Opinion

Edward Hadas

Has quantitative easing worked?

By Edward Hadas
September 4, 2013

It is nearly five years since the U.S. Federal Reserve slid into quantitative easing, the deployment of artificially created money into the bond market. QE and a prolonged period of near-zero interest rates have been the highlights of post-crisis monetary policy. That era is far from over, but it has lasted long enough for a preliminary judgment of monetary policy – especially as the Fed says it is now preparing to “taper” its bond purchases. My verdict: QE could have been worse, and it should have been better.

We know that policymakers might have done a worse job, because that is what they did in 1929, the last time a cross-border credit boom ended in a cross-border credit bust. Today’s central bankers have done better than their professional ancestors. In the 1930s, central bankers in many countries presided over debilitating deflation, and failed to prevent banking crises. This time, prices have neither collapsed nor exploded, and Lehman Brothers was the only big financial institution to topple.

While monetary policy helped stabilise economic and financial conditions, government bank rescues, large fiscal deficits and the automatic benefits of welfare states all played more important roles. The central banks’ support of weak institutions, and, in the euro zone, of weak governments was more important than their monetary policy.

Perhaps there would have been more financial destruction, and less productive investments, with tighter monetary policy. What can be said for certain is that QE has not worked economic wonders; growth remains slow and unemployment rates high.

Less certain, but still quite likely, is the claim that the injection of additional funds into the financial system has created new problems. The argument is simple enough. Some of the free and cheap money went to buy shares, bonds, commodities and currencies of fast-growing or high yielding economies. The new cash pushed up prices and supported unsustainably fast GDP growth in some developing nations.

It all may have looked good for a while, but now the prospect of the end of QE has abruptly reversed some of the flows. The result is wobbly financial markets and a sudden downturn in funding for countries such as India and Indonesia, which had become complacent about running large current account deficits.

So the world looks less financially stable, even as economic growth picks up a bit in developed economies. The withdrawal of QE could start another messy period in the markets.

It doesn’t add up to much to celebrate, especially considering the immense power of central banks. Surely, the monetary authorities, with the help of governments and financial institutions, could have found more effective ways to free up the global economy by cutting through the pervasive spider’s web of fear and debt? I think they need to know their limits, and have more intellectual bravery at the same time.

Humility would fight against fear. Although central bankers frequently speak about stimulating animal spirits, QE and ultra-low rates are more distressing than encouraging. They are obviously not normal, so the longer they last the greater the fear that their end will disrupt markets and the economy.

The monetary authorities adopted these policies because they overestimated the power of monetary policy to do good. No level of rates and no amount of money can deal with excesses of construction, finance or regulation. No monetary policy can train people, create jobs, build factories or change laws. Policy interest rates may help cool overheated economies or heat up unnecessarily chilly ones. Fiscal policy, however, is more effective for managing economic slumps (and booms).

After financial collapse was averted in 2009, central bankers should have set themselves more modest goals. They should have focused on keeping retail prices steady. Just that would have kept them busy enough. Success would have bred more economic confidence.

The bravery is needed to challenge traditional limits. While central bankers try to do too much, they choose to use too few tools. They have not abandoned their pre-crisis habits. They basically want to leave the financial system alone, even though volatile lending poses the greatest threat to monetary stability. They are reluctant to create and destroy money directly, even though balancing the supply of money with the supply of goods and services is the most direct way to ensure price and wage stability. And they are shy about intervening in markets, even when sharp moves in exchange rates and asset prices disrupt economies.

The respect of traditional policy limits reduced the effectiveness of QE. If the newly created money had gone directly into consumer and business bank accounts, rather than into banks, more of it would have been used to pay off excess debts or to invest productively. But at least QE was a new idea. With some more of those, central bankers could do a better job.

Comments
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”If the newly created money had gone directly into consumer and business bank accounts, rather than into banks, more of it would have been used to pay off excess debts or to invest productively.”

that’s entailment, to the bone.
high regards,

Posted by satori23 | Report as abusive
 

“If the newly created money had gone directly into consumer and business bank accounts, rather than into banks, more of it would have been used to pay off excess debts or to invest productively.”

I think that would have caused real and high inflation though as well. Also left the western financial systems at huge risk. Many investors would have lost much more…
Perhaps a split of the newly created money going to the banksters and consumers? Still would cause inflation though.

Posted by tmc | Report as abusive
 

”If the newly created money had gone directly into consumer and business bank accounts, rather than into banks, more of it would have been used to pay off excess debts or to invest productively.” So maybe the “Star Trek” economy is here where the government just prints enough money for people to pay debts or invest whether they work or not and no one worries about the asset foundation under the dollar? I don’t think that gives me a warm and fuzzy feeling for the long term.

I think the medical profession has it right when they endeavor to “first, do no harm”.

“No level of rates and no amount of money can deal with excesses of construction, finance or regulation. No monetary policy can train people, create jobs, build factories or change laws. Absolutely true and to the point!

Posted by OneOfTheSheep | Report as abusive
 

I just read the article “BRICS to commit $100 billion to foreign exchange fund, completion a way off” http://www.reuters.com/article/2013/09/0 5/us-mp-g20-brics-idUSBRE9840E020130905 It Flashed by on Reuters.

It appears that the vast majority of the stimulus money went straight to the BRICS and other emerging economies. The article bove just another case in point to that effect. This, in conjunction with off-shoring millions of jobs from the USCA and Europe to them (the BRICS) as well, significantly grew those economies. It created tens of millions of jobs. Just not here. But for the global economy and corporations, this grew their markets significantly too. The “middle class” of the world is far larger today than it was at the turn of the century. We must remember that “The world is flat” and national borders are merely market distortions.
So the job losses brought the recession to the western middle class, then the financial collapse shattered it further. The stimulus allowed the BRICS to continue thier hyper-growth for another five years, firming up the “new” global economy. So, I think Yes, quantitative easing worked. Did it bring back jobs to the western middle class? No, but we’ve been told repeatedly that those jobs are gone forever from the very creators of them. Did it increase the western middle class or their financial status? No, but we’ve been told repeatedly that we cost to much in the global work force and need a pay cut to compete. So this is how that pay cut took shape. The stimulus was an effective tool to balance global economies. So again I say yes, it worked.

Posted by tmc | Report as abusive
 

When you print trillions it has to do something. It will stimulate GDP but too much will filter through to the 1% and inequality rises. It also kills savers (0% interest is worthless to pensioners) and drives asset bubbles (what is the breakeven year from dividends of the stock exchange?). I really think there needs to be a new way – radical ideas with non-radical implementation.

Posted by BidnisMan | Report as abusive
 

Not majority of the easy money has gone to emerging market. That is not true. The emerging capital market is much less than the traditional capital market in scale. The intrinsic stimulus in the emerging market is a lot more forceful than the inflows. When the fear comes, there is no difference between the intrinsic money and inflows, when capitals are looking for safety, even if the safety is pretty virtual.

Posted by gee.la | Report as abusive
 

Fed diminishing effect creates a great mentality, even before it brings any solid influence. The change in mentality is the major impact. Although it is a virtual impact, it can carry a huge and quick worsening in economy and challenge the current recognition. After the wave has washed out the protection, the system is becoming weaker in front of the next real impact.

Posted by gee.la | Report as abusive
 

It’s interesting how many of us picked up on the statement at the end of the wandering article, “If the newly created money had gone directly into consumer and business bank accounts, rather than into banks, more of it would have been used to pay off excess debts or to invest productively.”

Not even a mention of the speculation in the housing market where the smartest people in the room all claimed to believe that housing prices would always rise. High-integrity bankers in the United States turned into addicted gamblers in their Wall Street Casinos, then the government covered their gambling losses with taxpayer funds because these professed capitalist companies claimed they were too big to fail. Too big to prosecute. Too big to be held accountable in a capitalist society. Too rich to be brought down.

THE PLUTOCRACY RULES !

Posted by ptiffany | Report as abusive
 

QE has distorted and inflated financial markets beyond anything anyone dares to imagine -
Just think about the weirdest anomaly of all that everyone got used to: When the US economy shows signs of weakness, stock prices go up since the general speculation is that the fresh data would prevent the Fed from ‘tapering’ their QE program, which is Wall Street’s bloodline.
And when the US economy shows signs of strengthening, stock prices go down, because investors speculate that it would bring a faster end to the Fed’s QE.

How did we learn to live with such an incredible, absurd, and counter-productive scenario?

And needless to say that like in every financial bubble, this is merely the tip of the iceberg, and the bulk of absurd distortions have yet to be revealed.

Still waiting for the ‘Dr. Doom’ of the next (present) financial bubble..

Posted by reality-again | Report as abusive
 

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