IN FELDSTEIN | HARVARD UNIVERSITY
The Federal Reserve's proposed policy of quantitative easing is a dangerous gamble with only a small potential upside benefit and substantial risks of creating asset bubbles that could destabilise the global economy. Although the US economy is weak and the outlook uncertain, quantitative easing (QE) is not the right remedy. Like all bubbles, exaggerated increases in the price of commodities and farm land and raised share prices can rapidly reverse when interest rates return to normal levels.
PAUL ASHWORTH | CAPITAL ECONOMICS
QE2 is hardly a game-changer. The Fed's new programme of asset purchases is not going to pull the US economy out of its current malaise because, given the scale of the balance sheet problems facing households and financial institutions, it is simply too modest to overcome those obstacles. Lower long term interest rates won’t do much to stimulate demand – half of all mortgage borrowers don't qualify to refinance at lower rates because they don't have enough equity in their homes.
ASHA BANGALORE | NORTHERN TRUST
Advocates of QE2 expect a positive impact from lower interest rates lifting all interest sensitive areas of spending such as home buying, refinancing of mortgages, and increased business expenditures, at the margin. And bankers should be induced to lend given the alternatives of paltry earnings from excess reserves and Treasury securities. Also, the benefit of increased exports from a depreciation of the dollar should be seen in headline GDP. From the Fed’s point of view, QE2 is the least costly option.