Fed's mysterious policy: How will we know if it's working?

[unhappycamper]

Fed's mysterious policy: How will we know if it's working?
By Kevin G. Hall | McClatchy Newspapers
Posted on Tuesday, December 21, 2010

WASHINGTON — The Federal Reserve's bold but mysterious plan to purchase $600 billion in long-term government bonds through June will be under the microscope in 2011 even if it works, in part because determining that is anything but simple.

The bond-buying plan is an unparalleled effort to spark the economy. It's called quantitative easing. It's intended to lower long-term lending rates. It's controversial because critics worry that it might lead to inflation that's hard to quell.

Ironically, the controversy about inflation itself may have been much of what Fed Chairman Ben Bernanke was after in the first place, although he's unlikely to say so publicly.

What Bernanke was trying to do, in part, with quantitative easing was to attack the threat of deflation — a decline in prices across the economy.

By sparking inflation fears, investor expectations shifted from worry that prices would fall into a downward spiral, a specter that can drive investors and consumers to postpone spending as they await lower prices, and thus depress economic growth. Instead, inflation is now seen as the bigger threat, though it has yet to appear.

[alc]

1. we'll know because they'll tell us it's working

just like the stimulus, health reform, tax cuts/raises/changes, etc. They avoid upfront measurements of success, fudge the "results", then tell us how they were right and it worked. Then followers of the current ruling part believe and followers of the other side don't believe and most people hear that it worked so they'll vote for more of the same.

The fact is that we can't know if something that "big" worked or we would have been better off with a different option. But we should require success measures on something that big and hold them responsible. If the measurements are not met, they failed - either it didn't work, or their understanding wasn't sufficient and "things were much worse than they thought". Either way I say it failed (failure is not necessarily bad if you learn from it.) They avoided specifics on the stimulus but made a couple of non-binding predictions
- 8% unemployment: failure
- 2-3 million jobs created or SAVED. No definition of how to measure saved. still need to fudge numbers to meet the number

[GeorgeGist]

2. It won't work in the long-run ...

because it's a scam in the short-run.

[SOS]

3. Just use the 2009 British QE model

All benefits accrue to City bankers.
Banks post huge profits.
Unemployment rises from 4.5% to 7.7% during QE period.

That was the magical result of British QE in 2009.