Most folks who identify as market monetarists have been in favor of the Fed’s bond-buying, or “quantitative easing,” program. They don’t think it’s been executed perfectly, however. If the Fed’s actions had been accompanied by a stated intention to target the level of nominal GDP, there’s a strong case that QE could have been far smaller yet far more effective. Still, as I write in my new National Review column, QE has likely helped the economy and thus been worth doing.
Question #1 on Monday: “QE is doing nothing since banks are just sitting on the money. Look at the huge increase in excess reserves! What’s the point? How is this boosting growth, exactly?”
Question #2 on Tuesday: “Maybe the Fed is having a positive economic impact, but isn’t it just a sugar high, papering over or propping up a bad economy with easy money?”
Question #3 on Wednesday: “Why hasn’t QE been inflationary?”
Question #4 on Thursday: “Does it matter if the Fed dials back its bond purchases if its balance sheet remains monstrously huge?
And here is the final question:
Isn’t this all just another form of central planning?
Scott Sumner, economist at Bentley University and blogger at The Money Illusion:
Right now resources are being misallocated because low nominal GDP combined with sticky wages lead to mass unemployment. A good monetary policy should lead to a situation where the central bank appears invisible, and lets the market allocate resources. To do that we need faster growth in nominal spending. Fiscal stimulus is better described as central planning, as monetary policy merely affects nominal GDP, and lets the market decide how that nominal spending will be allocated between the various sectors. You aren’t centrally planning the economy, rather you are planning the one thing you already control, money. Given the Fed runs the monetary system, it’s better they do so in a way that doesn’t damage the economy, than a way that it does. Consider this hypothetical: Suppose we currently had hyperinflation. Would a Austrian economist oppose tighter money on the grounds it was “central planning?” Why not?
Michael Darda, chief economist at MKM Partners:
Unless we are going to get rid of the Fed, which won’t and probably should not happen, having the Fed conduct policy in a way that provides nominal stability should be the goal. Scott Sumner’s proposal for a market-based NGDP level target is one way to do this. In this way the market guides policy and credibility prevents sustained nominal (monetary) shocks.
David Beckworth, economist at Western Kentucky University and blogger at Macro and Other Market Musings:
QE at its core is an imperfect attempt to respond to monetary disequilibrium. It is flawed because of its ad-hoc, make-it-up-as-we-go-along approach and until recently, not being tied to any explicit target. So this erratic policy implementation is problematic and does place too much focus and thus power on what the Fed does. I wouldn’t call this central planning, but I would call bad policy making. Ideally, the Fed would go to a NGDP level target that would make its actions more rule-like and predictable.
Josh Hendrickson, economist at the University of Mississippi and blogger at The Everyday Economist:
I actually agree that Federal Reserve policy suffers from the same types information problems as central planning. If one thinks of the Fed as trying to set the market interest rate equal to the natural rate of interest as David Beckworth and Mike Woodford prefer to think about it, then it is easy to see how difficult it is to solve this information problem. HOWEVER, we have a central bank. Thus, the question is what a central bank should do given that one exists. I favor nominal income targeting because (1) I think that it minimizes the information and knowledge that central bankers must have to do their job and (2) because a nominal income target requires the money supply to adjust roughly in the same way as it would under a free banking system. In other words, a nominal income target is as close as we can get a central bank to replicating what would happen if we had a free market for bank notes.
To argue that the Fed shouldn’t conduct QE because centrally planning is hard is an argument against a central bank, it is not an argument against QE.