The Rocky road away from QE

By Ben Walsh
August 26, 2013

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Hanging over this year’s Jackson Hole gathering is the same policy question that has been kicked around in economic circles all summer: How quickly and aggressively should the Fed slow quantitative easing?

Caroline Baum thinks this WSJ headline says it all: “At Fed conference, everyone knows how to make an exit”. The problem, the WSJ’s Victoria McGrane reports in the story that follows, is that while opinions are everywhere, agreement isn’t.

The IMF’s Christine Lagarde urged the Fed to not to “rush to exit” and that “the path to exit will and should depend on the pace of recovery”. Lagarde was echoed by the head of the Mexican central bank, who said that Fed officials need to take the effect of their actions on emerging markets into account. The response of US policymakers was, in effect, ‘no, we don’t’.

Two academics told attendees that quantitative easing was having far less positive effect on the economy than the Fed thought. Arvind Krishnamurthy and Annette Vissing-Jorgensen,  professors at Northwestern and Berkley, respectively, said that QE “works largely through narrow channels that affect the prices of purchased assets, with spillovers depending on particulars of the assets and economic conditions”. A slow end to QE would impact specific asset prices, but would have little impact on the larger economy. This study is a follow up to their widely-cited 2011 paper on the same subject. Cardiff Garcia excerpts Goldman’s analysis of the new study, which finds that QE pushed down MBS yields, but failed to do the same to Treasuries.

Neil Irwin looks at the post-crisis landscape and finds a world where central banking is interconnected and is now on the frontlines of regulation. Or, as Morgan Stanley’s chief economist Vincent Reinhart put it: “the biggest bubble of them all has been the bubble in central banking”. — Ben Walsh

On to today’s links:

Management Secrets
Steve Ballmer, Microsoft and the falseness of the “stupid manager theory” – Horace Dediu

Yikes
How doctors can charge $546 for a bag of saltwater – NYT

Alpha
Wall Street’s changed forever: the shoeshine edition – Will Alden

Good News
A convincing case that America’s economic future is bright – Bill McBride

Deals
“Endless agglomeration and oncophilia”: two bad trends that explain a $10 billion merger – Megan McArdle

Wonks
How to fix NYC’s soaring rents – Reihan Salam

Whoah
The world’s smartest dog is starting to learn the structure of language – PopSci

Financial Arcana
Derivatives from the ’90s are coming back to haunt Wall Street – Lauren LaCapra and Dan Wilchins
Financial innovation increases risk, study finds  - MIT

Growth Industries
Texas and North Dakota produced 18% of America’s employment increase in the last 4 years – James Hamilton

Amazing
The Romans were nanotech pioneers – Smithsonian

Hope/Change/Etc.
The Obama administration has made little progress on getting women in top-level jobs – Annie Lowery

New Normal
Wages are stagnant, part 1 million – WSJ

Servicey
Michael Lewis on writing: “A little delusional thinking goes a long way” – Brain Pickings

Be Afraid
1 million cockroaches escape from a farm in China – Inquisitr

Regulations
“What’s shameful is how easily our leaders have caved in” on bank regulation – Anat Admati

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