Bernanke, quantitative easing — and conservatives

“I beseech you in the bowels of Christ to consider that you may be wrong” – Oliver Cromwell, 1650

I think it’s safe to say consensus center-right opinion is that the Bernanke Fed’s program of quantitative easing has been and continues to be a monumental monetary mistake. The Wall Street Journal editorial pageThe Weekly Standard, and The Washington Examiner provide recent examples of this view. So does economist Brian Wesbury of First Trust Advisors in a pretty good summation of the center-right case:

 Last week the Fed invented another quantitative easing program out of whole cloth. We guess it figures that printing even more money (talking even louder and more emphatically) would help. The Fed has already taken its balance sheet from $900 billion to $2.8 trillion with little impact, so why would a bigger, $4 trillion, balance sheet make the difference?

The problem is that QE has not worked. Banks have responded by increasing their excess reserves – holding assets as deposits at the Fed rather than lending them and allowing the money multiplier to work its magic. In fact, excluding excess reserves, the Fed’s balance sheet is smaller than it was in late 2008, in the immediate aftermath of the collapse of Lehman Brothers. …


The reason QE hasn’t worked is not that the Fed hasn’t been clear enough about its intentions, but because tight money is not the reason for tepid economic growth. There is no lack of liquidity in the US economy. It is the huge expansion in government and the failure to address long-term entitlement issues that are the problem. Spending robs the economy of its potential, while the threat of higher future tax rates undermines value.

A few explanations, observations, declarations, and thoughts:

1. What I — and others including Scott Sumner, David Beckworth, and Ramesh Ponnuru — have been proposing is that the Federal Reserve target the pre-Great Recession growth path of nominal gross domestic product. If you target NGDP to grow at, say, 5% a year, and it grows 4% one year, you play catch up and shoot for 6% the following year.

2. Targeting NGDP can be done by raising and lowering the Fed funds rate. When that rate is essentially at zero, the Fed can engage in bond buying as it currently is doing. Here is Milton Friedman speaking about Japan in the 1990s — though he could have been as easily talking about America today:

Defenders of the Bank of Japan will say, “How? The bank has already cut its discount rate to 0.5 percent. What more can it do to increase the quantity of money?”

The answer is straightforward: The Bank of Japan can buy government bonds on the open market, paying for them with either currency or deposits at the Bank of Japan, what economists call high-powered money. Most of the proceeds will end up in commercial banks, adding to their reserves and enabling them to expand their liabilities by loans and open market purchases. But whether they do so or not, the money supply will increase.

There is no limit to the extent to which the Bank of Japan can increase the money supply if it wishes to do so. Higher monetary growth will have the same effect as always. After a year or so, the economy will expand more rapidly; output will grow, and after another delay, inflation will increase moderately. A return to the conditions of the late 1980s would rejuvenate Japan and help shore up the rest of Asia.

3. Many folks are quite taken back by this chart showing a huge expansion in the monetary base by the Bernanke Fed:

Here is Beckworth:

Our fellow conservatives have this tendency to see only the supply of money and ignore the demand for it. The fact that banks have not leant out the excess reserves indicates they still have an elevated demand for them. (Though we have to acknowledge here that some of that demand comes from the fact that the Fed is paying them more than they could get from holding treasury bills. How big this effect is is not clear to me. Even in the absent of IOR, banks would still be holding some excess reserves as long as the economy was weak.)

Also, it is odd to claim to there is no lack of liquidity of in the U.S. economy. Treasury yields are at historic lows and have been trending down since 2007. If we were satiated with sufficient liquidity this would not be happening, interest rates would be increasing as we tried to get rid of excess liquidity (i.e. we sell off treasuries which lowers their price and raises their interest rates.) Also, one can look to broader measures of money like M4 that show a decline since the crisis that has not fully recovered.

5. The Fed’s bond buying has not been effective as it could have been because it has been ad hoc, stop-and-go, and poorly communicated. By finally setting some clear numerical thresholds — though not yet, unfortunately, an NGDP target — and making its future actions dependent on the state of the economy, the Fed will lend certainty to expectations. Again, Beckworth:

It makes very clear to the public that the Fed will not stop until these targets are hit. Markets, in turn, should respond in anticipation of these goals being hit.  That is, the elevated demand for liquid assets should start declining as households and firms start moving their funds into higher yielding assets. This rebalancing should raise asset prices, help repair balance sheets, and ultimately spur nominal spending.  In other words, by better managing expectations, the Fed should cause the public to do the heavy lifting–and they already have started.  If all goes according to plan, the Fed may not have to actually purchase that many additional assets.  Ironically, this means that had the Fed been doing this all along its balance sheet would be much smaller now.

6. Monetary policy can be too tight even with low interest rates and lots of supposed liquidity. Sumner:

Interest rates are a very misleading indicator of monetary policy.  Both in the early 1930s and late 2008, falling rates disguised a tight money policy. The rates were actually falling for two reasons. Expectation of recession led to less borrowing and thus lower real interest rates.  And inflation expectations also fell sharply. … During periods of deflation and near-zero rates, there is a much higher demand for non-interest bearing cash and bank reserves.

7. It’s not just Uncle Miltie. Here’s Friedrich Hayek on targeting nominal income: “The moment there is any sign that the total income stream may actually shrink, I should certainly not only try everything in my power to prevent it from dwindling, but I should announce beforehand that I would do so in the event the problem arose.”

If you are going to have central bank, how do you want it to run monetary policy? NGDP level targeting would be a vast improvement. But it is no magic bullet that will alter the growth potential of the U.S. economy. For that we need supply-side, pro-growth tax, regulatory, immigration, and education reform.

11 thoughts on “Bernanke, quantitative easing — and conservatives

  1. ” Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker”

    so you’ve got quite a few beyond Bernanke …

    and…in terms of actual spending….

    if someone gets entitlements and they spend the money on food or services – it’s not going into a black hole… it’s going into the economy and it does employ people who grow, process, transport and market food.

    there is an argument that people who pay for entitlements, might, with lower taxes, spend the money on something else – but the point is the money does get spent on something – either way – and spent money does represent aggregate demand that does promote jobs.

    • a black hole? you mean, like stuffing it into a mattress?

      are you being sarcastic?

      I thought rich people spent money, too, or they invest it = give it to someone else to spend, in return for a little interest.

      Of course, who needs to borrow money from rich people when Bernanke just prints off some more billions to loan to the government to give to favored constituencies.

      If you can’t loan money with the big dogs, stay on the porch.

      • well the point is whether you spend it (or invest it) yourself of the govt takes it away from you and spends it – it still gets into the economy.

        one could argue about the fairness or “wrongness” of the govt taking the money but the argument that when the govt takes it – that it essentially “disappears” is wrongheaded.

        One could say that the rich guy would spend it on a Cadillac or the govt could take it and spend it on tank and that some worker at GM would have a job building either one.

        And that worker would then spend that money for milk and bread and mortgage…

        and at that point.. would the bakery, or dairy or bank really care where the money originally came from?

        Now the Rich guy could instead spend it on a Chinese factory or gold Krugerrands to keep in his safe but he could also buy T-bills with it.

        the recipient of the entitlement financed from the rich guys taxes would not be spending that money on Krugerrands..


        I’m not arguing the good or bad or right or wrong of it – only the mechanics.

        have I got the mechanics wrong?

    • When you take money from someone to give to another via an “entitlement”, how does that represent a change in aggregate demand? The person from whom you took the money has that much less to spend. Ignoring, of course, the considerable compliance costs of collecting that money.

      • re: change aggregate demand

        it does not really – unless the rich guy was not going to spend it.. on similar things the entitlement recipient would have, right?

        • it does not really – unless the rich guy was not going to spend it.. on similar things the entitlement recipient would have, right?“…

          You just can’t help yourself can you larry g?

          A silly, clueless statement from you is as dependable as sunrise…

  2. The reason the economy does not respond to silly new tinkering by the Government is because individual businesspersons look at the next 12 to 18 months and are scared to death that there will be more intrusive government control of their business, with Nationalization a very real possibility.

    If the Government is assuring that your business cannot make profits from new investments in capital equipment (which includes hiring additional workers), then every single month thousands of individual businesspersons conclude that this is STILL not a good time to invest and expand.

    Reckless spending by the Government scares the pants off real businesses, and they decline to either apply for loans from the stacks of cash at banks and decline to spend any of the billions the businesses themselves already hold in reserve.

    Consumer spending won’t ever expand the economy. Capital spending always expands the economy. Government spending is by definition wasteful.

    • tell me again why if a company is making good profits and the demand for their product/services remains strong and is exceeding their current ability to provide – that they would not expand?

      there are a LOT of factors that involve a business looking ahead – besides just govt – to consider.

      the simple-minded answer that the only one that really matters is govt – is just that – simple minded.

      The economy IS expanding right now – slowly, not robustly but there are companies that ARE HIRING and ARE EXPANDING DESPITE all the gloom and doom purveyors.

      • “the simple-minded answer that the only one that really matters is govt – is just that – simple minded.”

        Yeah, Larry, but who ever said that? Obama’s war on capitalism is a huge factor, but not the only one to consider. Duh.

        “The economy IS expanding right now – slowly, not robustly but there are companies that ARE HIRING and ARE EXPANDING DESPITE all the gloom and doom purveyors.”

        And there are many that are not giving us the weakest recovery since WWII. And that’s the whole point, isn’t it? Some companies expanded during the Great Depression also. Talk about simple-minded.

        Your socialist hero’s wrecking ball is smashing through some industries like the medical device industry, and is poised to flatten others like oil and gas fracking.

        • re: ” And there are many that are not giving us the weakest recovery since WWII. And that’s the whole point, isn’t it? Some companies expanded during the Great Depression also. Talk about simple-minded.”

          the economy expanded during the Depression rather than contract?

          re” the “socialism blather”…also simple-minded for the gullible

  3. Business will always expand to meet demand and consumer demand drives capital spending. Obama is no more a socialist than our last 10 presidents, the fact that Fox News calls him one does not make it so. Who knows if QE3 is good or bad ? You have a guy with a PHD in Economics and a board of FR Bankers that are advocating it versus the tea party who would just as soon turn it all over to grandpa from He Haw. Myself I will leave it up to the professionals at the FED to figure out. Freedman had interesting thoughts but he was blinded by his Ayne Raynd ideals, you all know Atlas Shrugged was fiction right ? meaning the author gets to make up the outcome, kind of like Fox News……..oh and producers ? if we want your money we will take it, you aint the boss of anybody no more.

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