The Costs and Benefits of QE

April 30th, 2013 at 1:59 am

I’m here at the Milken Institute’s Global Conference, where tomorrow (Tues) I’ll be joining a panel on tax reform (I’ll be sure to post it—they do an excellent job of recording the sessions).

I stopped by a session today on the Federal Reserve’s quantitative easing (QE: large-scale asset purchases—LSAPs—by the Fed in order to bring down longer term interest rates) wherein all five panelists where in intense agreement that the Fed was making a big mistake.

First off, not to be too contrarian, but I must say, when I hear such uniform confidence on a topic with such a limited historical record, I can’t help but wonder if there’s a thumb on the scale.  Here, as in the debt debate, one often hears economists holding forth with a level of confidence than goes well beyond the data.

The panel’s rap was that the Fed’s actions to fight the Great Recession were appropriate from 2008-10, but the expansion of their balance sheet since then—$85 billion a month in bond purchases, including Treasuries and MBS—was creating too much risk for too little reward.

The thing is, beyond a general—and understandable—nervousness about the Fed going deeper into uncharted territory [typo fixed, as per a few “helpful” tweets from “friends”], they really failed to make a case for their curiously qualitative cost/benefit analysis.  There was, for example, no evaluation of Fed Chairman Bernanke’s case that QE has significantly lowered longer term rates, including those on mortgages, and has thus contributed to growth and jobs.

In this speech from last summer, for example, Bernanke maintains:

If we are willing to take as a working assumption that the effects of easier financial conditions on the economy are similar to those observed historically, then econometric models can be used to estimate the effects of LSAPs on the economy. Model simulations conducted at the Federal Reserve generally find that the securities purchase programs have provided significant help for the economy. For example, a study using the Board’s FRB/US model of the economy found that, as of 2012, the first two rounds of LSAPs may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred.

Note his hedge re historical comparability, and such simulations should be taken with a grain, if not a few aggressive shakes, of salt.  But if the magnitude is uncertain, the sign is surely positive.  And housing and autos, two important and rate-sensitive sectors, have shown notable strength amidst weakness elsewhere, providing additional exhibits on the Fed’s side of the docket.

And what are the risks of unprecedented growth in the Fed’s balance sheet?  The Fed has been forthright about them: future inflation, low rates pushing investors to recklessly “reach for yield,” the balance sheet exposure to a rate spike, the instability to the markets once they start to sell off their holdings…to which some panelists added “the Fed’s credibility” if they screw it up.

Yep…that’s the right list.  But again, compared to what?  Surely evaluation of the Fed’s actions must offer more analysis than free-floating anxiety about unconventional tactics taken in highly unusual times, and taken in the interest of a great cause: providing some much needed opportunities for the jobless.

Remember, for reasons that range from anti-government ideology to just plain bad economics, Congress has been pushing the wrong way on fiscal policy, leaving the Fed as the only game in town still trying to do something about unemployment.  That’s a critically important pursuit.  If you want them to cut it out, you need to bring considerably more game to the panel than I heard today.

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7 comments in reply to "The Costs and Benefits of QE"

  1. foosion says:

    Inflation is significantly below the Fed’s target while unemployment is significantly above the Fed’s target. Sounds like they are doing too little rather than too much.

    Which is a worse risk: the possibility of future higher inflation (something the Fed has been able to deal with in the past) or the reality of today’s massive human suffering due to high unemployment and slow growth?

    I do wonder where interest rates would be absent the Fed’s actions. Given the state of the economy and the amount of savings looking for reasonable securities to buy, I’m not sure they would be much higher, but I haven’t seen a good model.


  2. tyler healey says:

    “1. QE does not stimulate the economy. It depresses the economy. When the Fed buys T-bonds, it takes those T-bonds out of private hands, thereby reducing the amount of federal interest paid to the private sector.

    “Rather than being stimulative, these money supply reductions depress the economy.

    “2. Banks neither need nor use additional reserves. They can obtain all the reserves they want, directly from the Fed, at near zero rates. So adding to reserves does not stimulate lending.”

    – Rodger Malcolm Mitchell


  3. Perplexed says:

    -“And what are the risks of unprecedented growth in the Fed’s balance sheet?  The Fed has been forthright about them: future inflation, low rates pushing investors to recklessly “reach for yield,” the balance sheet exposure to a rate spike, the instability to the markets once they start to sell off their holdings…to which some panelists added “the Fed’s credibility” if they screw it up.”

    Wow, sounds awful scary indeed! Any chance you would be able to elaborate on the extensive damage that might accrue from taking on all of these big risks?

    Or might this just be a “substitute” scare tactic now that “market value” of the 90% debt threshold has dropped so precipitously?


  4. TJ Parker says:

    You know better than this, Jared. Congress will not act if it doesn’t have to. And the Fed gives it the excuse not to act. So instead we get this endless flood of money, a bond bubble and now a stock market bubble. Is it worth it, to go through 2000 again, when Mom and Dad finally realize that the markets just won’t go down and pile into stocks and lose their retirement savings … again? Yeah, I know, they can only recognize bubbles in hindsight.


  5. Barry says:

    “The panel’s rap was that the Fed’s actions to fight the Great Recession were appropriate from 2008-10, but the expansion of their balance sheet since then—$85 billion a month in bond purchases, including Treasuries and MBS—was creating too much risk for too little reward.”

    Who are these panelists? Did any of them support the Fed’s actions back in 2008-10? If they were screaming about inflation then, then they are fools or liars, and should be ignored.


  6. JohnR says:

    “If you want them to cut it out, you need to bring considerably more game to the panel than I heard today.”

    That’s a rather optimistic assessment, I think. Perhaps I’m wrong (yet again), but it seems to me that the forces of “cut it out” need only wave their hands in an alarmed and alarming manner, and the game is all but won. The Knicks always seemed to start the game with a twenty-point edge back in the good old days at MSG; your “cut it out” team would laugh at such a slim margin.


  7. Frederic Mari says:

    Basically, I agree with everything Mr. Bernstein just said and I am still worried about QE and still think it does not deliver much bang for, if not our buck, the risks we’re taking with the buck.

    No one has much ideas or data about how things will go when they try to unwind those asset purchases. No one knows the QE effect on currencies.

    I’d be a lot more comfortable with fiscal stimulus. That’s a known known.

    Too bad that, yes, the Fed is the only game in town. And lucky are the USA to have the Fed. We, Europeans, have neither true fiscal stimulus nor much QE/unorthodox financing either…


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