Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
QE2 could have worked had Bernanke bought foreign currencies instead of Treasury bonds
University of Maryland business economist Peter Morici, former Chief Economist at the U.S. International Trade Commission, has an excellent understanding of the way economics works in the real world, but he made a rare mistake in a recent commentary (Fixing Markets Needs to Start in White House). He missed the fact that the Federal Reserve, not just the Treasury Department, can engage in foreign exchange purchases. He wrote:
The Federal Reserve has had the authority since 1962 to buy foreign currencies under its own account without being subject to any control by the U.S. Treasury Department. Indeed, the Federal Reserve made use of this policy option during the 2008 financial collapse when it engaged in currency swaps with foreign central banks.
Economic history will hold Greenspan and Bernanke accountable for their failures to buy foreign currencies whenever foreign central banks were building up their dollar hoards. As a result, the U.S. has lost market share in one industry after another since 1996, resulting in the loss of about six million productive manufacturing jobs.
Unlike QE2, which caused U.S. inflation to rise from 1% to 3.5%, currency interventions are sustainable. Not only that, but when a country's currency is artificially high, as the dollar is today, they can be quite profitable. The Federal Reserve could make considerable money for the U.S. government by buying Chinese yuan now, and then selling them later, after the dollar falls 40% against the yuan. QE2 could have worked had Bernanke bought foreign currencies instead of Treasury bonds.
Comment by M, 8/27/2011:
What are the chances that the U.S. will prevent the repatriation of U.S. dollars from overseas?
Can the monetary problems of Iceland, and the government’s response to those problems be seen as a possible model for the U.S.?
Journal of Economic Literature:
Atlantic Economic Journal: