The Menace of Fiscal QE

by George Selgin

“A fascinating critical overview of an idea that is gaining traction left, right, and center.” —Peter Conti-Brown, author of The Power and Independence of the Federal Reserve

As the Federal Reserve struggles to fulfill its mandate in a low interest rate world, it faces another new threats to its hard-won independence.

Thanks to crisis-era changes to its procedures, the Fed now enjoys practically unlimited powers of quantitative easing (QE): it can buy all the assets it likes while still controlling inflation. So far, QE has only been used to combat recession. But if certain politicians have their way, the Fed may end up using it not for macroeconomic purposes but to finance backdoor spending. That’s The Menace of Fiscal QE.

In his brief but systematic study, George Selgin reviews the fiscal QE movement, shows how it threatens both the Fed’s independence and democratic control of government spending, and counters claims that it offers a low-cost way to finance such spending. Finally, he proposes a way to rule-out fiscal QE without limiting the Fed’s ability to counter slumps.

Genres: Economics, Money, Politics

126 pages, Kindle Edition

Published February 11, 2020

Reviews

[Winmonroe · Rating 3 out of 5]

6/10

George Selgin's book is well written and much more willing to engage with the technical complexity of monetary policy than most monetary policy comentators. His broad thesis is that QE has tempted the public economic discourse to view monetary financing of fiscal policy as cheap and easy. George traces the advocacy and development of some of the more grandiose economic proposals over last decade and makes a compelling case. His next contention is that this threatens monetary policy and central bank independence. While I am sympathetic to some of these concerns, many of the specific arguments he advances feel much weaker, based on assumptions or simplifications that don't feel particularly reasonable. Finally, he argues that the central bank's operating framework importantly affects how tempting monetary financing is, with a lean central bank balance sheet being a better political shield for the central bank, in addition to some other market and policy benefits, but again I found these of mixed persuasiveness. Throughout, Selgin rightly points to the importance of democratic legitimacy as the basis of economic policy, but then frequently frames what seem like political questions as technocratic economic matters. While I found this particular book less compelling, George is clearly a deep expert on monetary policy and I look forward to reading his more scholarly oriented work in the future.

[Fidel Morla · Rating 4 out of 5]

As an economist in the Reserve Management Division of a central bank, I found this one to be a timely and thought-provoking read. George delves into the potential dangers of using quantitative easing (QE) as a tool for financing government spending, a practice he refers as fiscal QE. He articulates how this approach could undermine the Fed's independence and blur the lines between monetary and fiscal policy, leading to backdoor government spending without proper legislative approval.

Selgin's balanced analysis acknowledges the utility of QE in certain macroeconomic scenarios but cautions against its misuse for fiscal purposes, which could lead to inflationary pressures and moral hazard. While the book is concise and engaging, I would have appreciated a deeper exploration of potential safeguards to prevent the misuse of QE for fiscal objectives. Nonetheless, The Menace of Fiscal QE is a valuable contribution to the ongoing discourse on central bank independence and the prudent use of monetary tools. I highly recommend it to policymakers and fellow economists alike.

[Igor Pejic · Rating 5 out of 5]

All the titles so far in this category revolve around how technological advances and their combination changes the rules by which companies and banks compete. But fiscal and monetary policy is just as important to understand for executives, above all for those that are in the money business. In The Menace of Fiscal QE George Selgin tells you all you need to know about Quantitative Easing (QE) and the resulting inflation. He particularly warns that the Fed has the power to buy assets via QE while at the same time being in charge of inflation control. Selgin’s refreshing thinking inspired the first cypherpunks (ie the cryptographer circle that gave us the predecessors of Bitcoin) and I am pretty sure that to understand the future of decentralized finance and blockchain more broadly you should be familiar with his work. No banker nor fintech challenger should skip this book.

[Diego Ferreras · Rating 4 out of 5]

Thought-provoking little book on the fiscal temptations of large central bank balance sheets.