QE ends. So did it work?

[The Minsky Moment]

No surprise I beg to differ from Mr 0 Hedge.

It's IMO silly to say that big banks were the "winners" based on cash balances.  QE is just a form of open market operations - it consists of swapping securities for "cash" ( really fed reserves).  By definition any expansionary open market operation involved an increase in reserves at Fed system banks - it is tautological.   But does it make sense to say that the banks "win" because they swapped treasuries paying 1-3% or agency bonds paying even more in return for fed reserves paying 0.25%?  I guess you could argue yes as the transactions were voluntary.  But it certainly isn't compelling evidence of a windfall.

It's equally silly to say that  QE3 didn't benefit the middle class because for the subset of the period that happened to coincide with the tapering, real wages declined.  It raises two questions: (1) what would wages had been absent any QE, and (2) would the result have been different if the program was maintained and not tapered?

[MadImmortalMan]

But does it make sense to say that the banks "win" because they swapped treasuries paying 1-3% or agency bonds paying even more in return for fed reserves paying 0.25%?  I guess you could argue yes as the transactions were voluntary.  But it certainly isn't compelling evidence of a windfall.

If anything, depending on the inflationary environment, you could say the Fed is benefiting at the expense of the eurobanks by exploiting their need to achieve their capitalization requirements, and having few options from which to choose to get that done.

[The Minsky Moment]

This is a good explanation of the problem of drawing conclusions about efficacy: http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/10/will-somebody-please-think-of-the-data-generating-process.html

The Fed's words and actions impact on the entire economy.  There is no way to run a control - you can't for example randomly assign Americans to be affected by Fed operations or not.  You can look at cross-country and you can look across time but how do you control for all the other factors and policy variables?  You can't really so empirically it is just guesswork.

[Sheilbh]

Two opposing views in the Telegraph:

QE central bankers deserve a medal for saving society
The QE experiment has worked on one level for those countries that did it, but may have destabilized the global financial system yet further and stored up future trouble

Ambrose Evans-Pritchard By Ambrose Evans-Pritchard9:00PM GMT 29 Oct 2014Follow Comments532 Comments

The final word on quantitative easing will have to wait for historians. As the US Federal Reserve winds down QE3 we can at least conclude that the experiment was a huge success for those countries that acted quickly and with decisive force.

Yet that is not the ultimate test. The sophisticated critique - to be distinguished from hyperinflation warnings and "hard money" bluster - is that QE contaminated the rest of the world in complicated ways and may have stored up a greater crisis for the future.

What we can conclude is that extreme QE enabled the US to weather the most drastic fiscal tightening since demobilisation after the Korean War, without falling back into recession. Much the same was true for Britain.

The Fed's $3.7 trillion of bond purchases did not drive up debt ratios, as often claimed. It reduced them.

Flow of Funds data show that total non-financial debt has dropped from a peak near 260pc of GDP in 2009 and since stabilised at 237pc of GDP. Public debt did jump, matched by falls in household and corporate debt ratios.

On cue, federal debt is now falling as well. The deficit is down to 2.8pc of GDP, low enough to erode the debt ratio in a growing economy through the magic of the denominator effect.

This is not a "pure" economic experiment, of course. There are other variables: the shale boom and the manufacturing renaissance in chemicals and plastics that it has spawned; quick action by the US authorities to clean up the banking system. Yet it is indicative.

By contrast, the eurozone carried out its fiscal austerity without monetary stimulus to cushion the shock, lurching from crisis to crisis as a result. The region has yet to reclaim it former levels of output, a worse outcome than during the Great Depression by a wide margin. Not even the 1840s were this bad. You have to go back to the Thirty Years War in the 17th century to trump the economic devastation of EMU.

The eurozone's public debt ratios have rocketed, yet unlike America there has no been no drop in private debt to compensate.

The latest Eurostat data are staggering. They show that Italy's debt has jumped by 5.5pc of GDP to 133.8pc over the past year despite a primary surplus, purely because of EMU contractionary policies. The eurozone has bent every sinew to cut debt, and ended up in a worse predicament, exactly as Britain did under its infamous deflation policies in the 1920s.

At the end of it all, Euroland is again on the cusp of a triple-dip recession, with unemployment stuck at 11.5pc. It faces devastating hysteresis effects in southern Europe, where a large chunk of those under 30 have never had a permanent job. Leaving aside the social destruction, this will reduce the economic growth of these countries for two decades or more. It overwhelms the alleged benefits of EMU-imposed reforms.

The contrast with the US is so stark that there can be little argument. The US suffered broadly the same economic shock in 2008 and had a similar jobless rate in the white heat of the crisis. Its unemployment rate has since tumbled to 5.9pc. Lay-offs have dropped to a 14-year low. There is even an acute shortage of truck drivers, now able to command $40,000 a year.

Britain's workforce has reached fresh records above 30m. Some are highly-educated refugees from the EMU victim states, a loss to them, a boon to us. The British recovery may be unhealthy in many ways - not least the current account deficit - but it is surely better for the long-term prospects of this country than the cosmic gloom gripping the Maastricht bloc.

It is true that Japan is struggling despite the most radical QE blitz ever attempted in a large economy - roughly $70bn a month since Shinzo Abe took power, and began to shake Japan out of its fatalism - but it had a bigger mountain to climb, and it has in fact weathered the shock of its sales tax rise this year. Those who say QE has failed in Japan are premature, and offer no counterfactual argument. Clearly the status quo ante was a path to ruin.

You can argue that zero rates robbed savers, and that QE robbed them a fraction more, but let it never be forgotten that the state rescued the banking system across much of the industrial world in 2008. If governments had let banks collapse - and 4,000 went under across the US in the early 1930s - savers would have lost their shirts. They were in fact bailed out by the taxpayers, and little gratitude some show for it.

What QE has done is to distribute the costs of crisis evenly between creditors and debtors, a matter of natural justice. Eurozone policies are by contrast an enforcement mechanism for creditors alone. Debtors in Spain have been reduced to servitude by a combination of medieval debt laws and the "internal devaluation" imposed by the EMU regime.

We will never know whether extreme monetary stimulus averted social and political breakdown, a slide into beer-hall thuggery and street militias, but would you ever wish to put the matter to a test? So let us give due credit to the heroes of our time - Ben Bernanke, Mervyn King and those who stood by them against the mob of howling critics.

And yet, there is a problem. The Bank for International Settlements and others such as India's central bank governor Raghuram Rajan argue that QE is in essence a beggar-thy-neighbour ploy that shifts the burden onto others in a "Pareto sub-optimal" for the world as a whole.

They argue it led to a flood of liquidity into emerging economies and that they were not able to neutralise the effects. Most of the world has now been drawn into an all-engulfing debt trap that has left the international system more vulnerable than ever.

Debt has risen by 20 percentage points to a record 175pc of GDP in emerging markets, with China already around 250pc, according to Standard Chartered. These are unprecedented levels for countries without mature financial markets and deep layers of wealth. Morgan Stanley calculates that gross global leverage has risen from $105 trillion to $150 trillion since 2007. The BIS says the world is on a hair-trigger, at risk of "violent" effects if there is slightest loss of liquidity.

This may soon be out to the test since it is not only the Fed that is tightening, tapering QE3 from $85bn a month to zero since the start of the year. By a quirk of fate, China's central bank has stopped accumulating foreign bonds as well, for its own reasons. Let us hope they are talking to each other.

The Chinese central bank became a net seller of Treasuries, Bunds, Gilts and French bonds in the third quarter. This is a major change of strategy. It was buying $35bn a month earlier this year, before premier Li Keqiang announced that excess reserves had become an inflationary "burden". This shift is not exactly "reverse QE" but is analogous.

The world must deal with a double shock from the two monetary superpowers. Investors had hoped that the European Central Bank would pick up the baton in a seamless transition. This has not yet happened, and may not happen on any worthwhile scale for a long time given the "German problem".

The ECB's balance sheet has contracted by €150bn to just over €2 trillion since Frankfurt first unveiled its "QE-Lite" more than four months ago. The ECB bought €1.7bn of securities last week but this is a toe in the water.

It is too early to judge whether even the Anglosphere can really throw away its QE crutches. The risk of a relapse is obvious as the commodity nexus flashes global stress warnings. We may need QE4 after all.

If so, let us inject the stimulus directly into veins of the economy money next time, using it to build roads, houses and an infrastructure fit for the 21st century. Experts call that "fiscal dominance", a dirty concept, a slippery slope towards to monetary financing of deficits. To which the condign reply in a global deflationary trap with chronic lack of demand is, all the better.

Good riddance QE, which began well but ended badly
The US Federal Reserve has concluded its programme of asset purchases. QE was a goodsend at the start of the crisis, but since then its consequences have been increasingly negative
Jeremy Warner By Jeremy Warner5:32PM GMT 29 Oct 2014Follow Comments54 Comments

Is this really the end of quantitative easing, or is it just a pause, before QE, or something even more radical by way of central bank money printing, begins anew? The US Federal Reserve has been progressively decreasing its bond buying for some time now; this month marks the end of the taper. A few thought that a slowing international economy and an ever more subdued inflation rate might cause the Fed to reconsider. There was no such reversal in Wednesday's statement. The US Federal Reserve has concluded its asset purchase programme, and its thoughts are now turned to when to raise interest rates.

For Britain, the end of QE came a full two years ago, though the Bank of England retains the £375bn of assets it bought under the programme and keeps the level constant by reinvesting the proceeds of any maturing stock.

Has it been a success? Up to a point, yes. But after the first burst, it seems to have been progressively less effective, and certainly in its latter stages, it is reasonable to argue that the negatives outweighed the positives.

As a confidence booster in the immediate aftermath of the Lehman crash, QE probably did have a quite significant psychological effect, and it certainly helped support asset prices at a critical moment for the banking system, when any further deterioration would have pushed many individual banks, businesses and households over the edge. However, it's effectiveness since then in supporting demand looks much more questionable.

Admittedly, some of the predicted negative consequences - notably much higher levels of consumer inflation in countries applying QE - did not materialise. But hyper inflation was in fact never a very likely outcome of QE. Often characterised as central bank money printing, QE is actually nothing of the sort. OK, guilty as charged; I often use this form of description. Yet the reality is that QE doesn't create money as such. It merely swaps one asset, government bonds, for another, cash.

In this sense, it is no different from run of the mill central bank money market operations, only it targets long-term interest rates, rather than short-term. In any case, the central bank routinely makes liquidity available to the money markets as and when necessary. Technically, QE is quite similar.

In other words, there was never any reason per se why QE should have been inflationary, and as a way of fixing the mortgage market in the US, and underpinning asset values in the UK it certainly had its uses. The trouble came, I think, when it started to be used overtly as a tool to boost demand and revive growth.

In an environment where there is a continuing debt overhang and you have people who cannot expand consumption, and firms so worried about political uncertainty that they will not invest, QE was never likely to be particularly effective. On the other hand, it has most certainly generated a number of quite undesirable spillover effects.


Most obviously in asset prices, a number of which have been displaying bubble-like characteristics. It's all very well stopping an asset price collapse, but do you really want to recreate the conditions that led to the crisis in the first place? Obviously not. QE may not have had much effect on consumer price inflation, but it has plainly had a big impact on house prices. So sowing the seeds for future financial instability is one such adverse consequence.

In the process, QE has also had some quite disturbing distributional consequences, widening the gap between the haves and the have nots.

Furthermore, it is not quite correct to say there have been no inflationary consequences at all. Many emerging markets have experienced quite elevated levels of inflation, which in part may have had something to do with Western QE.

If some countries are pursuing easy monetary policy, other countries have to match them or they get a deflationary effect, resulting in a race to the bottom. What's more, some countries, including the UK and the US, have become too dependent on monetary policy. Where is the fiscal policy? Where is the structural reform? If you take the view that these alternatives aren't politically feasible, then the question becomes whether monetary activism is actually preventing pursuit of necessary supply side adjustment.

The key to understanding the crisis is that it is not at root cyclical, but a response to a variety of structural problems in the world economy. Unless we move away from the idea that a cyclical response, including QE, offers some kind of solution, we will keep on with half measures. Cutting interest rates that little bit more, or further tweaking asset prices with QE, do not in themselves generate sustainable growth. The true solutions lie not in attempting artificially to boost demand, but elsewhere in supply.

So let's hope that Wednesday's decision is not just au revoir QE, but adieu. Sadly, that's unlikely to be the case. With the European economy fast succumbing to outright deflation, it must surely only be a matter of time before the European Central Bank belatedly follows in the Fed's footsteps. QE has become the western economy's drug of choice.

[Savonarola]

Ambrose Evans-Pritchard

Every Englishman should be required to have a name similar to this.   

[Eddie Teach]

Ambrose Evans-Pritchard

Every Englishman should be required to have a name similar to this.   

Nah, only toffs.