A Look at QE2
From the University of Chicago's John Cochrane
. An excerpt:
All QE2 does is to slightly restructure the maturity of U.S. government debt in private hands. Now, of all the stories we've heard to explain our sluggish recovery, how plausible is this one: “Our big problem is the maturity structure of Treasury debt. If only those goofballs at Treasury had issued $600 billion more three-month bills instead of all these five-year notes, unemployment wouldn’t be so high. It’s a good thing the Fed can undo this tragic mistake.” That makes no sense. For the same reason, when money is the same thing as debt, it doesn’t cause inflation....
Moreover, QE2 distracts us from the real microeconomic, tax, and regulatory barriers to growth. Unemployment isn't high because the maturity structure of U.S. government debt is a bit too long, nor from any lack of “liquidity” in a banking system with $1.5 trillion extra reserves. Mostly, it is dangerous for the Fed to claim immense power, and for us to trust that power, when it is basically helpless. If Bernanke had admitted to Congress, “there’s nothing the Fed can do. You’d better clean this mess up fast,” he might have had a much more salutary effect.