On November 15, the badly battered and bruised 111th Congress will return for its closing lame duck session.  This is not the new Congress—this is the old Congress that has substantial Democratic majorities in both the House and Senate.  The many lame ducks are mainly Democrats who the voters summarily rejected in historic numbers on November 2.
 
Lame duck sessions are notorious for their ineffectiveness and often very nasty political bickering.  Perhaps this one will be different—but don’t hold your breath.  The returning 111th will do what it absolutely must:  pass a continuing resolution to ensure that the government doesn't shut down between early December (when the current continuing resolution runs out) and early January when the new and very different 112th Congress convenes.  But the times demand more than just keeping the government open for business.  Will this lame duck Congress find a way to deal with the other crucial issues?
 
The most significant issue is the future of the Bush tax cuts.  After the elections and before leaving for Asia, President Obama gave a boost to extending (at least temporarily) all the Bush taxes cuts for everyone without any income limitations.  The Financial Times carried the headline, "Obama Signals Deal on Tax Cuts."  But not everyone is on board with this.  Polls show that the American voters are split on this issue, though less than 20 percent support the Greenspan position that the Bush tax cuts should be allowed to expire.  In a best-case scenario for every American, the Bush tax cut extension issue will be debated  and resolved favorably before the 111th Congress adjourns for good.
 
But what position will the House Democrats take on this issue in the lame duck session?  What will their demands be on the White House as President Obama tries to negotiate a deal with the incoming Republican leadership?  Do the Republicans want the Bush tax extension issues resolved by the Democratically controlled 111th Congress or will they prefer to defer such decisions to the 112th Congress, when they will control the House and the important tax-originating Ways and Means Committee? 

Neglected (by the press) amongst the myriad of other tax issues on the table is the future of the estate tax.  There has been very little public discussion.  The estate tax is currently at zero but, come January 1 of next year, will move up to a highly punitive 55 percent for estates over the $1 million exemption level.  Rational estate planning already faces chaos. 

A Democratic priority will continue to be extending unemployment benefits, an issue that has become bitterly partisan as unemployment continues at 9.6 percent.  Some Democrats undoubtedly feel they have to get this done in the lame duck session—in other words, put up now or shut up forever.  Will this issue become linked to the extend- the-Bush-tax-cuts debate?  Is the lame duck session of the 111th Congress even capable of legislative compromise?  We can only hope.  President Obama has called for a political policy summit to consider these issues right after he returns from Asia.  Stay tuned.

The Federal Reserve's Quantitative Easing (QE2)
 
QE2 is not the exit strategy that the Federal Reserve hoped for.  And if the Fed had its druthers, it wouldn't have announced this unusual and controversial policy decision the day after a midterm election that dramatically altered the political landscape of the United States.  The timing of the decision thrust the Fed into the post-election political spotlight.  But its actions, as set forth in the FOMC press release of November 3, were designed "to promote a stronger pace of economic recovery" and, more controversially, to increase the rate of U.S. inflation from today's 1 percent to just under 2 percent. 

The Fed announced that the FOMC "will maintain its existing policy of reinvesting principal payments from its securities holdings.  In addition, the Committee intends to purchase a further $600 billion of longer- term securities by the end of the second quarter of 2011, a pace of about $75 billion per month.  The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.  The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period."
 
So the Fed has put its foot to the monetary stimulus gas pedal and will inject an additional $600 billion in reserves into the banking system.  Former Fed Vice Chairman Donald Kohn was on point in explaining this historic Fed policy initiative on PBS’s superb Nightly Business Report on Friday.  He was bullish.  One of the most distinguished Fed watchers in the world, Greg Ip, formerly of The Wall Street Journal and presently with the Economist, filed a major story carrying the headline, "Down the slipway—'Quantitative easing' is unloved and unappreciated—but it is working."  Ip wrote that "with a bit of a lag, these easier financial conditions are supposed to boost growth through three channels.  First, lower real yields spur borrowing and investment.  This channel is bunged up: many households cannot borrow because their homes have fallen in value and because banks are less willing to lend.  But the remaining two channels remain open.  Higher share prices have raised household wealth by some $1.4 trillion, which will spur some spending.  And the lower dollar should help trade.  American factory purchasing managers reported a sharp jump in export orders in October and a drop in imports."
 
There are critics.  Veteran Kansas City Federal Reserve Bank President Tom Hoenig continues his lonely and principled dissent, citing his perceived risks of "this continued high level of monetary accommodation."  Hoenig is joined by many respected foreign monetary officials who have an eye on the QE2 impact devaluing the dollar and adversely impacting their trade balances with the United States.
 
Disturbingly, some Republican politicians led by the “good” doctors Paul—Representative Ron Paul (R-Texas), incoming chairman of the Domestic Monetary Policy and Technology Committee of the very powerful House Financial Services Committee (who wants to end the Federal Reserve), now joined by his son Dr. Rand Paul, the Senator-elect from Kentucky—blasted the Fed's QE2 action. 

Earlier in this Congress, Rep. Ron Paul was successful in adding language authorizing a sweeping congressional audit of Federal Reserve monetary policy to the financial regulatory restructuring bill on the House floor.  Fortunately, this language, which would have destroyed the independence of the Federal Reserve, was dropped by the House-Senate conferees in what became the Dodd-Frank bill.  Senator-elect Rand Paul did not deviate from his father's policy footprints when he told the press that "the Fed continues to not learn from its mistakes. This situation also shows once again why we need a full audit of the Fed and the trillions of dollars they have put on their books or printed in the past few years."  Come January 2011, Senator Rand Paul probably will be appointed to a seat on the Senate Banking Committee where he can join his father's decades-long quest for a full congressional audit of the Federal Reserve by the GAO, including its sensitive monetary policy decisions.