Econintersect: An article in The New York Times highlights the debate among economists about just how effective the QE (quantutative easing) by the Federal reserve has been in aiding economic recovery from The Great Recession. Some economists feel it has had limited impact on the real economy, although none seem to argue that it has not buoyed the financial sector. The aggregate efforts of the government to provide funds for the banks and the Fed to buy U.S. Treasuries and MBS (mortgage backed securities) reaches into several trillion dollars.Almost all of this new money (yes, the Fed “printed” new money to finance this) remains in the banking system where it basically extends the bank bailout process started by the Treasury and the Congress in the fall of 2008. From the beginning with TARP, the purpose of the bailout efforts was “to get the banks lending again.” That has not happened as commercial bank credit has continued to contract. The following graph shows the real commercial bank credit numbers corrected for inflation by CPI (1982-84 dollars).
Real Total Credit Outstanding at Commercial Banks (1982-84 $)
The two spikes in credit total approximately $450 billion. This is a small fraction of the liquidity added to the banking system by the government and the Fed. On an inflation adjusted basis the banks have credit outstanding now that is less than the low in 2008 as the financial system and the economy were collapsing and more than $200 billion less than the credit outstanding at the official end of the recession.
The Fed has defended the QE policy as the only tool left (once interest rates have dropped to zero) to fight deflationary pressures. Economists are divided on the effectiveness of QE as an economic stimulus. Many are critical. From The New York Times:
As the Fed’s policy-making board prepares to meet Tuesday and Wednesday — after which the Fed chairman, Ben S. Bernanke, will hold a news conference for the first time to explain its decisions to the public — a broad range of economists say that the disappointing results show the limits of the central bank’s ability to lift the nation from its economic malaise.
“It’s good for stopping the fall, but for actually turning things around and driving the recovery, I just don’t think monetary policy has that power,” said Mark Thoma, a professor of economics at the University of Oregon, referring specifically to the bond-buying program.
Mr. Bernanke and his supporters say that the purchases have improved economic conditions, all but erasing fears of deflation, a pattern of falling prices that can delay purchases and stall growth. Inflation, which is beneficial in moderation, has climbed closer to healthy levels since the Fed started buying bonds.
“These actions had the expected effects on markets and are thereby providing significant support to job creation and the economy,” Mr. Bernanke said in a February speech, an argument he has repeated frequently.
But growth remains slow, jobs remain scarce, and with the debt purchases scheduled to end in June, the Fed must now decide what comes next.
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?”
“We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong … somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. … I say after eight years of this Administration we have just as much unemployment as when we started. … And an enormous debt to boot.”
“We want to see private business expand. … We believe that one of the most important ways of achieving these ends at this time is to continue progress toward a balance of the federal budget.”