…become respected liberal economists.
As mentioned in my last post, I wanted to comment on the reactions of Krugman and Ezra Klein to QE3. Well, they finally got around to saying something, and it’s more pathetic than I could have imagined.
Just a quick review. QE3 is The Federal Reserve’s plan to create $40 billion/month out of thin air to buy mortgage-backed securities from banks with the stated intention of lowering long-term interest and mortgage rates while boosting employment.
Let’s ignore, for a minute, that 30-year fixed mortgage rates are at 3.55%, which is 50% cheaper than the rates that caused the 2000-2006 housing boom - and just barely higher than current inflation. (What’s the Fed’s target when that’s already a record low? How long until banks pay customers to borrow money?)
Let’s also ignore QE1 and QE2, which were the same program. Since their multi-trillion dollar implementation began in 2008, we’ve seen higher unemployment despite a decline in the size of the labor force (blue line):
So, let’s forget that QE1 and QE2 were both failures. Let’s also ignore that interest rates are already at record lows.
Let’s also ignore that the stated goal of this program is to re-inflate the housing bubble that caused this mess in the first place.
If we can - somehow - do all that, then these comments might make sense:
It’s good to see the Fed moving, finally.
In effect, the Fed seems to be trying to “credibly promise to be irresponsible”, which is what I advocated way back when in this kind of situation.
That’s the reaction from Paul Krugman, the smartest living economist, according to Paul Krugman. He links to a blog post from 2010 as an example of what he advocated “way back when.” Let’s go back further, to 2002:
To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.
Spot on advice then; and even better advice now!
Let’s moveon.org to the young genius aspiring to one day be the next Krugman.
In a blog titled, “Here’s why everyone is so excited about what the Fed did yesterday” (really?), Ezra Klein writes:
Imagine you got a choice of superpowers. You could be invisible, you could fly, you could be really strong, or you could create unlimited amounts of money. You might well choose the money one. The other ones are cool for a bit, but they’re not all that versatile, and they may well get you into trouble.
The best way to think about the Federal Reserve is that it basically has a superpower. It can create as much money as it wants. Real, American money.
Anyone can choose the “superpower” of printing money. They’re called “counterfeiters” and they’re usually villains. If printing money is so great, why isn’t Klein extolling the virtues of xeroxing your own money at home? And, just as a matter of record, creating “unlimited amounts of money” is more likely to “get you into trouble” than flying or being strong.
And so, on Thursday, Fed Chairman Ben Bernanke said the Fed had finally decided to do something about unemployment. Something big. Something that might actually work.
Something big…and something that’s already failed twice. It’s called QE3 for a reason. He continues…
The way the Fed’s plan works — if it works — is that buying all these bonds will drive down long-term interest rates, which will give businesses and investors more incentive to spend now as opposed to sitting on their money waiting for later. It will make mortgages even cheaper, which should accelerate the housing market’s recovery.
Yeah, I’m going to run out right now and buy 30-year bonds with negative real yields on the hope this Fed action might bring me BIGGER losses!
And - yes - let’s hope for another housing bubble! What can go wrong with that??
….This is the intellectual elite!!!
(side note: on the first day after the QE3 announcement, rates on treasuries are UP. Whoops!)