A November 15, 2010 blog post by Michael S. Derby at the Wall Street Journal ("San Francisco Fed Official Says QE2 Is Working") told us that "The Federal Reserve‘s recently announced plan to buy $600 billion in Treasury securities to improve economic growth is having a positive effect on growth." The Fed official involved also predicted "the U.S. gross domestic product to come in at 2.5% this year (2010), and at 3.5% next year and 4.5% the year after that."
Uh, not exactly. Actual GDP results: 2.5% in 2010 (that was a gimme), followed by 1.8% and 2.8% in 2011 and 2012, respectively. Almost three years letter, the San Fran Fed's acknowledged result of that effort at "quantitative easing" — it "added about 0.13 percentage point to real GDP growth in late 2010" — is starkly different, and is only "positive" if you think a football team managing one field goal in four quarters is "positive." Of course, though it should be, the news is getting very little coverage.
Leave it to Bloomberg News to use a headline about a contribution to economic growth which might as well be a rounding error that adopts the Fed's pathetic adjective of "moderate" to describe the result:
Fed Economists See QE Offering at Best Moderate Growth Boost
The Federal Reserve’s unprecedented expansion of its balance sheet known as quantitative easing has probably given a more limited boost to the U.S. economy than previously estimated, two regional Fed economists said.
A previous study estimated that the second round of quantitative easing may have bolstered gross domestic product by 3 percentage points and pushed up inflation by 1 percentage point, Curdia and Ferrero said.
Well, they were "only" off by 96% on GDP (0.13% actual divided by 3% predicted is 4.3%, or 95.7% less) and 97% on inflation. What's there to complain about? (/sarc)
At NetRightDaily, in a post accompanied by a great cartoon, Robert Romano got the headline right, and raised an important point, namely that QE2 probably wasn't as much about growth as it was about bailing out domestic and foreign banks:
Since August 2007 when the crisis began, the Fed has increased its balance sheet by $2.7 trillion — purchasing $1.3 trillion of mortgage-backed securities and $1.4 trillion of treasuries.
That money winds up directly on bank balance sheets, and about 75 percent of it has been simply stockpiled as $2.03 trillion excess reserves by financial institutions. There it earns 0.25 percent interest from the Federal Reserve, or about $5 billion. Easy money.
In the meantime, banks got to unload a lot of risky assets they might have otherwise taken major losses on. For example, a 2010 Fed audit revealed that of the $1.25 trillion of mortgage-backed securities the central bank purchased after the housing bubble popped, some $442.7 billion were bought from foreign banks.
According to the Fed, the securities were purchased at “Current face value of the securities, which is the remaining principal balance of the underlying mortgages.” These were not loans, but outright purchases, a direct bailout of foreign firms that had bet poorly on U.S. housing.
They included $127.5 billion given to MBS Credit Suisse (Switzerland), $117.8 billion to Deutsche Bank (Germany), $63.1 billion to Barclays Capital (UK), $55.5 billion to UBS Securities (Switzerland), $27 billion to BNP Paribas (France), $24.4 billion to the Royal Bank of Scotland (UK), and $22.2 billion to Nomura Securities (Japan). Another $4.2 billion was given to the Royal Bank of Canada, and $917 million to Mizuho Securities (Japan).
At CNBC, John Carney is pretending that the whole QE exercise has been mostly harmless, and that it wouldn't even matter if Ben Bernanke calls a halt:
Almost everyone is misreading Fed's new QE study
The study out of the San Francisco Fed showing that quantitative easing adds only "a moderate boost" to the economy is being misread as a critique of the Fed's bond-buying program. It should actually be read as a testament to very low risk involved in the program.
... That should actually be reassuring. We don't want unconventional monetary policy to unleash epic growth and inflation. The effects should be muted. (So "muted" you can't even see or hear them? -- Ed.)
Even more reassuring, Curdia and Ferrero find that the Fed can fine-tune through forward guidance.
... This suggests that QE is not a blunt instrument and does not create large macroeconomic risks. What's more, the effects can be turned up or down by adjusting forward guidance.
In other words, this isn't an instance of the Fed criticizing its own policies as much as the Fed taking comfort that its bond programs are neither superfluous nor superdangerous.
Sure, John. Tell that to the markets, which panic any time the prospect of "tapering" QE gets raised. The reason that happens is because its participants know, as the Fed Chairman Bernanke himself has said, that the economy would "tank" if QE were halted. The San Fran Fed's work has basically confirmed Bernanke's assessment.
An econ teacher of mine once advised skepticism any time someone uses the term "fine tuning" to describe what a central bank is capable of doing. This is one of those times.
The fact is that QE has been a tool designed to prop up an otherwise pathetically weak economy and to provide cover for a plethora of negligent and business-hostile Obama administration policies too numerous to mention here. It's also fair to ask who else would step in to fill the breach with enough money to make up the difference if the Fed stopped using part of its more current QE to buy Treasury and other government securities. Best guess: no one, meaning that the government couldn't go on as it has without the Fed's crutches.
Despite the virtual non-results of previous QE efforts, one can expect to press to continue to treat them as a panacea, and to implicitly urge the Fed to never, ever take its foot off the gas pedal, lest the house of cards completely collapse.
Cross-posted at BizzyBlog.com.
