Can Bernanke and the Fed unwind “quantitative easing” without destroying the Dollar?
*Reuters, by James Saft, July 23, 2009
“Federal Reserve Chairman Ben Bernanke may discover that having an exit strategy from quantitative easing is one thing, having the power and will to implement it is quite another.
Financial markets were much impressed by Bernanke’s recent detailing of the tools he would use to unwind the trillions in quantitative easing the bank has employed to avoid deflation and restart credit markets.
Bernanke will press the right button, these investors reason, perhaps the one labeled ‘avoid massive inflation’ and the blimp that is the Federal Reserve’s swollen balance sheet will glide gently to earth.
The issue, however, is not whether Bernanke and the Fed have the tools – the mechanisms are surely in place – but will they have the guts and the will to buck the inevitable political pressure to keep the fountains gushing.
Even more to the point, if Bernanke is not reappointed to serve another term when his current one expires at the end of January, he may never get the chance to try.
We are facing a long and hard recession, and recovery when it comes will not be the electrifying type that makes it easy to ease up on the gas; it will be slow, grinding and accompanied by continued high unemployment.
Unemployed people vote and the people they vote in and out of office will want the Federal Reserve to err on the side of profligacy. They always do.
There is no doubt that – perhaps for very good reasons – the role the Fed has played in the crisis has made it subject to more political interference, not least because it has strayed into areas of fiscal allocation that are traditionally, and best, left to elected officials.
After all, when the Fed decides to buy a mortgage rather than a corporate bond, or anything else, it is making the kind of capital allocation decision that in the U.S. has traditionally been left to Congress.
The Fed was used, essentially, as a source of oversight-light funding for Fed-Treasury bailout plans, another factor which will leave it open to more political control when Congress inevitably tries to wrest its powers back.
Desperate times have arguably justified extraordinary measures, but it is impossible to pretend that those measures don’t bring risks also.”
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