Monday, August 30, 2010

Monetary Policy Cannot Make Up for Other Blunders

"Many proponents of quantitative easing (QE) appear to be highly confident in its effectiveness despite the absence of supporting evidence. It is likely that many supporters of QE do so because to do otherwise would be to admit that we have reached, or are very near the limits of, monetary policy. Unfortunately, while QE may enable the Fed to finesse the zero "bound", the only existing evidence strongly suggests the effectiveness of unconventional monetary policy is waning. It should not be surprising, if we have reached the limit of monetary policy. It has been the go-to policy to stimulate growth. US tax policy is best explained as an effort to garner campaign contributions despite deleterious effects on growth, fairness and efficiency. It has also encouraged the buildup of debt and leverage, while discouraging saving and equity-financed investment. The expenditure side of fiscal policy has been reduced to partisan-seniority-determined allocations of pork. Regulatory policy has become a means of placating valued constituencies and expanding moral hazard incentives. Trade policy is non-existent. Energy policy is non-existent. Perhaps it is time to expect less from monetary policy and demand more from other policies and policy makers."

--Christopher Whalen, Institutional Risk Analytics

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