Quantitative Easing

[opebo]

The Feds new wave of quantitative easing is good, but why on earth do they create money to buy bonds?  Why don't they print up the 600 billion and give it to people who will spend it (such as myself)?

[Earth]

They're almost intent on keeping the funds within the financial sector. Why would they 'spread it out'?

[opebo]

They're almost intent on keeping the funds within the financial sector. Why would they 'spread it out'?

But the point is that it can't do any good in the financial sector ('pushing on a string').  If it were sent outside that sector it would be spent, thus actually having a growth effect.

Apparently no one at the Fed has studied the great Depression or Japan.

[Gustaf]

They're almost intent on keeping the funds within the financial sector. Why would they 'spread it out'?

But the point is that it can't do any good in the financial sector ('pushing on a string').  If it were sent outside that sector it would be spent, thus actually having a growth effect.

Apparently no one at the Fed has studied the great Depression or Japan.

Given that the Japanese invented QE and given Bernanke's reserach background...lol.

They don't want to redistribute wealth, only increase liquidity (that is oversimplifying a little bit of course)

[opebo]

Given that the Japanese invented QE and given Bernanke's reserach background...lol.

They don't want to redistribute wealth, only increase liquidity (that is oversimplifying a little bit of course)

Yes, that's the point - that doesn't work.  Only redistribution works.  And anyone who observed the Japanese case should know this.

[Sam Spade]

They're almost intent on keeping the funds within the financial sector. Why would they 'spread it out'?

But the point is that it can't do any good in the financial sector ('pushing on a string').  If it were sent outside that sector it would be spent, thus actually having a growth effect.

Apparently no one at the Fed has studied the great Depression or Japan.

Given that the Japanese invented QE and given Bernanke's reserach background...lol.

They don't want to redistribute wealth, only increase liquidity (that is oversimplifying a little bit of course)

Which it will not do - you can't increase liquidity with the amount of debt overhang (not to mention value of debt loss cover-up) at present.

Therefore, what QE will do, naturally, is create rampant speculation in asset classes and cause the dollar to decline, which should, yet again, cause commodities to skyrocket to the moon (they already have been the last couple of months).

When commodities skyrocket, the price businesses have to pay for materials, and down the line, what consumers have to pay for basics, will skyrocket also.  This amounts to an incredibly regressive tax against poor people.  Plus businesses won't hire (they have to pay more for goods).  After all, when oil gets over $85/90 a barrel, it starts affecting a lot of businesses margins badly.

These are practical effects, not the really complicated stuff that could happen on the worldwide stage or in more esoteric markets, etc. 

If the left or right have any cojones (or brains or if they actually care about poor/middle class people), they'll call for the resignation of Bernanke now.  Let's see who figures this out first.

[Beet]

The problem with the "commodities will rise" argument against quantitative easing is that it applies not only to quantitative easing but to any scenario where demand recovers; in other words, any scenario where there is economic recovery sees final demand pick up sharply and hence the price of commodities rising. After all, the price of commodities only collapsed in the first place in 2008-09 because of the economic contraction.

Yes, the prices the poor paid in 2009 were lower than 2008 for certain basic goods, but the poor were still better off in 2008 than 2009. Witness the rise in poverty rates or the amount of uninsured. The poor are the ones who pay the most in a depressed economy, because they are the most vulnerable. The loss of a $600 a week paycheck means more for the unskilled laborer than the loss of $10 million for the hedge fund manager. If QE is too regressive (which, I don't see why the conservatives would complain, given that they have long argued for the regressive sales tax, so when did they start opposing regressive taxes?) then the solution is for government to make this up in transfer payments; or, as opebo suggests, for QE to be invested in ways that directly benefit the poor.

As for the decline of the dollar, at free market prices the dollar would decline sharply with or without QE. It is being artificially propped up by the central banks of dozens of countries around the world. Some 60% of the world's foreign exchange reserves and held in dollars, and their amount far exceeds the $600 billion QE announced today. A free currency market under a floating exchange regime would be a self correcting mechanism to current account imbalances; unfortunately that is not what we have.

[memphis]

The Feds new wave of quantitative easing is good, but why on earth do they create money to buy bonds?  Why don't they print up the 600 billion and give it to people who will spend it (such as myself)?

That would be teh socialism. I miss the $300 checks W sent out. I could use a few more of them.

[opebo]

That would be teh socialism. I miss the $300 checks W sent out. I could use a few more of them.

Precisely.  If the Fed would print $300/week for every poor, and send it out, then we would have economic growth.

[angus]

Why don't they print up the 600 billion and give it to people who will spend it (such as myself)?

It's misleading to say that the fed should print money.  The Fed doesn't actually print money to buy any of these securities.  Only the U.S. Treasury Department can print money (through the U.S. Bureau of Engraving and Printing that it controls.)  

Moreover, this "dual mandate" mantra is a ruse.  The Fed's real dual mandate is to enrich banks (those that the central bank is created by and works for), and to cover Congress when its laws enrich banks at the expense of jobless American taxpayers.  This quantitative easing plan will only serve as a stimulus for the already-rich investors, but not for the average taxpayer.  It isn't likely to stimulate job growth either.  Overall, it seems that quantitative easing is likely to only exacerbate the income disparities between the rich and the poor.

I read recently that quantitative easing is not as popular with the fed as we were initially led to believe.  

http://money.cnn.com/2010/11/23/news/economy/fomc_minutes/

And there's no shortage of good, well-researched articles against QE2.  See, for example,

http://seekingalpha.com/article/238471-has-quantitative-easing-actually-helped-the-economy

I hold out hope that pressures, both internal and international, will convince the Fed to back off.

[opebo]

But, angus, without even the low-quality stimulus of monetary policy, there is precisely nothing to make the economy grow ever again.

[angus]

I may be a little confused, but it seems that capitalism depends on growth.  The model we learned about in school to describe growth was the Solow model.  I don't know if they're still teaching that in macroeconomics, but what I remember was that this model depends on saving, natural population growth, and technological progress.  Those things still happen.  There was also some discussion of policy, but I forget the details.  What I do remember was something about production functions, depreciation rates, and investment.  And the steady state (not unlike the "steady state approximation" in chemical kinetics, about which I know more), equilibrium is achieved in the long run and the economy ends up with the steady-state level of capital, regardless of the level of capital with which it begins.

Is that model now debunked?  I understood, even as I was taking that course, that empirical evidence was mixed, and I guess I'm not an expert on this, but it seems that we're in a period of adjustment not because the model failed, but precisely because the parametric rules of production, depreciation, and investment were ignored.  Folks lived beyond their means and clever investment councilors sold air, packaged as goods, to people.  We will find that equilibrium again, if we're patient. 

I agree that the government should react by adopting regulatory policy (or enforcing the policies we already have!), but further devaluing the dollar doesn't seem like a reasonable long-term solution for raising the standard of living.  If we can't compete with Asian economies, we need investigate the reasons (educational, legal, cultural, etc.), and try to understand and then ameliorate the underlying causes of our weakness.

[Beet]

In the long term, the Solow model is broadly, intuitively correct (and yes, they were still teaching when I was in school too about 5 years ago now); even though the empirical evidence for the Solow model is somewhat lacking. (According to the Solow model, the lower you are on the curve of capital and technology the faster your growth, but real world data has not born this out). The only evidence that has been found for the Solow model's prediction of convergence thus far as been between Western Europe, Japan, and the Anglo nations. Of course, with emerging markets now growing fast, perhaps the reason evidence hadn't been found is that not a long enough time-line was given. I accept the Solow model as a very long term (50-100 years) model.

But what Keynes pointed out is that we don't give all that much of a hooey what happens 50 to 100 years from now. We might never know. So opebo (and more importantly, Bernanke) is referring to the medium term. There is a lot of criticism out there about QE. But much of it is junk, frankly, including the ft alphaville article you linked. You'll note it's a long article with a lot of charts and graphs, but what it boils down to in the end is the author's repeated predictions of massive CPI inflation, which has not borne out. Had the author of that article been right about inflation, the Fed would never have done QE, no matter what the bankers wanted. And should he prove right about inflation in the future, the Fed will stop QE, no matter what the bankers want. But the author is not right about inflation, and the rate of inflation now is at its lowest since 1955.

All the criticisms of QE boil down to inflation, but we don't have much inflation, in the aggregate. This is true whether you go by CPI, core CPI, or various trimmed means. In fact, if we could get inflation up to about 3%, the rate at it was in the 1990s, we might be better off.

[Gustaf]

I'm studying Solow right now.

I'd say empirical evidence actually gives a lot of support for Solow. If you have completely messed up institutions (like Africa) you won't see convergence, but as soon as a country takes care of that they do catch up. We've seen this in many countries, especially in Asia.

It's also important to note that once a country gets into gear they start to catch up. Look at China for instance.

[Beet]

Well of course once fast growth starts, you can retroactively say they've 'gotten into gear'. But it's not like there's very strong legal or property rights in China, or financial transparency, or intellectual property, or independent judiciary and legal system. Besides, economic structure isn't captured in the Solow model.

[angus]

All the criticisms of QE boil down to inflation, but we don't have much inflation, i

Oh, and all the criticisms of smoking crystallized meth boil down to bad teeth, but I know some meth-heads who have nice teeth.  By your logic we should not worry about meth teeth.

Okay, that was stupid.  Still, I don't think you can say that since we have an extremely low inflation rate just now, then it's okay to inject 600 billion dollars into the economy in the form of a massive federal buyout of securities.  I understand that some folks claim that the plan is meant to stimulate the economy by keeping interest rates low, leading to more borrowing and spending by both businesses and consumers.  But that's nonsense.   Quantitative easing will only have the effect of exaggerating the already large income disparity between the rich and the poor.  There's really no demonstrable advantage for them to be doing this, but there's potentially a disadvantage.  The markets respond to uncertainty, or to fears.  Even the prospect of inflation, whether or not it realizes, is enough to tank the stocks.  And that's not even getting into the hyperinflation argument.  Why let them do that?  It's irresponsible. 

Go back to your basic economic quantity theory.  What happens when you increase the supply of money?  It either has no effect, and frankly that's what I think will happen.  Banks are going to be a bit reluctant now to lend money to small businesses and families following the latest round of regulatory pressures.  Or, it can lead to excess inflation, as you have pointed out.  So, it's either neutral, bad, or really fucking bad.  Those are the options.  And you cannot possibly predict today which one will be realized.  I say "No thanks."

[Beet]

Where to begin. I understand that quantitative easing is criticized as hurting the poor by raising import prices. But that's nonsense. Quantitative easing will only have the effect of stimulating the economy by keeping interest rates low, leading to more borrowing and spending by both businesses and consumers. There's really no demonstrable disadvantage for them to be doing this, but there's potentially an advantage. When more businesses and consumers invest and spend due to lower interest rates, the economy will begin to see a pickup in final demand, and stocks will rise. [Insert empirical evidence: stocks were up big on Bernanke's decision] The prospect of inflation won't tank stocks because there is no inflation.

When you increase the supply of money and it's injected into the system, the worst thing is that it has no effect. But that's not a reason not to do it. That's neutral. And banks aren't not lending because of regulation, they're not lending because of lack of loan demand coupled with a need to repair their balance sheets. QE can't lead to excess inflation, because if it does the Fed will pull back. But frankly, I'd rather have 5% inflation and 5% unemployment than what we have now.

Keep in mind, the first thing FDR did was devalue the currency. That was the first step in recovery from the GD.

[opebo]

...Still, I don't think you can say that since we have an extremely low inflation rate just now, then it's okay to inject 600 billion dollars into the economy in the form of a massive federal buyout of securities.

Actually it can't have any effect on inflation because it is such a picayune amount, and the economy is so extraordinarily slack right now.

Banks are going to be a bit reluctant now to lend money to small businesses and families following the latest round of regulatory pressures. 

No, the reason banks lend or don't lend it their prospects of being paid back, which can only be rosy in a Keynesian 'inflationary' growth environment.

[opebo]

... it seems that we're in a period of adjustment not because the model failed, but precisely because the parametric rules of production, depreciation, and investment were ignored.  Folks lived beyond their means and clever investment councilors sold air, packaged as goods, to people.  We will find that equilibrium again, if we're patient. 

Quite wrong, angus.  The capitalist model 'failed' completely generations ago (in the 1920s-30s), and performed abominably before that in terms of making the great majority of people relatively worse off, and causing astonishing instability.  What we're seeing now is just the breakdown of Keynensian nirvanna since bad governance set in in the 1980s.  Another way of saying this is that the ills you describe above are inevitable in capitalism sans reform and most importantly redistribution. 

And the important lesson is only the State can save us from capitalism.

but further devaluing the dollar doesn't seem like a reasonable long-term solution for raising the standard of living.  If we can't compete with Asian economies, we need investigate the reasons (educational, legal, cultural, etc.), and try to understand and then ameliorate the underlying causes of our weakness.

The reason we're 'uncompetitive' is we make too much, angus, and the owners want us to be as poor as the Asians.  The long term solution (and the purpose of free trade) is a lower standard of living for all workers everywhere, and higher profits for the owning class.  Thus, again, the underlying cause of all miseries are political (owner-power).

[Sbane]

Is it possible that QE might produce inflation in other countries?  It's hard to see how it causes inflation here though. I would even prefer a little inflation right now.

[opebo]

Is it possible that QE might produce inflation in other countries?  It's hard to see how it causes inflation here though. I would even prefer a little inflation right now.

Yes, particularly China with its very undervalued currency.  They're already having some inflation troubles there.

[angus]

It wasn't just China.  The G20 ambassadors almost universally rejected America's ideas for correcting trade imbalances, particularly QE2.  Germany (a highly competitive capitalist state, I'd add for opebo's benefit), was particularly adamant against the U.S. plan.  Although the governments expressing disdain toward the Fed's QE2 plan were doing so more because it might cut into the trade surpluses (surpli?) they enjoy, rather than because fears of inflation.  At least that's what they claim.  The truth is that there aren't enough goods produced in the US that folks in China and Germany want, so I suspect that there's more to their unified complaints than they let on.  I guess, at a stretch, you could argue that increased liquidity in the world's largest economy could spur the sort of investment that tends to spur consumption, and thus inflation, in other economies as well.  In that analysis you could predict that inflation pressures are real outside the U.S.  Let's call that area the G19, just for fun.  And the G19 would like to see a strong, stable U.S. economy.  After all, they want to sell their sweatshop-made trinkets in Walmart and their Mercedes-Benz autos in suburbia.  And putting six hundred billion dollars in the pockets of already super-rich Americans doesn't help them do that any more than it helps us.

[Sbane]

How does QE2 help the rich exactly?

[Beet]

Lol at the notion that the G19 cares about what's best for the US. The G19 cares about what's best for the G19. They don't have to answer to the problems in the US. We are the ones who have to answer. Ben Bernanke will have to answer to the effects of his own policies, and he knows this, that's why he cares about getting it right. For decades, the US has sucked up the trade surpluses of other countries. First it was Europe, then Japan, then the "Four Asian Tigers", then China, now Brazil, India, Germany all want to export to the US. Finally, Bernanke is saying "No. America can no longer afford to be your pig. We are broke." That's what's got them in a tizzy. As for Germany, they are screwed. Just watch.

[opebo]

...I guess, at a stretch, you could argue that increased liquidity in the world's largest economy could spur the sort of investment that tends to spur consumption, and thus inflation, in other economies as well.  In that analysis you could predict that inflation pressures are real outside the U.S.  Let's call that area the G19, just for fun.  And the G19 would like to see a strong, stable U.S. economy.

And putting six hundred billion dollars in the pockets of already super-rich Americans doesn't help them do that any more than it helps us.

Actually, it would only create inflation in those countries which now have very artificially low exchange rates, mainly China and some other Asian countries.  It should have no such effect in Europe, which while not as moribund as the US or Japan, is still relatively so compared to the rest of the world. 

Also, it is quite inaccurate to call Americans 'super-rich' - disposable income outside the elite class (which is not a significant source of consumption) has been in steep decline for decades.  The 600 billion, even if it somehow managed to find its way to consumers, is such a minute amount that it isn't really worth our time discussing it. 

It is worthwhile to keep in mind that neither China nor Germany are good world economic citizens - China is a mercantilist monstrosity, and Germans are defined by inflation-angst (bizarrely).