Renewing AmericaRenewing America

Must Read

PrintPrint EmailEmail ShareShare CiteCite
Style:MLAAPAChicagoClose

loading...

FT: QE2 is risky and should be limited

Author: Martin S. Feldstein, President Emeritus, National Bureau of Economic Research
November 2, 2010

Share

In this Financial Times opinion piece, Martin Feldstein, a Harvard economics professor, argues that the Federal Reserve's quantitative easing proposal is not a fix for the U.S. economy.

The Federal Reserve's proposed policy of quantitative easing is a dangerous gamble with only a small potential upside benefit and substantial risks of creating asset bubbles that could destabilize the global economy. Although the US economy is weak and the outlook uncertain, QE is not the right remedy.

Under the label of QE, the Fed will buy long-term government bonds, perhaps one trillion dollars or more, adding an equal amount of cash to the economy and to banks' excess reserves. Expectation of this has lowered long-term interest rates, depressed the dollar's international value, bid up the price of commodities and farm land and raised share prices.

Like all bubbles, these exaggerated increases can rapidly reverse when interest rates return to normal levels. The greatest danger will then be to leveraged investors, including individuals who bought these assets with borrowed money and banks that hold long-term securities. These risks should be clear after the recent crisis driven by the bursting of asset price bubbles. Although the specific asset prices that are now rising are different from last time, the possibility of damaging declines when bubbles burst is worryingly similar

Full Text of Document

More on This Topic

Op-Ed

Politics-Proof Economies?

Authors: David Brady and A. Michael Spence
Project Syndicate

A. Michael Spence and David Brady argue that reformers facing tough constraints on fiscal policy can have a bigger impact on growth by...

Foreign Affairs Article

Blind Oracle

Author: Richard Katz

In his recent essay "Never Saw It Coming" (November/December 2013), Alan Greenspan makes two central arguments: first, that virtually no one...