Wednesday summary: Domitrovic on the Fed's dual mandate; Malpass on Operation Twist 2011; Forbes predicts Perry will beat Obama.

From Forbes, Brian Domitrovic notes the Federal Reserve’s dual mandate isn’t contradictory as a weak dollar coincides with higher unemployment.

In The WSJ, David Malpass critiques the Fed’s updated Operation Twist:

The modern version [of the Twist] would probably be even less effective since markets are expecting it. The Fed's idea is that the private sector will go looking for riskier and longer duration assets to make up for the bonds the Fed bought. But the evidence is clear that this isn't working: The Fed's near-zero interest rate policy and its huge overhang of bonds create uncertainty. This hurts small-business confidence and discourages job growth.

The twist from the second round of quantitative easing (QE2) contributed to the sharp economic slowdown in the first half of 2011 when the Fed was buying $70 billion in bonds per month. The more it bought, the slower the economy grew as the twist sucked capital from savers and small businesses to the government.
The Fed has conducted a controversial experiment with near-zero interest rates and massive bond purchases. These policies have hurt growth and added to unemployment by distorting financial markets.

At CNN, President Clinton argues Republican policies do not create prosperity:



The NYT reports the Republican congressional leadership opposing additional Federal Reserve stimulus.

On The Daily Ticker, Steve Forbes predicts Rick Perry will beat President Obama.

From Alhambra Partners, Joe Calhoun dissects public opinion on taxes and spending.

In The WSJ, Jonathan Anderson explains why China is still a financial midget despite its fast growth:

The bigger problem is that China can't open its capital regime, at least not fast enough to matter. For more than two decades, China's philosophy of monetary management and financial development has been based on a closed-economy system: maintaining low and stable interest rates without having to worry about external arbitrage, breezily adopting economic stimulus when needed without concern about the banking system's asset quality, propping up banks with historically high nonperforming loan ratios and fixed-cost pricing, and keeping iron-clad control over the exchange rate. All of these only work when foreign portfolio funds cannot influence asset prices, and when locals have nowhere else to go.

While China's GDP may be 10 times larger than it was in 1995, its external capital controls are still similar to what they were back then. China has opened a few windows at the margin, but it has never seriously opened the doors. If anything, the financial crises of 1997-98 and 2008-09 have taught the authorities to be as slow as possible in making adjustments.

Even if China were to remove external controls, this still leaves the lack of deep domestic markets. Put simply, there's nothing to invest in. You need a local bond market, and China doesn't have one. Relative to its size, China has a much less mature fixed-income market than most of its major emerging-market peers.

On The Street, Phil Streible notes the correlation between rising gold prices and the President’s declining poll numbers:



Bloomberg reports Robert Mundell advocates Serbia fix to the euro in preparation to entering the eurozone.

At Fox Business News, conservative Keynesian Martin Feldstein discounts the President’s economic plan.

The WSJ criticizes US Rep. Barney Frank’s (MA) proposal to reduce Fed independence.

From 1980, candidate Reagan debates President Carter on the economy and inflation.

At COAL, Paul Krugman amplifies his argument that the economy is in a liquidity trap.