A Benjamin Cole post
Former Fed Chair Ben Bernanke is blogging, but somehow the topic of quantitative easing (QE) has disappeared from the room, at least so far. In fact, ignoring the pachyderm QE standing alongside, Bernanke blogs there is little the Fed can do even about interest rates.
This policy dead-end is then supplemented by Bernanke’s most recent post, in which he points out that if real interest rates are zero, then it makes commercial sense to flatten the Rocky Mountains and build a toll road across. In short, low interest rates must result in explosions of investment, and a more-robust economy. Still no mention of QE.
David Beckworth, Western Kentucky University scholar and wonderful Market Monetarist blogger, appears to be seduced, at least for now. In Beckworth’s latest post, he seems to accept Bernanke’s proposition that low interest rates alone are enough to beat recessions, ergo secular stagnation is a hoax.
Japan, Europe, And the United States?
Of course, we have seen in Japan and now Europe, that very low interest rates do not always do the trick. In particular, rates were low for 20 years in Japan, and they mired along. Corporate bond yields are skimpy in the U.S. presently, yet business investment is lackluster.
This Bernanke-ist historical amnesia regarding QE is troubling for another reason: As a practical matter, it may be that the United States enters the next recession with interest rates still dead in the water. Then, the Fed will be largely out of ammo even as a recession unfolds—unless it goes to QE.
Which raises the most important question of all: Should the Fed wait until there is a recession well under way to resort to QE—the present inclination—or should it use QE as a prophylactic against recessions?
QE As Conventional Policy?
What would be the argument against the Fed conducting $100 billion a month of QE whenever the nominal GDP growth rate shrank below, say, 3%?
Could it be that, for reasons not yet in textbooks, that QE must become conventional policy at central banks?
Buying off government bondholders with fresh cash has not resulted in meaningful inflation anywhere yet, but has coincided with better growth and lower public debt loads.
Is the reluctance to use QE a case of dogma and theory trumping practical observation?