Government

Bernanke Translates The Fed Into English

Yesterday, we translated the Fed's $600 billion statement into plain English. Today, Ben Bernanke does the same thing (more or less) on the op-ed page of the Washington Post.

Bernanke describes our economic troubles — high unemployment and the threat of deflation. He explains the Fed's plan to buy $600 billion in government bonds in order to drive down long term interest rates. Then he makes the case for why he thinks the plan will help the economy:

...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.

Well, maybe.

There are some limitations and potential problems, Mohamed El-Erian argues in the FT. He lays out three key issues:

1. Congress is unlikely to make any bold moves to address the economy. So the Fed "is virtually on its own among US policymakers in meaningfully trying to counter the sluggishness of the US economy and the stubbornly high unemployment." That makes it tough.

2. Investors may shift even more money out of the U.S. and into emerging economies. That could exacerbate the ongoing "currency wars" and lead to more protectionism around the world. That could lead to a decline in trade, which is bad for the economy.

3. In the long run, the Fed's ongoing series of interventions could lower the global status of the U.S. and the dollar.

In all, El-Erian argues, the latest program "will be of limited success in sustaining high growth and job creation in the US, and will complicate life for many other countries."

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