By Steven K. Beckner

SEOUL, South Korea (MNI) – Perhaps the most remarkable and, for a
long-time Federal Reserve correspondent, sad thing to see at the Group
of 20 is the growing disrespect in which the U.S. central bank is held.

Its protestations to the contrary notwithstanding, the Fed is no
longer seen as an independent central bank in the eyes of many. And
we’re not talking wacky Fed gadflies here, but leading G-20
policymakers, not to mention very prominent former Fed officials.

The Fed would deny that QE2 was primarily motivated by a desire to
depreciate the dollar or that it was working hand-in-hand with the
Treasury and the administration in pursuit of a weak dollar policy.

But the FOMC knew that one result of the large new asset purchases
would be to drive down the value of the dollar. They had seen it fall
just in anticipation of QE2.

In fact, some Fed officials openly talked about dollar depreciaiton
as one channel through which QE2 would work to boost economic activity.
You might say the FOMC was counting on dollar depreciation, whether or
not it was the policy’s main purpose.

Fed Chairman Ben Bernanke is not in Seoul to defend himself, but he
and the Fed’s policymaking Federal Open Market Committee stand accused
of conniving with the U.S. Treasury and the Obama administration of
driving down the value of the dollar.

The dollar is still, by far, the world’s leading reserve and
transactions currency, and the Fed, still the world’s most powerful
central bank, is supposed to be the guardian of the purchasing power of
that currency.

But in the eyes of many, the Fed is neglecting its role in a quest
for faster economic growth and higher inflation. Last week’s decision by
the FOMC to resume quantitative easing is considered proof positive of
that.

The Fed’s open-ended plan to create $600 billion in new money out
of thin air to buy U.S. government debt was not billed as a dollar
depreciation device, but that’s the way it’s being viewed in other G-20
countries.

This is making it difficult for the U.S. to credibly tell other
nations how to run their exchange rate regimes.

Some of this criticism of the Fed, admittedly, is self-serving and
perhaps intended to distract attention from the critics own flawed
policies. Nevertheless, there is no denying that it has been unusually
widepread and vehement.

Most recently, at a Thursday night press conference after the first
day of G-20 discussions, Zhang Tao, director-general of the
International Department of the People’s Bank of China, charged that QE2
“will undermine and increase downside risk in the global recovery.”

“Undoubtedly this has increased the vulnerability in emerging
markets and emerging markets are heading the global recovery,” said
Zhang Tao, adding that excess liquidity could created by the Fed could
“end up in an increase in asset prices, asset bubbles or foreign
exchange rate fluctuations.”

Chiming in, Zheng Xiaosong, director-general of International
Department of the Ministry of Finance, said countries with “reserve
currencies should bear in mind the impact on the global economy of
(their) policies. By doing this we can safeguard the stability of
capital markets.”

This is just the latest of a stream of complaints directed at the
Fed and U.S. dollar policy.

Before coming to Seoul, for example, German Finance Minister
Wolfgang Schauble remarked, “It doesn’t add up when the Americans accuse
the Chinese of currency manipulation and then, with the help of their
central bank’s printing presses, artificially lower the value of the
dollar.”

At the time of the annual meetings of the International Monetary
Fund and World Bank in early October, Brazilian Finance Minister Guido
Mantega warned that if the Fed went ahead with more quantitative easing
it would exacerbate a “non-declared currency war.”

Mantega warned QE2 would push the dollar down further, and said
that, because the dollar is “an anchor currency of world,” the U.S.
“can’t behave as if it was only looking to its own interests.”

Anticipating the Fed’s action last month, Bank of Japan Governor
Masaaki Shirakawa was quoted saying, “If a central bank tries to seek
greater impact from its monetary policy, there is no choice but to jump
into such a world.”

No one has criticized Bernanke personally, but even at the worst
moments of his predecessor’s long crisis-marred tenure, one would be
hard-pressed to recall instances of such barbed commentary on Fed
policy.

Former Fed Chairman Alan Greenspan himself had some thinly veiled
criticism in a Financial Times article timed to coincide with the
opening of the G-20 Summit.

Greenspan didn’t cite the Fed per se, but after criticizing China’s
yuan-pegging practice he wrote, “America is also pursuing a policy of
currency weakening.”

Former New York Federal Reserve Bank President Gerald Corrigan
expressed “uneasiness” with the Fed’s pursuit of higher inflation and
inflation expectations at an Atlanta Federal Reserve Bank conference
last Saturday in Jekyll Island, Georgia.

And a number of currently serving Fed officials have expressed
grave reservations about the resumption of QE2 and its international
financial implications.

Ahead of last week’s FOMC meeting, Kansas City Fed President Thomas
Hoenig warned that a new round of quantitative easing could intensify
international currency market tensions.

Hoenig, who dissented against the FOMC decision, said the Fed
“absolutely should care about” potential international “spillover”
effects of QE2. He noted that Shirakawa had recently said the BOJ
resorted to Q.E. because “if the world is going to engage in
quantitative easing” then the Japanese central bank has to “be in the
game” because of the effect on the yen’s exhange rate.

Hoenig also warned that QE2 could lead to new asset price bubbles
— a concern echoed by a number of G-20 officials.

Dallas Fed President Richard Fisher, who will be an FOMC voter next
year, also cited Shirakawa’s comment with concern and said such talk
“raises the specter of competitive quantitative easing. Such a race
would be something of a one-off from competitive devaluation of
currencies, a beggar-thy-neighbor phenomenon that always ends in
tears….”

Fisher also said he had “begun to wonder if the monetary
accommodation we have already engineered might even be working in the
wrong places…. (F)ar too many of the large corporations I survey that
are committing to fixed investment report that the most effective way to
deploy cheap money raised in the current bond markets or in the form of
loans from banks, beyond buying in stock or expanding dividends, is to
invest it abroad where taxes are lower and governments are more eager to
please….”

But ultimately, the FOMC majority decided, for domestic economic
reasons, to inject more money into the economy and let the chips fall
where they may as far as the dollar was concerned.

Just over a week before the meeting, New York Fed President and
FOMC Vice Chairman William Dudley conveyed the majority view when he
said, “The dollar may go up or down,” but “the dollar is not the goal of
policy.”

“If we do what we need to do in terms of achieving our dual
mdandate… the dollar will take care of itself…,” Dudley said. “I
don’t spend a lot of time focusing on the dollar….”

Interviewed a few days after he voted to support QE2, St. Louis Fed
President James Bullard told MNI of the dollar, “That’s not one that we
usually worry about a lot…. We take it as an imput to monetary policy
as to what we think will happen with trade flows and so on. But our
mandate is inflation and maximum sustainable employment in the U.S.”

Now, the Fed’s seeming disregard of the exchange rate consequences
of its policy is reeping a whirlwind of international, not to mention
homegrown, condemnation.

This is serious business for a central bank whose long-term success
depends on confidence in its ability to exit from a hyper-acommodative
monetary policy and preserve price stability and the purchasing power of
the greenback.

The Fed’s most important currency, next to the dollar itself, is
its hard-won credibility, which in turn rests on its independence. Now,
unfortunately, both its credibility and its claim of independence have
been brought into question.

It’s a sad day for a great institution.

[TOPICS: MI$$$$,M$U$$$,M$A$$$,MGU$$$,M$$BR$,MMUFE$,MMJBJ$]