Wednesday, November 13, 2013

If You are Going to Criticize QE...

Do not do it this way or you might face the combined firepower of Caroline Baum, Scott Sumner, Jim Pethokoukis, and Joe Weisenthal. No one could survive that onslaught. But this does not mean the Fed's large-scale asset purchasing programs are perfect. There are legitimate critiques one can make about the QE programs.

One might, for example, criticize how the QE programs have been incredibly ad-hoc and unpredictable. Even with the new "data dependent" approach of QE3, there is still confusion as to how the Fed will respond to the incoming data. A great example of this is the FOMC's decision not to taper in September. It came as complete surprise to the market. The Fed's clarity has not gotten any better since then. There is now talk of the Fed changing its "thresholds" for action. But no one knows for sure. This confusion does not help an economy struggling to get out of a slump. This is a good critique.

One could also critique the Fed for claiming it is using QE a way to restore full employment while at the same time it systematically keeps inflation below its target. The Fed's large-scale asset purchases will never gain full traction if the Fed continues to place one foot on the gas and one foot on the brake. This is definitely worthy of a critique.

One might also critique the Fed for not learning from FDR in 1933 or Abenomics in 2013 that QE can be very effective if done right. These experiences show that QE-type programs work when monetary base injections are expected to be permanent. Temporary or sterilized injections, on the other hand, are ineffective. Though QE3 can be viewed as introducing some permanence to the injections, the Fed has clearly indicated it plans to wind down most of the growth in its balance sheet. Long-run inflation forecasts indicate the public believes it. The Fed doing QE wrong is is also worthy of a critique.

But do not criticize the QE programs by saying you are sorry they ever happened. Yes, the Fed could have let the payment system crash as it did in the 1930s instead of doing QE1. And yes, the Fed could have let the economy continue to drift into deflationary territory in 2010 instead of doing QE2. And yes, the Fed could have let the economy continue to stumble in 2012 and face the sequester in 2013 alone instead of doing QE3. Very few observers would explicitly make these arguments, but one implicitly does if they question the inherent worthiness of the QE programs.

So if you are going to criticize QE do it right.


  1. Excellent blogging...but now we get to the nub: Can independent central banks adapt to ZLB?

    You are asking an independent public organization--The Fed---with its history, insularity, culture, exalted mission statements, credos and mottoes to change.

    Ryan Avent recently pointed out that even if one assumes a rather lengthy US economic recovery, the US will still be close to ZLB when we enter the next recession.

    In short, the Fed is not adapting to the new world.

    We can critique all we want. So what. The Fed does not listen. It is independent, remember?

    The Fed says it has a 2 percent inflation target. Really, that is a ceiling. Even "doves" talk about it as a ceiling, as they say "We should stay with QE until we get close to 2 percent."

    In other words, 2 percent is a ceiling not really to be touched, so the real ceiling is 1.5-17 percent, at which point the Fed will get weak knees.

    Egads, we have a Fed that would never countenance a year of 3 percent inflation, despite the fact we have been under target since 2008.

    The time for independent central banks is over. Independent public agencies are notorious for ossification. Central banks are no different.

  2. David:
    Cogent considered insight. The transparency of this Fed does not approach its stated intent to avoid GreenSpeak and as you say, the uncertainty risk detracts from goal achievement. The only shock and awe this Fed is providing was in fact the decision to not begin to taper. This Fed will not even clarify what tapering really means with various Fed Governors, as is they are able and rightfully so, adding to the confusion that is admirable for its diversity but with a cacophony that is disturbing. There is a possibility that the market will soon quit speaking and swing a big stick if this continues. I am agnostic now about the Fed's ability to push the string any further and they are losing credibility even as they are running out of bullets...ZIRP to infinity and beyond