As my loyal readers know, I’m near the end of a long rant about the silliness of entrusting economic policy entirely to professors.

I’m going to suggest – I’m hardly alone in this – that the unconventional policies being followed by the good professors at the Fed have done very little to help the economy while doing a great deal of harm. Here’s the argument.

Ben Bernanke once claimed that quantitative easing had added about 3% growth to the US economy. He was laughed out of the house, and so he commissioned a couple of other professors at the Fed to research the matter. Those professors concluded that by spending $3.5 trillion, the Fed had added $40 billion to a $17 trillion economy (2/10 of 1%).(1)

PIMCO’s Mohammed El-Erian, hardly a crazed Fed-basher, has also been warning all year that the costs of QE outweigh the benefits. In other words, even if there had been no downsides at all to the Fed’s policies, the bang for the buck is laughably small.

But the downsides have been startling. Here are just two of the worst:

  • By turning the world upside down to try to get the economy moving, the Fed has taken the pressure off Congress to do anything at all. This issue, a very serious one, was an “externality,” an incidental consequence of the Fed’s policies, and therefore not contemplated by the professors’ models.
  • Another “external” casualty of the Fed was the bubble created in the emerging markets, as dollars went from ridiculously (i.e., manipulated) cheap to suddenly expensive when the Fed brought up the subject of tapering in May. Currency crashes in India, Brazil, etc. fell outside the professors’ models but have affected quite literally billions of people.
  • While very little has been done for the US economy, and virtually nothing for the hard-hit jobless, Wall Street has been enriched even beyond its own (seriously extravagant) wild dreams. The prices of virtually all risk assets – the ones sold hard by Wall Street – have soared and bank profits are staggering even as they fail to lend.

The idea of lavishing money on the folks who caused the Financial Crisis, while mostly ignoring the folks who suffered from it, probably looks good in the professors models. That’s because Professor Bernanke spent way too much time obsessed with what happened to the banks way back in a vastly different era. So enriching the banks looks good in the models, but from the point of view of the American people it is so wrongheaded, so amoral, so breathtakingly idiotic that it suggests a whole new mandate for the Fed – let’s put the professors in charge of the criminal justice system!

What would the professors do? Why, they’d tax the victims of crime so they could enrich the perps! Why didn’t we think of that? As the perps get richer and richer, their inclination to commit more crimes will wane! Crime rates will fall! Everybody will be happy!

Or not.


(1) Vasco Cúrdia and Andrea Ferrero, “How Stimulatory Are Large-Scale Asset Purchases?” FRBSF Economic Letter, August 12, 2013.


Next up: Professors, Free Markets & The Fed –The Little Red Riding Hood Economy

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