A Benjamin Cole post
Even before the U.S. Federal Reserve ended its on-and-off, iffy-stiffy quantitative easing (QE) program, the fear-mongers were screaming.
The Federal Reserve balance sheet would spark hyperinflation, or deflation, or destabilize financial markets, or the Fed would be forced to fire-sale its vast hoard in a futile attempt to stem a financial holocaust—or worse: Ever just over the horizon is The Money Bogeyman, the ill-defined but darkly alluded to visitor of “unintended, unpredictable and unforeseen consequences.”
Of course no financial catastrophes unfurled, and we have seen sullen, lowflation growth ever since the Fed wanly committed to the least amount of QE that would avert a Great Depression. QE should have been bigger and longer.
No matter. The Wall Street Journal is still throwing vases across the room at QE.
“All of this [the modest economic recovery] has been achieved at no small cost, especially the pile up of $4.5 trillion in assets on the Fed’s balance sheet. In that sense QE is not over, and the Fed will still reinvest the principal payments from its maturing securities….” sourly observed The Wall Street Journal on October 30.
What is the “cost” of this balance sheet?
From the get-go, this argument against QE—that it has a “cost” and was a burden to the Fed, or the economy, or to somebody somewhere—has always struck me as nuts.
The Fed owns (by extension, U.S. taxpayers) $4 trillion in yielding assets that it bought for free by digitizing cash, but the Fed is now straining? If I could counterfeit perfect Ben Franklins, and buy $5 million of U.S. Treasuries, would I be straining? Rather, I think I would be coasting.
But let The Wall Street Journal explain:
“The evidence of QE’s benefits in its second and third iterations is far more speculative and its full costs still aren’t clear. Those won’t be known until the Fed wind downs its balance sheet, if it ever does, and until we see how markets and the economy respond to rising interest rates.” (My italics.)
Here The Wall Street Journal is evidently engaged in fisticuffs with itself, wearing Full Crackpot Jacket.
First, The Wall Street Journal lays the premise down that the balance sheet must be liquidated. Why? This is never explained, and indeed many economists, such as David Beckworth, have argued that the Fed should explicitly state that the enlarged balance sheet is permanent. There is no sense in expanding the money supply, only to simultaneously say that someday the central bank will pull the rug out from underneath an expanding economy in a reverse QE program.
Nevertheless, the Fed balance sheet must liquidated, and that incurs the intimidating cost, avers The Wall Street Journal: The rising interest rates.
The paragraph becomes doubly stupefying when it is remembered that The Wall Street Journal has been honking for higher interest rates and tighter money since…well, always.
Now, The Wall Street Journal thunders that rates may go up if the Fed starts to sell off it balance sheet. Although the Fed might not sell off the balance sheet, concedes the paper. And even though the The Wall Street Journal has on innumerable occasions called for a tighter Fed and higher rates.
QE Has Driven the Right-Wing Nuts
I have opined here a few times that QE has driven the right-wing nuts, and that seems truer every day.
But then, it should be remembered that in 2009, The Wall Street Journal put this headline on an Arthur Laffer op-ed:
“The unprecedented expansion of the money supply could make the ’70s look benign.”
Yes, it could. But not in the way Laffer (who has recanted) meant.
The real U.S. economy expanded by more than 20% from 1976 to 1979, after the 1975 recession.
That real growth was benign, compared to the feeble recovery—constantly gasping for monetary air—overseen by the Fed since 2008.