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.