While Congress is busy arguing about taxation and spending — the nuts and bolts of fiscal policy — an even bigger problem in the realm of monetary policy may be looming.
“Zero interest rates and quantitative easing are the time bomb that’s really ticking,” said Stephen Roach, a senior fellow at Yale University and former chairman of Morgan Stanley, during a panel discussion last week. “That worries me a lot.”
Quantitative easing, usually shortened to QE, has also been referred to as “printing money” or “monetizing the debt.” The process injects a pre-determined amount of money into the marketplace by purchasing government bonds from commercial banks, generally with electronic funds.
“The monetary policy and mistakes that were made beginning with Alan Greenspan and continuing with Ben Bernanke played a critical role in setting us up for this monster crisis,” Roach said, adding that the Simpson-Bowles Commission offered a “a formula that can get us out of the quagmire we’re in on the fiscal side,” and that President Obama made a mistake in ignoring the commission’s recommendations.
Roach said he held little hope that Congress would keep America off the fiscal cliff. He predicted that Congress will once again “kick the can down the road.”
“I think this is all a bit of a publicity stunt to make us look like we’re going to the edge and then Washington comes in and rescues us from the brink,” he said. “But I’m not optimistic that we’ll get the grand deal that will really solve our longer-term problems, and that disturbs me the most.”
The following video contains excerpts from the panel discussion, held in in Santa Monica, Calif., during the Rand Corp.’s Politics Aside conference:
QE for dummies:
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