Goodbye To Quantitative Easing, But Not To The Arguments Over ItCommentary by
October 29, 2014
I retired from the Federal Reserve on November 4, 2004, which will be 10 years ago in 6 days. At 8 AM tomorrow, I’m scheduled to give a speech on the economy after which I’ll have to give a defense of Quantitive Easing, which the Fed said today it will wrap up at the end of October, unless I try to preempt it during the speech.
Texas audiences are polite, but they know deep in their bones that there is (was) something not quite right about QE. Their doubts have something to do with the impropriety of “printing money” even if doing so seems not to have turned out too badly. I’ve tried and tried to explain that there has been very little money printing during QE, and that is why the dire consequences of hyper-inflation, a collapse of the dollar, sky-high interest rates, and gold through the roof have not taken place. Unfortunately, it’s also the main reason that QE has not stimulated the economy any more than it has.
But nobody seems to believe me. They are deeply invested in the notion of money printing. They don’t want to hear that the Fed has been “printing” bank reserves and that banks have held onto large amount of those reserves as excess reserves without using them fully to fund new loans and investments and thus unleash the money multiplier. I realize I will never win the debate because everyone calls it an “experiment” and won’t let the jury come in until the experiment ends. As long as I’m leading on points, the experiment isn’t over.
Many critics still expect to be right about the dire consequences—just you wait. Well, I have some bad news for them. Growth in the M1 and M2 measures of the money supply has actually slowed over the past year; so, we aren’t on the verge of an inflationary blowout. QE is ending quietly.
Not that I’ve been a big fan of QE. I was when it started around November 2008. Chairman Bernanke’s improvisations saved our cookies back then. Some time between then and now, the economy was probably strong enough to survive an earlier phase-out or taper, but every time one Q was about to end the economy swooned and we got another one. Following along one meeting to the next, I remained supportive, but, looking back on it, I find it hard to imagine that it lasted so long. Good riddance.
The announcement today was what I expected, but that’s not saying much since they prepared the way so carefully. I do find it amusing that many of the early critics of QE are now faulting the ECB for not getting into the game earlier. I do dread the inanity of trying to guess in the next few FOMC meetings whether the phrase “considerable time” will survive and just how long is a considerable time anyway. Don’t forget that Chair Yellen following the previous FOMC meeting said that considerable time had nothing to do with time. That reminds me of the opus I never got around to writing: Zen and the art of monetary policy.