A day after launching QE2, Fed Chairman Ben Bernanke took the unusual step of offering a public rationale. In an op-ed in The Washington Post, Bernanke wrote: "Easier financial conditions will promote economic growth."
The stock market is surging Thursday in response to the Fed announcement and the President's concessions on extending the Bush tax cuts. But "what [QE2] has to do with restoring economic growth is a complete mystery to me," says University of Texas Professor James Galbraith. (Indeed, if easy money were the solution the economy's problems, we'd have very low unemployment and super-high GDP given all the Fed's efforts to date.)
Instead of additional stimulus that mainly weakens the dollar and helps the banks print money with the carry trade, as detailed here, Galbraith says the Fed should focus its regulatory powers on the problems of ‘Too Big to Fail' and "bank fraud that got us into the crisis and the foreclosure frauds the banks are using to try and get themselves out of it."
Unless and until those "structural problems" in the economy are addressed, "you're not going to break the logjam that's in the credit markets and private debt situation," he says. "Monetary policy isn't going to get you very far. "
Dan Gross and I discuss these issue further with Galbraith in the accompanying video, where we also address the philosophical question: Does Ben Bernanke really believe his own bullsh...err...rhetoric?