Economic Boost Or Bad Policy? GOP Denounces New Fed Plan

Nov.10, 2010 -- The Federal Reserve's new $600 billion monetary stimulus plan is designed to spur the country's sluggish economic recovery. But the central bank's program is now encountering a growing backlash both at home and abroad.

China and Russia have criticized Fed chairman Ben Bernanke's plan, while prominent Republicans are starting to voice concerns of their own.

"I would say that Bernanke is fundamentally wrong, that he is running -- he is fundamentally misreading the economy. This economy lacks confidence in the government. It doesn't lack cash," former House Speaker Newt Gingrich told ABC's George Stephanopoulos Tuesday on "Good Morning America."

Under the plan dubbed QE2 -- which stands for quantitative easing -- the Fed will buy $600 billion worth of government bonds in a bid to make loans cheaper and get Americans to spend more. Doing so is designed help the economy and prompt companies to boost hiring.

The top Republican on the Senate Banking panel told ABC News that he is "worried" about the Fed's plan.

"While I share Chairman Bernanke's concern regarding the condition of the economy, I am worried about the risks associated with his actions," said Sen. Richard Shelby of Alabama. "However, Chairman Bernanke would not be in this position had President Obama and the Democrats used their power to enact pro-growth policies. Instead, they have grown government and created the most anti-business regulatory environment our country has ever seen."

The comments come on the heels of former Republican vice-presidential candidate Sarah Palin's calls for the Fed to "cease and desist" with its new plan.

"It means our government is pumping money into the banking system by buying up Treasury bonds. And where, you may ask, are we getting the money to pay for all this? We're printing it out of thin air," Palin told a trade association convention in Phoenix on Monday, according to the National Review.

"And if it doesn't work, what do we do then? Print even more money? What's the end game here?" she asked. "Where will all this money-printing on an unprecedented scale take us? Do we have any guarantees that QE2 won't be followed by QE3, 4, and 5, until eventually -- inevitably -- no one will want to buy our debt anymore? We shouldn't be playing around with inflation."

Skepticism about the plan is even rife within the Fed itself.

Kevin Warsh, a member of the Fed's board of governors, praised the program as "necessary limited, circumscribed, and subject to regular review." At the same time, he expressed reservations about the program earlier this week.

"The Federal Reserve is not a repair shop for broken fiscal, trade, or regulatory policies," Warsh wrote in the Wall Street Journal. "Given what ails us, additional monetary policy measures are poor substitutes for more powerful pro-growth policies. The Fed can lose its hard-earned credibility -- and monetary policy can lose its considerable sway -- if its policies over-promise or under-deliver."

Right Cure for What Ails the Economy?

But Bernanke believes the additional money, injected into the economy through a program which will buy up Treasury bonds during the next eight months, can reduce borrowing costs for American consumers and businesses, while also lowering interest payments for people and businesses with lots of money in savings.

The Fed boss made the case for the program in an opinion piece published last Thursday in the Washington Post.

"[The Federal Open Market Committee] decided this week that, with unemployment high and inflation very low, further support to the economy is needed," Bernanke wrote.

"This approach eased financial conditions in the past and, so far, looks to be effective again," he said. "Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth."

Bernanke also denounced criticism that the plan would result in higher inflation as "overstated."

"Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits. Nor did it result in higher inflation," he said. "We have made all necessary preparations, and we are confident that we have the tools to unwind these policies at the appropriate time. The Fed is committed to both parts of its dual mandate and will take all measures necessary to keep inflation low and stable."

Obama Defends Fed Move

This week, with the backlash against the Fed plan still building, President Obama took time while on a trip through Asia, to defend the central bank's program.

"I will say that the Fed's mandate -- my mandate -- is to grow our economy," the President said in India. "And that's not just good for the United States, that's good for the world as a whole."

The central bank has already reduced short-term interest rates as low as they can go -- between 0%-0.25% -- and has kept them there for nearly two years running. But with the country's economic recovery still fragile, the Fed decided it was time to take more action.

Just two days after the Fed's announcement, the Labor Department reported that the nation's unemployment rate remained at 9.6 percent as of the end of October. An increase of 151,000 jobs during the month was significantly better than economists had expected, but not enough to bring down the jobless rate.