Use Western Union

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.

Update

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.

14 comments… add one

  • Icepick

    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.

    -and-

    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. [emphasis added]

    First, are you certain that it is coincidental? Hell, Obama couldn’t have been any more shameless in pumping up Immelt, so why should we assume that the other policies recently inacted (by Presidents of both parties, and with Congressional support from both parties) are any different?

    Shorter me: Feature, not bug!

    Also The job of boosting expectations feel, as they should, to elected officials, particularly the president of the United States.

    I assume that the -feel- should be -fell-.

    Finally, Marriner Eccles has to be the best name of any civil servant in US history. Unless God Shammgod has gone to work for The Man.

  • john personna

    The QEs have been very effective at scaring people into equity markets, commodities, and now defensive cash purchases of housing(*). They haven’t forced lending

    … but I wonder if Bernanke isn’t just happy with that first part. It might not have merely been a Great Recession if props had not been put in place.

    Now that you’re safe you want growth? ;-) I can understand that, but how easy is it to instill confidence in an obviously propped economy?

    * – not really sure if that’s smart or dumb money, maybe dumb, a herd move

  • Thanks, Icepick. Yes. Fell. I also corrected a failure of agreement in number in the following clause.

    Interestingly, Eccles was a Mormon. 70 years ago it didn’t seem to be a barrier to him serving as Fed chairman for quite a long time. And he went to BYU. Apparently, that was quite good enough back in those benighted days. How far we’ve come!

  • Now that you’re safe you want growth? I can understand that, but how easy is it to instill confidence in an obviously propped economy?

    For some reason that reminds me of the wisecrack about marriage to the effect that a wife is your companion and support in all the tribulations you wouldn’t have if you weren’t married. I guess Fed chairmen protect us from the problems we wouldn’t have if there weren’t any Fed chairmen.

  • john personna

    I have a hard time visualizing the no-Fed counterfactual. I tend to think of a similar world, with similar opportunities for me in my youth. I’m not really sure that’s true. Without the whole fractional reserve and inflationary system, would my father’s generation have joined the middle class?

    (His parents weathered the Great Depression as domestic servants. Though as I might have mentioned, they had a cool boss, who let them take the Pierce Arrow for days at the beach.)

  • Maxwell James

    I’m not sure it’s possible, in the media environment of the past 20-30 years, for any elected politician to boost confidence in the way FDR did. I suppose by the mythology of the present Reagan & Clinton were able to, but I think that has a lot more to do with luck + their willingness to inflate bubbles which would pop later.

    I’m not praising the Fed nor Bernanke (nor Obama), just not convinced that “new politicians” is itself any kind of answer. We got a whole bunch of new politicians last fall, you might remember, and what change has accompanied them? Bupkis, from what I can see.

  • I think it’s certainly harder to mislead persistently than it used to be.

    My point is simply that a) the Fed has enough to do without being responsible for instilling confidence, too; b) Fed chairmen are peculiarly unsuited to the task; c) if instilling confidence is anybody’s job it’s elected officials’. Now it may be the case that presidents aren’t able to instill confidence any more, either. In my view there’s a misfit between the process by which one becomes president and what presidents need to do.

  • I have a hard time visualizing the no-Fed counterfactual. I tend to think of a similar world, with similar opportunities for me in my youth. I’m not really sure that’s true. Without the whole fractional reserve and inflationary system, would my father’s generation have joined the middle class?

    Basic history:

    1. The Federal Reserve System was created in 1913–i.e. countries can and have existed without a central bank.
    2. The Federal Reserve has a rather spotty history when it comes to managing the eocnomy:

    a. The inflationary period during WWI
    b. The Great Depression
    c. Several recessions in the post WWII era, including the one in 1980.

    And now I think we can lay at least a portion of the blame for our current mess at the feet at the Federal Reserve. Does anyone here think that interest rates were not kept too low for too long thus allowing the real estate bubble to continue to expand?

    But people are comforted by the notion of fractional banking and inflation so what the heck…lets keep the system we got, after all the last 3 years were so awesome!

  • john personna

    Are there any countries who held out much longer, without central banks? Maybe that would help me see it.

    A “fork” at 1913 … more than 2 generations ago …

  • Canada didn’t have a central bank till much later I think, I believe they didn’t have one until after the Great Depression.

  • PD Shaw

    To some extent, countries without central banks historically relied upon the British, either as a store of currency, or through British lending, a vehicle by which monetary policy was controlled. If the printing of money got out of control, the British banks levied a high price for lending and in a worse case scenario, troops were deployed.

    I’m not sure what to make of American history, which has had central banks, no banks, state banks, regionalized national banks, and whatever we call the federal reserve. I think they all experienced panics and crisis, which led to change.

  • Also try this article by Hayek, note I haven’t read it.

  • john personna

    Available here as a free PDF.

    I’ll put it on my first gen nook (refurb, recent impulse buy) $89. They’re out there now for $79 now. In my brief experience not bad for the price. I’m not getting super battery life, but at least a few days of reading.

  • Icepick

    I’m not praising the Fed nor Bernanke (nor Obama), just not convinced that “new politicians” is itself any kind of answer. We got a whole bunch of new politicians last fall, you might remember, and what change has accompanied them? Bupkis, from what I can see.

    I’m reminded of the school teacher debates. Everyone wants better teachers – that’ll fix the problem. But that’s crap. You want better schools, get better students. Take the teachers from the best school in the area and switch them out with the teachers from the worst school in the area, and guess which teachers will look like the good set next year?

    If you want better pols, get better voters.

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