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The following article was published in our article directory on December 31, 2010.
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Federal Reserve Secondary Quantitative Easing Will Fail

Article Category: Business Management

Author Name: Amanda xzh

If you want to affect the global economy in 2010 selected the ten figures, Bernanke should definitely tops the list. In the quantitative easing on the road, the Fed chairman to demonstrate his stubbornness and "treason." From March 2009 the "QE", to August 2010 the "QE1.5", and then in November the "QE2", and even now begin discussion of the "QE3", Bernanke again and again to the global investment central banks and bottom line expectations and tolerance challenge. On the current international economic situation, Bernanke's actions in the end what the merits and demerits? Second quantization in the end is the "angel" or "the devil"? Listen to the Yale University professor, non-executive chairman of Morgan Stanley Asia Stephen Roach, the dialogue with the reporter.

Reporter: In a recent speech, Bernanke said the Treasury is to buy again and again to come down interest rates, and thus achieve the purpose of stimulating faster economic growth. But in fact, U.S. bond yields over a period of time, not fall, shortly before the 10-year Treasury yields had risen to about 3.2%, a record half year high, and promote the 30-year fixed mortgage rates rebounded sharply. Bernanke reasons for the implementation of quantitative easing, the second does not seem sufficient.

Roach: Fed's this great experiment will be left to fail.

The reason why the Fed start of quantitative easing, is worried about a "mission of insufficient growth", that is, the coexistence of high unemployment and low inflation. In layman's terms, this means that the era of the U.S. economy after the crisis, the Fed did not achieve the statutory goal of full employment two major policy and price stability. However, the Administration has been unable to further reduce interest rates, so, out of the "dual mission" of the faithful, the Fed's loose policy has turned conventional unconventional easing. On Ben Bernanke, this is only to use different techniques to achieve its goals, although non-traditional, so, what the big deal of it?

But worse, the dual mission itself is seriously flawed. First of all, this is a historical relic. 1978, promulgated the " Act" requires the Federal Reserve not only to achieve the 1946 "full employment bill," provides full employment objectives, but also to maintain price stability.

In the beginning some 20 years, this arrangement to be effective. However, since the late 90s of last century, the double mission of trouble. Generous funding, coupled with ideologically inclined to self-regulatory central bank, making the emergence of asset and credit markets over the dangerous tendency. As a result, a bubble growth will eventually depend on the tragedy.

Reporter: Bernanke said, "If necessary, we can raise interest rates in fifteen minutes", that the authorities have the ability to let loose monetary policy continued to bring the risk of inflation. However, the practice of the past few years the Federal Reserve, Alan Greenspan led the Fed at least not properly implement this, you think the Bernanke-led the U.S. central bank will be able to do well at this point?

Roach: Fed insisted that he have the tools to avoid inflation. This argument is not the point. This debate has nothing to do with the tools, the use of those tools is the political will and independence. Nominal interest rates remain low in the case of large-scale implementation of liberal policies will lead to a new round of asset bubbles, increasing current account imbalances and lead to competitive devaluations.

Reporter: We all know that Bernanke is the U.S. central bank's governor, the first in the formulation of policy interest from the United States for granted, and it is only right and proper. But it is strange, if the benefits for the sake of the U.S. economy, then why have so many people in the United States against Bernanke, like his predecessor, Alan Greenspan, the economy such as the veteran of many Republican?

Roach: Second quantization not only upset the market, but the United States government, academia, policy and political circles and the global focus of the debate. Fed unusual defensive posture, brought the only effect is to deepen people's suspicions, while the U.S. central bank's reputation and 30 years of hard-won independence at risk.

Bernanke had explained frankly secondary quantitative policy, said the stock market soaring in the form of a more relaxed financial environment, may enhance confidence, promote the so-called asset-based wealth effect stimulated aggregate demand. These remarks are not sound very familiar? Because of Bernanke's predecessor, Alan Greenspan is exactly the same way.

The assumption is that the Fed, QE2 will re-energize the current downturn in the U.S. asset-dependent economy, "animal spirits." But this presumption is a very dangerous strategy. Many people, even including myself, believe that it is this dangerous practice is started in this great crisis of 2008 potential problems.

Reporter: October, year on year increase in U.S. core CPI record low in history. But in many other countries, inflationary pressures have continued to heat up. However, any other difference is that a country's central bank, the dollar is the world's number one reserve currency issuing countries, two thirds of the circulation of the dollar in international markets. So someone said, in the context of the second quantization, with global inflation in the United States to solve their own deflation.

Roach: I think the problem in the implementation of the second quantization, there is a perfectly reasonable speculation: The Fed ultimately prove to be wrong, American consumers will continue to "deleveraging." In this case, the liquidity injection will not be absorbed by domestic demand. So a large part of QE2 is likely to flow abroad, the development of high-return lead to asset bubbles in the economy. Such concerns have prompted South Korea, Thailand and China, and many other economies, tightening of capital controls.

Q: Not long ago, the G20 summit in Seoul, Bernanke and Obama became the focus of all the siege. Many emerging economies are considered, by repeated expansion of quantitative easing, the U.S. is actually in the "competitive" against the dollar in order to export power. Export growth in recent months illustrates this point. Although the United States has repeatedly called strong dollar is in U.S. interests, but it still seems to escape the suspicion of manipulating its currency.

Roach: far as U.S. is concerned, I would not think that is being manipulated. U.S. current account deficit of structural problems in the short period of financial crisis, narrow, now that the deficit began to increase. U.S. dollar has dropped 8 and a half years, the U.S. dollar trade-weighted index peaked in February 2002, down 23% so far. But the U.S. dollar will continue to fall, unless the United States to solve the problem of inadequate savings.

But the United States do Secondary loose bring danger to the world. To be sure, QE2 on the dollar. Therefore, it will only aggravate the recent "currency war" in the skirmish, driving the global move toward competitive devaluation, trade frictions and protectionism. Bernanke November 19 date for the QE2's defense in the subtext of criticism of China, to highlight these risks.

In addition, assuming that Bernanke is correct, QE2 promoted to lead the U.S. asset market rebound in consumer demand. As asset-dependent economies tend to have lower savings rate based on income, and ultimately, the U.S. current account deficit will widen again, which brought new problems of global imbalances. 2004 to 2007 when the situation is a good negative materials, the United States should not be again on the old road.

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