There’s something about quantitative easing that bothers just about everyone – including, believe it or not, Fed chief Ben Bernanke.
But in contrast to his many critics, Bernanke’s problem lies not with the policy itself, in which the Federal Reserve has pledged to buy $600 billion worth of Treasury bonds over eight months in its latest bid to bring down interest rates and stimulate the economy.
No, Bernanke’s beef is that what the Fed is doing isn’t properly called quantitative easing, as he reminded everyone in his speech Friday.
Bernanke’s sensitivity is understandable: The term came into use and accordingly into disrepute a decade or so ago when the Bank of Japan belatedly and unsuccessfully tried to rouse a floundering economy by giving commercial banks more money. The bankers obliged their policymaking peers by not lending any of it, leaving the economy thrashing around and a debilitating deflationary trend intact.
Aware that the policy response in Japan didn’t exactly play out to anyone’s satisfaction, Bernanke made a point in late 2008 of giving the Fed’s first round of massive bond purchases an exiting new name: credit easing.
He explained why in a speech in London in January 2009.
That point, eloquently made though it was, was almost universally ignored, and everyone went on their merry way calling the Fed’s $2 trillion bond purchase plan quantitative easing, as even Bernanke’s allies admit.
“Chairman Ben Bernanke tried to call the Fed’s new policies ‘credit easing,’ probably to differentiate them from actions taken by the Bank of Japan (BOJ) earlier in the decade, but the label did not stick,” former Fed vice chairman Alan Blinder wrote this month in a review of the policy for the St. Louis Fed.
That plan wound down in March, so by the time Bernanke started talking in August about the need to further ease credit conditions in the United States everyone was already calling it QE2 – even though, by Bernanke’s lights, there never was a QE1.