Daniel W. Drezner
The international relations of QE3
The Wall Street Journal has two great stories on the Federal Reserve’s decision to go for QE3 — a third round of quantitative easing. First, Jon Hilsenrath documents how Fed chairman Benjamin Bernanke built a consensus among the Federal Reserve governors: For weeks, Mr. Bernanke made dozens of private calls on days, nights and weekends, ...
The Wall Street Journal has two great stories on the Federal Reserve’s decision to go for QE3 — a third round of quantitative easing. First, Jon Hilsenrath documents how Fed chairman Benjamin Bernanke built a consensus among the Federal Reserve governors:
For weeks, Mr. Bernanke made dozens of private calls on days, nights and weekends, trying to build broad support for an unusual bond-buying program he wanted approved during the Fed’s September meeting, according to people familiar with the matter….
Fed officials described the Fed chairman’s phone calls as low-pressure conversations. Mr. Bernanke sometimes dialed up colleagues while in his office on weekends, catching them off guard when their phones identified his private number as unknown. He gave updates on the latest staff forecasts, colleagues said. He asked their thoughts and what they could comfortably support, they said.
The calls helped Mr. Bernanke gauge how far he could push his committee. It also won him trust among some of his fiercest opponents, officials said. Nearly all of Mr. Bernanke’s colleagues described him as a good listener.
"Even if you disagree with him on the programs, you know your voice has been heard," said [Dallas Fed President Richard] Fisher, one of his opponents. "There is no effort to bully."
So Bernanke did a lot of hand-holding, a lot of listening… to the key Fed decision-makers. What’s equally important is who he didn’t talk to — namely, other central bank heads in the rest of the world.
I bring this up because some of these central bank officials are pretty pissed. QE3 has caused the yuan to hit its all-time high against the dollar, for example. Which leads us to the other interesting Wall Street Journal story. Aaron Back and In-Soo Nam document how South Korea and China have reacted to QE3:
Chinese and South Korean central-bank officials criticized the U.S. Federal Reserve’s latest easing efforts and advocated reducing Asia’s dependence on the U.S. dollar.
The comments Thursday, at a joint seminar in Beijing by the two central banks, are the clearest indication yet of a rising backlash in Asia against U.S. monetary policy, suggesting it could speed up the search for alternatives to the dollar as the main global currency.
"The rise in global liquidity could lead to rapid capital inflows into emerging markets including South Korea and China and push up global raw-material prices," said Bank of Korea Gov. Kim Choong-soo. "Therefore, Korea and China need to make concerted efforts to minimize the negative spillover effect arising from the monetary policies of advanced nations."
Chen Yulu, an academic adviser to the People’s Bank of China, said Asia needs a "regional core currency" to reduce its dependence on the dollar. China’s ultimate goal is for the yuan to be as important as the euro or the dollar, he said.
Whoa, this sounds pretty bad… until you get to the next paragraph:
But [Chen] acknowledged that will be a slow process, saying it would be possible for the yuan to be fully convertible by 2020, and that the overall yuan-internationalization process may last until 2040. China strictly controls its currency, though it has made small moves to broaden its use globally in recent years and has also allowed a little more flexibility in its movements (emphasis added).
Furthermore, it’s worth noting that the international bitching and moaning about QE3 seems much less than the "currency war" rhetoric that QE2 triggered. Why? Based on my half-assed blog analysis I’d speculate that there are three reasons:
1) The global economy is in a more sluggish state in 2012 than in 2010, so it’s hard to argue that expansionary monetary policy is inappropriate now.
2) The United States was not the only major economy to go the quantitative easing route in the past few months. Both the European Central Bank and the Bank of Japan have made similar — if uncoordinated — moves.
3) The central bank heads have learned frrom QE2 that the bitching and moaning won’t accomplish anything. It didn’t stop QE2 and it won’t stop QE3.
Am I missing anything?