The Rising Tide Against the Federal Reserve

I notice that there is mounting public criticism of quantitative easing II (QE II), the new program of government bond purchasing put forth by the Federal Reserve. The level of the criticism is somewhat unprecedented and rooted in populist sentiment. Today there will be a letter published by the Wall Street Journal and the New York Times as a paid advertisement that is critical of the Fed.

While I have mixed feelings regarding QE II and some of the moves by the Fed Chairman Ben Bernanke, I believe there should be independence for the Central Bank. The Fed chairman by virtue of his position sees a perspective of the US and global economy that is unique and comprehensive. Populist anger over the Fed has been ongoing for more than 100 years in America mostly from the Midwest and West. This anger and resentment alone is not a good reason to criticize the Fed.

I think the current group of vocal critics totally ignore the potentially devastating near and medium-term effects of deflation, something that I believe is a real possibility in the aftermath of perhaps the greatest asset bubble in the history of economics.

First and foremost, QE II is a near desperate action against deflation. I think the chances of this move creating hyperinflation are slim. A recent poll of economists supports my view.

In addition, critics seem to ignore the rising storm clouds involving international trade. Simply put, America cannot continue with a negative balance of trade. It is sucking the life out of the economy. Currency pegging by China and various monetary interventions from Central Banks around the world are causing havoc that can only translate into reduced global economic growth for 2011 and perhaps beyond. Trading partners who have a single-minded focus on exports look to the US economy as a means of domestic growth. This is not a sustainable situation and will continue to lead to rising global tension.

I believe the Fed's policy of QE II is partially in response to international trade practices by export oriented economies, which are destined to disrupt the global economy for many years into the future unless America takes immediate action to send a strong signal in favor of reason.

The populist critics seem to miss these points.

In the history of America, populism in its raw form has never been something of great political significance mostly because the movement's positions are seldom consistent over time.

For some reason, Central Bank monetary policy has always been the target of the populists. With the 2010 midterm election victory by the Republicans, one of the greatest challenges for the new leadership will involve moderating extreme positions advocated by the populists, who often feel all economic problems are local. A shift inward toward isolationism will do perhaps more damage to the US economy than any other policy.