Image: Patrick Rizzo
By Senior editor
updated 11/10/2010 10:39:40 AM ET 2010-11-10T15:39:40

It’s rare that $600 billion gets called a joke. But these are different times.

As the U.S. readies to join the other Group of 20 nations in Seoul, South Korea, its plan to pump money into the banking system to jump-start the recovery is finding enemies both foreign and domestic – from finance officials in Germany and China to Sarah Palin.

Former vice presidential candidate and Tea Party favorite Palin weighed in on the debate late Monday over whether the plan, known as quantitative easing, would help boost the U.S. economy, calling on Federal Reserve Chairman Ben Bernanke to "cease and desist."

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"When Germany, a country that knows a thing or two about the dangers of inflation, warns us to think again, maybe it's time for Chairman Bernanke to cease and desist," Palin said in a speech in Phoenix.

Story: U.S. slammed on Fed policy before G-20 summit

Palin was referring to a statement last week from German Finance Minister Wolfgang Schaeuble, who said he was perplexed by the move, which aims to boost the economy by making loans less expensive.

The issue, if not Palin’s take on it, is sure to loom over the two-day G-20 conference, which opens Thursday.

"I have great doubts about whether it makes sense to pump unlimited amounts of money into the markets," Schaeuble told Der Spiegel news magazine on Saturday. "There is no shortage of liquidity in the U.S. economy. I can't see the economic argument for this move."

More to the point, last week he called the policy "clueless."

Bernanke has been defending the plan almost from the moment it was announced last Wednesday.

Story: Bernanke: Inflation worries are ‘overstated’

In an editorial penned for The Washington Post last week, Bernanke said concerns that the Fed's program would spur rampant inflation were overblown. He has argued that the policy would lead to a stronger U.S. economy, which is good for the world and would eventually lead to a stronger U.S. currency.

The Fed is making the move because unemployment, now at 9.6 percent, is too high and inflation is too low, he argued. "In the most extreme case, very low inflation can morph into deflation (falling prices and wages), which can contribute to long periods of economic stagnation," Bernanke said.

China, Germany, Brazil and a host of developing nations are worried the plan will have the opposite effect. They are concerned that the Fed's move will weaken the U.S. dollar and spark asset bubbles and inflation in their own nations. Pumping $600 billion into the U.S. banking system is likely to lead to lower interest rates and a weaker dollar, which makes U.S. exports relatively cheaper than exports from other nations.

Ma Delun, a deputy governor of the People's Bank of China, said Tuesday he was concerned the Fed's spending spree may undermine efforts to balance out global growth.

The Fed's program "may add risks to the global economic imbalance, put pressure on emerging markets to adjust their international balance of payments and could also stir the formation of asset bubbles, all of which require our vigilance," Ma said in Beijing.

China is concerned enough about that possibility that it has pushed up yields on short-term debt and announced for new rules to slow the flow of "hot money" into its banking system.

There's even worries within the Fed about whether the program could ignite inflation in the United States. Kevin Warsh, a Fed governor with close ties to Bernanke, warned Monday that the program has "significant risks" and said he doubted it would have "significant" benefits for the economy.

Story: Bernanke ally has doubts about latest Fed move

But Bernanke drew unusual support from Obama, who rarely comments on decisions made by the independent Fed.

"The Fed's mandate, my mandate, is to grow our economy. And that's not just good for the United States, that's good for the world as a whole," Obama said at a news conference in India Monday. "The worst thing that could happen to the world economy . . . is if we end up being stuck with no growth or very limited growth. And I think that's the Fed's concern, and that's my concern as well."

Obama said that a strong, job-creating economy in the United States would be the country's most important contribution to a global recovery as he pleaded with world leaders to work together despite sharp differences.

"The United States will do its part to restore strong growth, reduce economic imbalances and calm markets," he wrote in a letter sent Tuesday to G-20 leaders.

Some investors were voting with their pocketbooks by buying gold, a safe haven in times of economic uncertainty. Gold hit record highs for a fourth day in a row Tuesday, with futures for the precious metal climbing to $1,422.10 an ounce (on a non-inflation adjusted basis).

The growing tensions have led some to call for using gold if not as a standard, then at least as a guidepost for currencies. World Bank President Robert Zoellick, a former Treasury Department official, called for a system to use gold "as an international reference point of market expectations about inflation, deflation and future currency values."

Writing in the Financial Times, Zoellick said the system “is likely to involve the dollar, the euro, the yen, the pound and a (Chinese) renminbi that moves towards internationalization and then an open capital account."

Obama turned the criticism around on China Tuesday as he cautioned that the G-20 still had a long way to go to in creating a framework for balanced global growth.

"We still have a lot of work to do," Obama said at a news conference in Indonesia.

"One of the key steps is putting in place additional tools to encourage balanced and sustainable growth," he said. "We have not yet achieved that balanced growth," he added, noting that some countries were intervening in currency markets to maintain an advantage, without naming names.

The Associated Press and Reuters contributed to this report.

Video: China, Germany criticize U.S. economic policy

  1. Closed captioning of: China, Germany criticize U.S. economic policy

    >>> tomorrow, later itted, 20 of the world major economic powers will meet in seoul as the g-20 gets under way. there is controversy. president obama says strong growth in the u.s. would spark a global recovery. some world leaders are slamming the fed's recent decision to pump billions into the american economy , arguing it could hurt their countries' economies. with me to explain, steve liesman . he is in the vast room where we'll see thousands of reporters from around the world. steve, everybody mad it at the fed. this is going to be a showdown with china . explain.

    >> well, first of all, you have to understand the funny position that the obama administration is in. the federal reserve is an independent entity and doesn't really answer to the obama administration. but the obama administration finds itself it answering for the fed. the fed, of course, agreed a week or so ago to this new program to buy $600 billion worth of treasuries. this ends up weakening the dollar. all the countries around the world, many of the countries around the world are upset by this. this strengthens their currency and creates an influx of money into those countries and also makes their exports less competitive. one of the reasons why this may be beneficial to the u.s., it makes u.s. exports more competitive. obama lands on the ground, trying toed lead the world in terms of dealing with global imbalances. comes right away to this criticism from other nations about this. a little background on this is important. a lot of these meetings end up with a lotrancor leading up to it. a g-20 official told us earlier, they have expect the ang-20 leaders to agree to more market-based currency exchanges and expect the g-20 to agree to noncompetitive valuation. there will be an historic agreement on new banking regulations coming out of the financial crisis where world leaders will agree to make tougher standards for big banks and banks around the world and agree in a year's time for even stricter regulations on the biggest banks, the global banks that create systemic risk. there is one major outstanding issue, which is the issue of global imbalances. the united states runs a $700 billion trade deficit with the rest of the world . that means it imports more than it exports. the obama administration wants g-20 leaders to agree to new standards for that. it's unclear if they'll get them. of course, as you said, china is on the table in a big way here. back to you.

    >> steve, just one quick follow-up question. i know we have a satellite delay. i want to get at this issue with china . obviously the currency back and forth. you said there's supposed to be a global agreement there won't be some race to the bottom when it comes to currency valuations. is that going to include china or is china going to keep that threat on the table to try to keep our fed from spending even more money?

    >> well, you know, some people suggested that china was saying this stuff ahead of the meeting to deflect criticism away from it. it remains totally unclear how much pressure will be able to be put on china . i think there's general agreement that china is part of the problem. china is big enough and strong enough it doesn't really have to new here. here's the measure of how effective this communique will be. they'll agree to it sometime tomorrow. we'll hear about it friday. when all of the leaders go home, they'll all give either different interpretations or the same interpretation. what they're doing is either painering ov ering papering overing it or having real agreement.

    >> steve liesman , thank you.

    >>> leelshe is a real soul man as well. steve liesman in south korea for us. thanks very much.

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