Woolsey and Sumner on QE3
The best piece I’ve seen on QE3 so far is by Bill Woolsey. Even though it’s long, there aren’t many wasted words. So the whole thing is worth reading.
I do want to highlight one important point he makes. Woolsey writes:
The other “problem” with the Fed’s policy is that it has specified that it will be purchasing mortgage backed securities. Since these are all “agency debt,” that means they are already guaranteed by the U.S. taxpayer for credit risk.
Generally, Market Monetarists (like Traditional Monetarists) do not worry much about what particular assets the Fed purchases. It is the impact on the Fed’s liabilities–the quantity of base money–that is important. However, this policy certainly has an odor of credit allocation–the Fed is trying to encourage people to obtain home mortgages and buy houses. Bernanke reinforced this view at the press conference by explaining how the policy is supposed to work. It is supposed to lower interest rates on home mortgages and so more mortgage lending and more spending on housing. [italics added]
I’m tempted to respond; and how? Most people, including George Selgin and market monetarists like David Beckworth, believe that an easy money policy during the early 2000s led to an overheated economy in the middle of the decade, and that this was one factor in the crash during the latter part of the decade. I’m not convinced, or perhaps I should say I doubt the effect was as strong as most people believe. First of all, I see little evidence that monetary policy was particularly expansionary during the early 2000s. Some people cite the low rates, but we all know what Milton Friedman said about that.
Scott makes an important point about monetary policy, one that Jeff Hummel and I have made, but he misses the point Selgin, Woolsey, and I are making here. The charge is not that it’s too easy a monetary policy: the charge is that it’s allocating credit to a particular sector and, therefore, is, to some extent, a credit allocation policy. That’s dangerous. It’s more of the central planning by Bernanke that Jeff Hummel has gone after. And to housing of all places? That’s just perverse.