Quantitative Easing—Uncharted Waters for Monetary Policy

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Letter Writer:

Donald B. Swenson, philosopher in Marana, Ariz.

Date Posted:

July 30, 2010

Letter:

I would like to express my thoughts on the past and current policies and philosophy of the Fed and the FOMC. I do think that the use of quantitative easing (now) is a questionable policy which probably acts to promote a "moral hazard" for our system. What Mr. Bernanke and the FOMC are (were) practicing (2008-2010) creates a confusing use of our monetary unit (the dollar). I would maintain that creating some 1.4 trillion via QE (2008-09) and then collecting interest on this sum is a clear moral hazard for most Americans...and also a policy which promotes a mentality that is not philosophically sound. The message that this policy sends to the marketplace is that our market system cannot solve its problems. Furthermore, this policy sends a message to the American people that capitalism has failed and that select sectors must be favored to resolve the issues.

The fact that the excess revenue (billions) earned from this sum is transferred to the Treasury account does not really help. Revenue is earned by creating QE via policy action, and this gives the public (myself and others) the perception that the Fed is playing by special and somewhat unique accounting rules. I think that most Americans have viewed our central bank as independent from favor or special profits up until now.

The Fed, when acting as an umpire or coach, is acceptable to most Americans...but when policies are used to FAVOR select persons, sectors, entities, then a moral hazard is evident. Has the QE policy allowed the marketplace to rebalance? This is doubtful, in my opinion. Do the Fed and FOMC policymakers think that favoritism is absolutely necessary given our current situation? If so, then this policy needs to be explained to the public so that the people will support this policy. Implementing policies via the media and then assuming that the public will support these policies is doubtful strategy. And we all know that CONFIDENCE is key to progress under our system.

Perception is important, and the soundness of our monetary unit ($1.00) is also important. I might add that a monetary unit ($1.00) which is not grounded in physical reality is much more difficult to maintain within a marketplace that has lost confidence. Fiat money can work if the people have confidence and if they view our central bank as independent (no favoritism). History, however, does suggest that imaginary monetary units ($1.00 and multiples thereof) can collapse quite quickly if the marketplace loses confidence. In the final analysis, money is a psychological concept. I hope my comments will be helpful to those who are representing us within the Fed and the FOMC.

Editor's Note:

This letter was received following the publication of several articles in St. Louis Fed periodicals on quantitative easing. Among the other articles was "The First Quantitative Easing: The 1930s," in the July issue of Monetary Trends.

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