Stephen Williamson writes:
The Fed is trustworthy, in some sense, but I don’t think they will be able to withstand the pressure to do the wrong thing when the time comes to do the right thing.
Is this an argument against QE or an argument against the Fed? I think it is the latter and I think this is the source of disagreement among conservatives that Ramesh Ponnuru has been highlighting. (By the way, I have no idea whether Williamson should be considered a conservative — likely not. I am not even sure I should be considered a conservative — although I have been classified as such. However, we are both market-oriented guys, so let’s not quarrel about labels.)
The source of right-wing opposition to quantitative easing seems to have more to do with skepticism of the Fed than the potential effectiveness of policy. I am plenty skeptical of the Fed. David Beckworth and I are currently working on a project to examine nominal spending crashes in the last century. We find significant evidence that these are caused by monetary factors and suggest that had the Fed acted to stabilize the monetary base, these crashes could potentially have been avoided. In addition, I think that the Fed played a major role in creating the housing boom.
Nonetheless, I do not let my skepticism of the Fed dissuade me from what the right policy is in the current situation. If we need further monetary easing to stabilize nominal income, then that is the policy the Fed should undertake. In fact, my skepticism of the Fed is part of the reason that I advocate an explicit nominal income target that coincides with QE. That pre-commitment helps shape expectations and requires the Fed to follow through on its promise.
If one’s skepticism of the Fed trumps the proposed policy, isn’t this just an argument against the Fed? If one recognizes that further monetary easing is necessary and yet continues to argue against QE because they don’t trust the Fed, then it is time for a debate about whether or not the Fed should exist and, if so, in what capacity.
I am probably one of the only people on the planet who has an open mind toward competition in currency and other alternative monetary institutions while simultaneously advocating QE. I will not, however, let my skepticism of the Fed prevent me from advocating what I believe is the correct policy.