Nobel winner Fama downplays QE risks to Tea Party hero Santelli
Rick Santelli, CNBC reporter and early Tea Party catalyst, interviewed 2013 Nobel Laureate in economics Eugene Fama Tuesday, hoping to find common ground on what he sees as the US Federal Reserve's risky policy of financial asset purchases known as quantitative easing (QE).
The exchange didn't quite go to plan for Santelli, who failed to keep his calm:
Central banks wanting to expand the monetary base during tough economic times typically buy short-term bonds to lower short-term market interest rates. But since the US (and many other countries') short-term rates have for so long been so close to zero, there's not much point.
Hence the QE thrust from the Fed, which, by purchasing large quantities of longer term debt securities, is able to push longer-term rates downward.
Santelli and others, including many top economists like Stanford's John Taylor, believe that there are serious risks involved with QE exit on such a grand scale, including interest rate volatility, the potential for out-of-control inflation, and already palpable spillover affects on emerging market currencies and economies.
Fama may have addressed all of these concerns if he hadn't been interrupted so often.
Santelli is certainly not alone is his fear of QE exit, but next time he might want to call for back up with more sophisticated understanding of monetary economics before challenging Fama.