Tags: Stiglitz | Fed | QE2 | Creates | Risks

Stiglitz: Fed’s QE2 Creates ‘Considerable’ Risks

Friday, 10 Dec 2010 04:01 PM

The U.S. Federal Reserve’s plan to boost purchases of bonds poses “considerable” risks by increasing capital inflows to emerging markets, Nobel Prize-winning economist Joseph Stiglitz said in Santiago today.

“All this liquidity that they’re creating is not going back to grow the American economy and is going to Asia and other emerging markets where it’s not wanted,” Stiglitz said. “Most of the countries around the world have begun to react. They put in capital controls, exchange rate interventions, taxes on these capital flows — a variety of interventions.”

The Fed will buy an additional $600 billion of Treasuries through June in a program dubbed quantitative easing two, or QE2. The program is designed to boost U.S. economic growth, Fed Chairman Ben Bernanke said in a Nov. 3 opinion article for the Washington Post.

Banks will invest money provided under the Fed’s program in Asian and other emerging markets where economies have recovered faster than the U.S. and Europe from last year’s recession, Stiglitz said at an economic seminar in the Chilean capital hosted by Banco de Credito e Inversiones.

Increased capital inflows could cause emerging market currencies to appreciate and could create asset bubbles, he said.

Regional Response

Brazil in October raised so-called IOF tax on foreigners’ fixed-income purchases to 6 percent — triple the level from a year earlier — to help depreciate the real, which has gained 1.5 percent against the U.S. dollar so far this year.

The country’s finance minister, Guido Mantega, as recently as yesterday said that Brazil is open to taking additional measures if needed.

Countries like Chile that have opted not to implement capital controls or intervene in currency markets could suffer from an unwanted increase in capital flows, Stiglitz said.

Chile’s peso has appreciated 6.6 percent against the U.S. dollar in 2010, the seventh-best performance among 26 emerging market currencies tracked by Bloomberg. The country last intervened in the peso market in 2008 when the central bank bought $5.75 billion in pre-announced daily auctions of $50 million.

The South American country will want to consider intervening in the peso market again and could need to consider implementing capital control measures, Stiglitz told reporters after his speech.

“Unintentionally, QE2 is leading to a fragmentation of global financial markets because each country takes actions to protect itself,” he said during the seminar. “As more and more do that, it puts more and more pressure on those that don’t, and they will eventually be forced to take some form of action.”

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The U.S. Federal Reserve s plan to boost purchases of bonds poses considerable risks by increasing capital inflows to emerging markets, Nobel Prize-winning economist Joseph Stiglitz said in Santiago today. All this liquidity that they re creating is not going back to...
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2010-01-10
Friday, 10 Dec 2010 04:01 PM
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