The lessons of quan­ti­ta­tive eas­ing

The Daily Star (Lebanon) - - OPINION - STEPHEN S. ROACH Stephen S. Roach, a fac­ulty mem­ber at Yale Univer­sity and for­mer Chair­man of Mor­gan Stan­ley Asia, is the author of “Un­bal­anced: The Code­pen­dency of Amer­ica and China.” THE DAILY STAR pub­lishes this com­men­tary in col­lab­o­ra­tion with Pro­jec

No­vem­ber 2018 marks the 10th an­niver­sary of the U.S. Fed­eral Re­serve’s quan­ti­ta­tive eas­ing pro­gram, un­doubt­edly the bold­est pol­icy ex­per­i­ment in the his­tory of mod­ern cen­tral bank­ing. So, what have we learned from it? The first and most im­por­tant les­son con­cerns the link be­tween Fed pol­icy and its twin ob­jec­tives of max­i­mum em­ploy­ment and price sta­bil­ity.

Here, the ver­dict is mixed. While the first round of QE did ar­rest the fi­nan­cial cri­sis of 2009, sub­se­quent rounds – QE2 and QE3 – were less ef­fec­tive at fu­el­ing growth.

The Fed mis­tak­enly be­lieved that what worked dur­ing the cri­sis would work equally well af­ter­ward.

A sec­ond les­son con­cerns QE’s role in in­flat­ing fi­nan­cial bub­bles.

Be­cause the ex­cess liq­uid­ity cre­ated by the Fed’s bal­ance-sheet ex­pan­sion spilled over into eq­uity mar­kets and sup­ported the bond mar­ket, it was mone­tary pol­icy – rather than eco­nomic fun­da­men­tals – that shaped as­set prices.

And while cri­sis-bat­tered U.S. con­sumers and for­eign bor­row­ers ini­tially wel­comed this for­mula, the Fed’s wind­down of QE ap­pears par­tic­u­larly painful.

The third les­son re­lates to QE’s ef­fects on in­come in­equal­ity. Ac­cord­ing to the Con­gres­sional Bud­get Of­fice, vir­tu­ally all of the growth in pre­tax house­hold in­come over the QE pe­riod was in the top decile of U.S. in­come dis­tri­bu­tion, where the bulk of eq­uity hold­ings are con­cen­trated.

In other words, it is not a stretch to con­clude that QE ex­ac­er­bated Amer­ica’s al­ready se­vere in­come dis­par­i­ties.

Fourth, Fed pur­chases of gov­ern­ment se­cu­ri­ties un­der­mined mar­ket-based fis­cal dis­ci­pline. While this may mat­ter lit­tle so long as in­ter­est rates re­main low, a run-up in fed­eral debt be­comes highly prob­lem­atic in a nor­mal mone­tary-pol­icy en­vi­ron­ment where in­ter­est rates will be ris­ing.

The fifth and fi­nal les­son con­cerns the dif­fer­ence be­tween tac­tics and strat­egy.

As lender of last re­sort, the Fed de­serves credit for halt­ing a wrench­ing cri­sis back in 2008 and 2009. But the Fed also played a key role in set­ting the stage for the cri­sis.

This raises a key ques­tion: Do we want a re­ac­tive cen­tral bank that fo­cuses on clean­ing up the mess af­ter a cri­sis erupts, or a pro-ac­tive cen­tral bank that leans against ex­cesses be­fore they spark crises?

A decade of fierce de­bate about whether to “lean or clean” has shown that there is no easy res­o­lu­tion to this ques­tion.

Ten-year an­niver­saries are an op­por­tu­nity for great re­flec­tion and ac­count­abil­ity. We can cer­tainly hope that cir­cum­stances will never re­quire an­other un­con­ven­tional pol­icy ex­per­i­ment like QE.

But, if a new fi­nan­cial cri­sis does erupt, it would pay to be mind­ful of what we have – or at least should have – learned.

Newspapers in English

Newspapers from Lebanon

© PressReader. All rights reserved.