I hope to post some concerns about the Federal Reserve’s new round of “quantitative easing” (“QE2”) in the next few days. In the meantime let me quote from Fed Chairman’s Ben Bernanke’s explanation of how it is all going to work (this is from Chairman Bernanke’s article in The Washington Post):
“The FOMC [Federal Open Market Committee] intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August [of 2010].
This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”
It is my understanding that Chairman Bernanke wanted to have a diagram to go with his article, to show how it is all supposed to work, but Rube Goldberg said it was too complicated.
Which is actually a serious concern. Look at all the steps in the plan: this leads to that which causes this other thing which results in something else. You have to wonder whether we really know if or how it will all work together. The problem is that every step adds the potential for unintended consequences or for the plan to go off track. The more steps, the more potential for unintended consequences to gum up the works and/or for things to go wrong.
This is especially true when people are involved. We can never be sure how people will react because people are, well, people and, therefore, unpredictable. This is especially true in a situation as unusual as the current one. You might have some hope that a plan with one or two steps will work as anticipated (or will at least not go too far off track), but when you have a plan with as many steps as this one, you have to wonder how it is all going to turn out. You get the feeling that, if there is any similarity between what the plan says is going to happen and what actually does happen, it will be more a result of coincidence than actually getting it right.
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