Quantitative easing, the method of economic stimulus employed by the Japanese over the last couple of decades and the Federal Reserve for the last several years, has not been particularly effective:
A study published in February found that interest rates decreased, but only for companies with top credit ratings. “Rates that are highly relevant for households and many corporations — mortgage rates and rates on lower-grade corporate bonds — were largely unaffected by the policy,” wrote Arvind Krishnamurthy and Annette Vissing-Jorgensen, both finance professors at Northwestern University.
Another indication of its limited success: Borrowing has not grown significantly, suggesting that corporations — which are sitting on record piles of cash — are not yet seeing opportunities for new investments. Until they do, some economists argue that the Fed is pushing on a string.
“What has it done? It has eased credit conditions, it has pumped up the stock market, it has suppressed the dollar,” said Mickey Levy, Bank of America’s chief economist. “But does the Fed think that buying Treasuries and bloating its balance sheet is really going to create permanent job increases?”
Paul Krugman defends QE as having sent a signal:
What QE2 might have done — and probably did do for a while — is act as a signal of the Fed’s determination to do whatever is necessary,and maybe of a willingness to accept higher inflation. But this only goes so far, especially with all the political pressure on the Fed and its constant declarations, in the face of that pressure, that it remains as steadfast against inflation as ever.
That reminds me of Sam Goldwyn’s wisecrack about “message” movies: “If you want to send a message, use Western Union.” The Federal Reserve already has an impossibly difficult bundle of statutory responsibilities: it’s supposed to regulate banks, control inflation and, produce minimal unemployment. To this we should add sending messages about the economy?
I recognize that expectations are an important part of the economy. Whose job is it to boost expectations? I strongly suspect that in the 1930s most Americans couldn’t have picked the Chairman of the Federal Reserve out of a lineup (Eugene Meyer followed by Eugene Black followed by Marriner Eccles). The job of boosting expectations fell, as it should, to elected officials, particularly the president of the United States. Heard about those fireside chats that Roosevelt gave every few months during his presidency? Their specific intent was to boost the public mood, to give confidence.
Ben Bernanke doesn’t have the training, experience, or temperament to raise the mood of the public during a period of economic uncertainty and anxiety. Expecting him to do so is an abrogation and failure of our political system and doing so by distorting the books of the Fed out of any sane proportions and, coincidentally, making a handful of investors enormously wealthy, is inexcusable.
We need to open a new can of politicians.
Yves Smith’s take on the psychological argument in favor of QE:
You could argue that the big impact of the QEs was psychological, that it was tangible proof that the Bernanke put was the Greenspan put on steroids. And you have thegeneral concern, that the more the Fed meddles in rates, the more it creates economic distortions, which are very likely to be speculation rather than real economy investment.
Of course if you look at the proximate effect of the Fed’s moves over the last several years which is to make hundred of billions of dollars for big banks as a feature rather than a bug maybe everything is going according to plan.