Investors certainly cheered on Ben Bernanke when the Federal Reserve Chairman recently announced a second round of quantitative easing. With the Fed printing money to buy government bonds, the thinking goes, stocks would look good relative to bond yields.
Since then, though, it seems that an endless line of critics - professional money managers, economists, even finance ministers - have emerged, arguing either that quantitative easing won't work or that it will create a stock market bubble or that it will destabilize trade. Well, it looks as though Mr. Bernanke has a least one high-profile defender in the form of Paul McCulley, managing director at Pacific Investment Management Co., or Pimco.
"It brings me great angst to observe professional critics - many of them acquaintances and friends of mine - rhetorically beating Fed Chairman Ben Bernanke about the head and shoulders for launching QE2," Mr. McCulley said in a recent note. "At the same time, the fact that Sarah Palin has joined the chorus brings me great joy. If what Ben is doing offends both the learned and the unlearned, then he is clearly acting unconventionally relative to orthodoxy. And this is good, very good."
He is not being facetious here. The Federal Reserve is facing a so-called liquidity trap, where spending is sluggish even as the central bank's key rate sits close to zero per cent - and Mr. McCulley believes that unorthodox approaches stand the best chance of success.
"I fervently believe, as Chairman Bernanke voiced back in 2002-2003, that quantitative easing coupled with proactive fiscal expansion, alongside price level targeting, is the hat-trick with the most likely probability of success in breaking an economy out of a liquidity trap," he said. "But, while far from the best outcome given the paralysis of the fiscal agency, that does not mean that one-hat QE2 will be ineffectual."
They must love debating at Pimco, because Bill Gross made a splash with his comments on the Fed's quantitative easing plan, comparing it to a Ponzi scheme.
David Berman