[Congressional Record Volume 156, Number 148 (Monday, November 15, 2010)]
[Extensions of Remarks]
[Pages E1889-E1890]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                 IT'S AMERICA-BASHING, NOT FED-BASHING

                                 ______
                                 

                           HON. BARNEY FRANK

                            of massachusetts

                    in the house of representatives

                       Monday, November 15, 2010

  Mr. FRANK of Massachusetts. Madam Speaker, Federal Reserve Chairman 
Ben Bernanke is playing an extremely valuable role in helping foster 
growth in our economy, and I am deeply disappointed at the extent to 
which many of our foreign allies--who have been such beneficiaries of 
America's goodwill--have attacked him not simply for the substance of 
what he was doing, but for even daring to take the interests of the 
American economy into account in his actions.
  Apparently there is a view in many parts of the world, including 
among our European allies, that it is America's destiny to be their 
protector and benefactor, and that for American officials taking 
important and constructive steps to help our own economy prosper must 
take second place. And while many of our allies have exhibited this 
attitude, I have seen nothing more blatantly hypocritical than for the 
Chinese Peoples Republic, the poster country for economic moves that 
completely ignore any sense of international obligation whether in 
currency, trade or in any other way, to criticize the United States for 
daring to take our own interests into account.
  I have also been surprised that a number of Americans, particularly 
on the conservative side, have failed to come to Mr. Bernanke's 
defense. This is a case where a man appointed to high economic 
positions by President Bush, and continued in that position by 
President Obama, and confirmed in that position by Senates under both 
Republican and Democratic control, is acting to promote economic 
activity in America. He is being criticized by a variety of foreign 
nations for this, and instead of coming to the defense of our right to 
act constructively on our own behalf, many conservatives have joined in 
the America-bashing that is going on.
  Madam Speaker, fortunately the understanding of the value of Mr. 
Bernanke's work--and its legitimacy--is clear in many places where 
thoughtful economic thinking prevails, and that is not only in the 
United States.
  Madam Speaker, I ask that the Record here reproduce an editorial from 
the New York Times, on November 9, 2010, entitled ``The Fed vs. the G-
20.''
  Madam Speaker, the very fact that the title has to say that is a sad 
reflection on the failure of so many of those who have benefited from 
America's leadership and generosity to recognize our right to take 
responsible action to deal with our economy.
  In addition, I ask, Madam Speaker, that the Record also contain here 
an article from the Financial Times entitled ``The Fed is right to turn 
on the tap,'' by Martin Wolf, one of the most thoughtful and 
justifiably respected writers on economic affairs.

                [From the New York Times, Nov. 9, 2010]

                          The Fed vs. The G-20

       When President Obama arrives in Seoul, South Korea, on 
     Thursday for the summit of the Group of 20 leading economies, 
     he will be met by blistering criticism of the Federal 
     Reserve's plan for ``quantitative easing''--pumping $600 
     billion into the weak American economy over the next eight 
     months.
       Many nations are worried that a weaker American dollar 
     would harm their export sectors and overheat their economies 
     as more capital flows in, in search of better returns. Their 
     fears are understandable but shortsighted. The Fed's move is 
     a much-needed attempt to stimulate the American economy and 
     head off deflation here. Prolonged stagnation, or worse, in 
     the United States would turn off one of the main sources of 
     global demand and global growth.
       By buying Treasury securities, the Fed aims to lower long-
     term interest rates and increase expectations of future 
     inflation. This would spur households and businesses to spend 
     and invest rather than hold on to money that will fall in 
     value.
       The approach is not ideal. It would be better if fiscal 
     policy were carrying some of the load of economic stimulus. 
     Building new rail links and roads or other large job-creating 
     projects would do more to promote growth than lowering the 
     price of debt, as the Fed is doing. Republican Party leaders 
     in Congress--for political and ideological reasons, rather 
     than sound economics--have vowed to block all stimulus 
     spending.
       China, eager for someone else to take the heat, is trying 
     to equate the Fed's attempts at stimulus with its own long-
     term manipulation of its own currency. That may play well in 
     some quarters, but it also makes no sense. Beijing has a 
     policy to cheapen its currency to grow through exports, on 
     the back of other countries' demand, while slowing its own 
     domestic demand. The Fed's policy also weakens the dollar, 
     but its objective is to boost demand at home.
       The pain caused by the falling dollar on the export sectors 
     of many economies is real enough. Yet rather than criticize 
     the Fed, the G-20 should focus on working out complementary 
     policies. Washington should back plans by developing 
     countries like Brazil to impose capital controls and slow the 
     inflow of money fleeing low interest rates in rich countries. 
     Europe and Japan, where growth is anemic and inflation 
     virtually nonexistent, could try the same approach as the 
     Fed.
       They need more stimulus than the United States.
       China should take this opportunity to shift course, allow 
     its currency to rise against the dollar and rely more on 
     consumption at home. That will be good for China and good for 
     the global economy.
                                  ____


                      [From FT.com, Nov. 9, 2010]

                  The Fed is Right To Turn on the Tap

                            (By Martin Wolf)

       The sky is falling, scream the hysterics: the Federal 
     Reserve is pouring forth dollars in such quantities that they 
     will soon be

[[Page E1890]]

     worthless. Nothing could be further from the truth. As in 
     Japan, the policy known as ``quantitative easing'' is far 
     more likely to prove ineffective than lethal. It is a leaky 
     hose, not a monetary Noah's Flood.
       So what is the Fed doing? Why is it doing it? Why are the 
     criticisms ludicrous? What should the Fed be doing, instead?
       The answer to the first is clear. As the Fed stated on 
     November 3, ``to promote a stronger pace of economic recovery 
     and to help ensure that inflation, over time, is at levels 
     consistent with its mandate, the [federal open market] 
     committee decided today to expand its holdings of securities. 
     The committee will maintain its existing policy of 
     reinvesting principal payments from its securities holdings. 
     In addition, the committee intends to purchase a further 
     $600bn of longer-term Treasury securities by the end of the 
     second quarter of 2011, a pace of about $75bn per month.''
       Ben Bernanke, the Fed chairman, gave the rationale in a 
     speech last month. He pointed out that US unemployment is far 
     above any reasonable estimate of equilibrium. Moreover, 
     prospective economic growth makes it unlikely that this will 
     change over the course of 2011. This is bad enough, but what 
     makes it worse is that underlying inflation has fallen to 
     close to 1 per cent, in spite of the expansion of the Fed's 
     balance sheet, over which so many tears were shed. 
     Expectations of inflation are well anchored, he added, but 
     that might change once deflation gripped. Given the slack, 
     that might not be far away (see charts).
       The Fed, added the chairman, has a dual mandate, to foster 
     maximum employment and price stability. Doing nothing would 
     be incompatible with this obligation. The only question is 
     what is to be done. The answer is the proposed purchases of 
     Treasury bonds. This simply extends classic open market 
     operations up the yield curve. It would also only expand the 
     Fed's balance sheet by about a quarter, or around 4 per cent 
     of gross domestic product. Is the US really on the same road 
     as the Weimar Republic? In a word, no.
       It is hardly a surprise that Wolfgang Schauble, finance 
     minister of Germany, thinks differently. He describes the US 
     growth model as in ``deep crisis'', adding that ``it's not 
     right when the Americans accuse China of manipulating 
     exchange rates and then push the dollar exchange rate lower 
     by opening up the flood gates''. Presumably, he believes 
     that, in a proper world, the US would be forced to follow the 
     deflationary route imposed upon Greece and Ireland, instead. 
     This is not going to happen. Nor should it.
       Boiled down, the criticisms of the Fed come down to two: 
     its policies are leading to hyperinflation; and they are 
     ``beggar my neighbour'', in consequence, if not intention.
       The first of these criticisms is not just wrong, but weird. 
     The essence of the contemporary monetary system is creation 
     of money, out of nothing, by private banks' often foolish 
     lending. Why is such privatisation of a public function right 
     and proper, but action by the central bank, to meet pressing 
     public need, a road to catastrophe? When banks will not lend 
     and the broad money supply is barely growing, that is just 
     what it should be doing (see chart).
       The hysterics then add that it is impossible to shrink the 
     Fed's balance sheet fast enough to prevent excessive monetary 
     expansion. That is also nonsense. If the economy took off, 
     nothing would be easier. Indeed, the Fed explained precisely 
     what it would do in its monetary report to Congress last 
     July. If the worst came to the worst, it could just raise 
     reserve requirements. Since many of its critics believe in 
     100 per cent reserve banking, why should they object to a 
     move in that direction?
       Now turn to the argument that the Fed is deliberately 
     weakening the dollar. Any moderately aware person knows that 
     the Fed's mandate does not include the external value of the 
     dollar. Those governments that have piled up an extra 
     $6,8000bn in foreign reserves since January 2000, much of it 
     in dollars, are consenting adults. Not only did no one ask 
     China, the foremost example, to add the huge sum of $2,400bn 
     to its reserves, but many strongly asked it not to do so.
       It is also simply false to argue that the weakening dollar 
     is due to Fed policies alone. Indeed, anyone with half a 
     brain should realise that the US can no longer combine a 
     large trade deficit with a manageable fiscal position. Those 
     who want their US bonds to stay sound should welcome anything 
     that helps the US expand domestic demand and rebalance its 
     external position. Current US monetary policies are, contrary 
     to Mr Schauble's views, simply the yang to the yin of east 
     Asian mercantilism.
       More fundamentally, market forces, not monetary policy, are 
     pushing global rebalancing, as the private sector tries to 
     put its money where it sees the opportunities. The Fed's 
     monetary policies merely add a twist. Instead of all the 
     futile bleating, what was needed was a co-ordinated 
     appreciation of the currencies of the emerging economies. The 
     fault here does not lie with the US. I sympathise strongly 
     with a Brazil or a South Africa, but not with China.
       The sky is not falling. But this does not mean the Fed's 
     policies are the best possible. It is probable that any 
     impact on the yields on medium-term bonds will have a modest 
     economic effect. It would be far better if the Fed could 
     shift inflation expectations upwards, by issuing a commitment 
     to offset a prolonged period of below-target inflation with 
     one of above-target inflation. A decision to monetise 
     additional government spending might be an even more 
     effective tool. Equally necessary is a plan to accelerate the 
     restructuring of the overhang of excessive debt. But, in the 
     absence of co-operation with the newly elected Congress, what 
     the Fed is doing is, alas, about the most we can now expect, 
     though it should have dared to do more. Meanwhile, ``sound'' 
     people will shriek that the sky is falling only to be 
     surprised that it is not. We have seen this play before--in 
     Japan in the 1990s. Japan fell into chronic deflation, 
     instead.
       Yes, it may be reasonable to call for a reconsideration of 
     the global monetary system, as Robert Zoellick, the World 
     Bank president, has done. But gold? Does anyone expect 
     politicians to put placating the world's most speculative 
     commodity market before worrying about a slump? Whom the gods 
     wish to destroy they first make mad.

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