Kevin Hassett: If QE2 succeeds, the Fed runs the risk of insolvency

Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, was an adviser to Republican Senator John McCain in the 2008 presidential election. He was a signator to the open letter to Ben Bernanke.  He has an opinion piece explaining why he signed the open letter. 

He says, QE2 is pointless if it fails.  It is worse if it succeeds.  This is a view that we would agree with here. We are very afraid of CPI inflation 2%.  As KC Fed's Hoenig has said, “Two percent inflation over a generation is a big impact.”  Via Bloomberg:
There’s also the possibility that the Fed will have a hard time withdrawing the stimulus when inflation increases. The Fed will take big losses on its long-term bond positions if QE2 succeeds. Given how large the Fed’s balance sheet is, there’s a genuine risk that it might find its capital cushion wiped out -- which, if the Fed were a traditional bank, would mean insolvency.

This seems to trouble even one big-name Republican economist who chose not to sign the letter -- Harvard University Professor Gregory Mankiw, chief economic adviser to President George W. Bush. He wrote that QE2 is “a small but risky step in the right direction,” but also observed: “By borrowing short and investing long, the Fed is in some ways becoming the hedge fund of last resort.”

Comments

Popular posts from this blog

October retail sales come in strong, especially auto sales

Tea Party Buffalo Pictures

How to spot a fake Tea Partier