Were credit easing’s risks sufficient to forgo its use?
Despite the unanimous approval of credit easing by the Fed’s Board, it was the wrong call. Not because current conditions do not warrant extraordinary action, but because there are some actions, particularly those predicated on erroneous assumptions, that have a greater potential for harm than good. Chairman Bernanke has predicated his confidence in the Fed’s success on the assumption of sufficient “political will,” including the willingness to put our financial house in order. Indeed, his assumption regarding political will is the bedrock principle of credit easing’s potential. On the facts, it appears wrong. Instead, we have a Federal government that proposes budget deficits that will average $700 billion per year for the next decade. We have counter-cyclic policies aimed at encouraging borrowing by already over-leveraged businesses and households. In that context, credit easing is tantamount to holding temperance meetings in a tavern. Congress will order drinks for the house and exp
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