Wednesday round up: Melloan on the Fed; Woodhill on the GOP Medicare plan; Kudlow on QE3.

From The WSJ, George Melloan explains the Federal Reserve can’t handle higher interest rates:

But the Fed is running a big interest-rate risk. Over the past few years, the Fed has borrowed about $1 trillion in excess reserves from member banks. The banks can call in those loans to the Fed on demand, which is about as short-term as you can get. Should the economy pick up and banks need that money to make private loans, the Fed would have to offer a higher rate to try to hold those reserves. But when interest rates go up, the value of bonds goes down—and so too would the market value of the Fed's $2 trillion-plus portfolio of Treasurys and mortgage-backed securities.

Writing in Forbes.com on May 6, William F. Ford (a former Atlanta Fed president) and Walker F. Todd (who did stints with both the Cleveland and New York Feds as a lawyer and economist) note that a one percentage point rise in long-term interest rates would lower the market value of the Fed's current bond portfolio by $100 billion. That would more than wipe out the $81.7 billion in earnings the Fed reported for 2010.

In Forbes, Louis Woodhill advises Republicans to reconsider their Medicare proposal and focus on growth.

At NRO, Larry Kudlow opposes a new round of quantitative easing.

On The Kudlow Report, David Goldman discusses the likelihood of QE3 in response to the softening economy:




Reuters reports 150 economists, including supply-side guru Robert Mundell, support Republican efforts to cut spending.

From Reason, Jerry Brito discusses a new attempt at private money.

IBD notes the weak economic recovery.

In The WSJ, David Malpass proposes an alternative strategy to bring down spending:

The way to do it is legislation linking debt or spending to GDP and forcing the government to cut spending when it exceeds a set ratio. For example, if the debt-to-GDP ratio is over 65% in fiscal years 2012-2014 (as it surely will be), or over 60% in 2015-2018, or over 50% thereafter, the president could be required to submit budgets that are no greater than the previous year's nominal spending.

At NRO, Cato’s Michael Tanner suggests the GOP presidential candidates haven’t proposed enough spending cuts.

From COAL, Paul Krugman pushes back on Benn Steil and Manuel Hinds.

On the John Batchelor Show, I discuss Robert Mundell’s euro/dollar argument.