unemployment include intense strains on family finances, more foreclosures and the loss of job skills.

Thus the plan: create 600 billion new dollars as electronic deposits at financial institutions by buying Treasury bonds. Why? To bring down long-term interest rates and thus mortgage rates while hiking the value of assets like stocks.

“And higher stock prices,” wrote Bernanke, “will boost consumer wealth and help increase confidence, which can also spur spending.”

The plan has its share of detractors, among them conservative economist Ed Yardeni:

‘[M]onetary debauchery.’ Of course, Fed Chairman Ben Bernanke and his allies on the FOMC much prefer to call what they are doing ‘quantitative easing.’ In a speech on October 25, (Federal Reserve Bank of New York) President Bill Dudley dismissed the notion that the Fed is monetizing the debt simply by claiming that this is not the Fed’s intention. However, as both sides said during the 2008 presidential campaign: If you put lipstick on a pig, it is still a pig. The Fed is committing to finance all of the federal deficit through the middle of next year.

No one disagrees with the logic. If the U.S. economy needs a boost and neither consumers nor businesses nor even government (federal, state, local) will provide it, who’s left but the Fed?

But it’s a big “If,” given the potential costs.

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions _Follow Paul on Twitter._