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Wednesday, November 17, 2010

Mankiw on QE2

Greg Mankiw:

QE2: ...I judge QE2 to be a small but risky step in the right direction.

Update: In his post, Mankiw says:

I do see some potential downsides.  In particular, the Fed is making its portfolio riskier.  By borrowing short and investing long, the Fed is in some ways becoming the hedge fund of last resort.  If future events require higher interest rates, the Fed will end up making losses on its portfolio.  And even if doesn't recognize these losses (by not marking to market), it could end up paying more interest on newly expanded reserves than it is earning on its newly acquired portfolio of long bonds.  Such a cash-flow deficit could potentially undermine the Fed's political independence (which is already not very popular in some circles).  Yet if the Fed tries to avoid these losses by failing to raise rates when needed, inflation could indeed become a problem down the road.  I trust the team at the Fed enough to think they will avoid that mistake.

Economics of Contempt emails:

Pretty absurd post on QE2 from Mankiw, don't you think? Calling the Fed the "hedge fund of last resort" is about as disingenuous as it gets. If the Fed is becoming a hedge fund, it's a hedge fund that only invests in *Treasuries*! Is Mankiw seriously worried about the risks of the Fed owning 10YR and 30YR Treasuries? I *highly* doubt it.

    Posted by on Wednesday, November 17, 2010 at 02:31 PM in Economics, Monetary Policy | Permalink  Comments (17)


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