“The problem with QE is it works in practice
but it doesn’t work in theory.”
– Ben Bernanke
Well, at least Ben got it half right
Virtually everyone believes, as the Financial Times puts it, that “the first round of purchases in 2009 helped to avoid a catastrophic depression.”(1) There isn’t, of course, any actual evidence for this, since we can’t possibly know what would have happened had the Fed not launched QE. It’s just contemporary dogma.
But let’s give the Fed the benefit of the doubt and say that launching QE in 2009 was a sensible thing to do, just in case. The problem arises because the Fed now thinks it’s God. “We saved the world from depression!” they are thinking. “We can do anything!”
And so the central bankers did not just do anything, they did everything. Even though financial markets were back to normal by early 2010, the Fed kept manipulating the markets anyway, as they continue to do to this very day.
But while we can give the Fed the benefit of the doubt in 2009, the increasing downsides of central banker market manipulation – and the modesty of any upsides – have become so worrisome that the time is long past for any benefit of the doubt.
The supposed “upside” is that the Fed, calculating that which can’t be calculated, claims QE and other interference added very modestly to economic growth. One can just as well argue, with much greater force, that Fed interference has very substantially interfered with economic growth. I’ve made this argument in depth in these pages, so I won’t belabor the point now.(2) I will merely note that since 2008 central banker interference in the operation of markets and economies has been greater than it’s ever been, and that since 2008 we’ve had the slowest economic recovery we’ve ever had.
My point in today’s post is that central banker policy is not only arrogant and ineffective, it also suffers from an underlying paradox: every market and economic crisis we’ve experienced in the past quarter century or so has had, at its root, persistently dovish central banker policy. Yet, what we have today, and have had since 2008, is persistently dovish central banker policy. It doesn’t take a Ph.D. in economics to see that central bankers are even now planting the seeds of the next crisis.
The question is why. The answer to that, I’m afraid, lies in what might be the central character failure of our time: we can’t tolerate the notion that there should be any consequences to our actions.
In the run-up to the Financial Crisis virtually every economic actor on the planet behaved badly. Some of us dove into a stock market that was obviously running way ahead of itself. Some of us piled leverage-on-leverage, converting moderate-risk assets into violent-risk assets. Some of us bought homes we couldn’t possibly afford, often lying about our income and assets. And our central bankers cheered us on, keeping rates low as a way of assuring us that we could play with fire forever and with impunity.
But that’s not the way the world works. And when reality came starkly home, were we ready to take our medicine? That medicine, after all, wouldn’t have been all that awful. It would have meant a fairly severe recession that would persist until American industry had righted itself – weak players would go out of business or sell to stronger players, and so on.
Some of my readers are old enough to remember the early 1980s, when then-Fed Chair Paul Volker drove the US into not one, but two recessions. He did this because inflation was running over 13.5% and had been gutting the US economy since the Oil Crisis of the mid-1970s. Volker raised the Fed funds rate to a high of 21.5% in 1981. Unemployment rose above 10%, but inflation dropped to about 3% and the economy was back on track. Was it painful? Sure. Was it necessary? Yes. Did it get America back on track? You bet.
But that was then. Today, if something is painful, we just don’t go there. No matter how irresponsible our own conduct was, we don’t want any pain, and the Fed had better not give us any. This leaves the Fed with one option: persistently dovish central banker policy, leading inevitably to the next financial crisis. Like selfish teenagers, we think only in the moment. Hell, if we’re lucky, the next Fed-induced crisis might not happen until it’s our children’s problem.
(1) Robin Harding, “Bernanke joke underscores questions on QE’s efficacy,” Financial Times, 10/14/14.
(2) See, just as an example, “Professors, Free Markets & The Fed,” a 5-part series of posts that ran from 11/21/13 through 12/19/13. I’m hardly alone in this opinion. See, e.g., James Grant, “Low rates are jamming the economy’s vital signals,” Financial Times, 10/12/14.
Next up: The Politicization of the Fed
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