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The Fed’s QE2 — Unsurprising Move but Surprising Reaction
December 23, 2010
With fiscal policy limited by our long-run federal debt challenges, monetary policymakers took action to address the lackluster economy in 2010. In early November, the Federal Reserve announced a plan to purchase $600 billion of longer-term Treasury securities by mid-2011. The plan has come to be known as “QE2” because it represents a second wave of the Fed’s so-called quantitative easing program, the first installment of which involved purchases of up to $1¾ trillion in longer-term assets during 2009 and early 2010.
QE2 was not a “big” economic event in the sense of being exotic. For some time, the Fed has not been able to increase monetary stimulus by lowering the short-term federal funds rate, its traditional policy lever, as that rate has been close to zero since late 2007. The next logical step has been to ease financial conditions by lowering still-positive longer-term interest rates; purchasing longer-term assets is simply a means to that end.
Nor was QE2 surprising. By law, the Federal Reserve has a mandate to set monetary policy so as to promote the dual goal of stable prices and maximum employment. With underlying inflation now well below the mandate-consistent target of 1½ to 2 percent and a gap between actual employment and full employment that is perhaps as large as 12 million, neither objective is currently being met. The Fed’s decision to implement QE2, a policy designed to both spur economic growth and return inflation to a more desirable long-run level, represented a step toward meeting its dual mandate.
What has been notable about QE2 is the considerable backlash that it has spurred. Critics abroad have argued that the U.S. is exporting its economic problems, as quantitative easing (like traditional Fed policy) puts downward pressure on the foreign exchange value of the dollar and and upward pressure on prices of foreign assets. This is a particular problem for emerging market economies that have rebounded faster than industrial economies and are now at risk of asset price bubbles and overheating more generally. Domestically, some skeptics worry that the weaker dollar and larger Fed balance sheet could put the U.S. economy at risk of excessive inflation.
These concerns merit serious discussion but reasonable counter-arguments can be made. On the international front, a more vigorous and sustainable U.S. recovery would have important benefits for the rest of the world. With regard to the domestic concerns, falling inflation (and its capacity to foster economic stagnation) has been a larger concern than rapidly rising inflation.
The backlash to QE2 bears watching because it lends support to those who wish to reduce Federal Reserve independence. While the Fed should be held accountable for its actions, excessive political oversight of monetary policy could prove very harmful to the U.S. economy. It would open the door to attempts to win over with voters by boosting growth and employment over the short run at the cost of higher inflation over the long run.
C.E.O., Owner, & Founder
Aransiola Fakorode
June 30, 2010
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Excerpt: The Return to Fiscal Sanity Began in
December 23, 2010
Historians of our era may describe 2010 as the year Americans finally woke up to the fact that their federal budget was on a dangerous course, hurtling toward a debt crisis that threatens American prosperity and international leadership. They may, but we won’t know until we see whether the political system responds with decisive action in 2011.
But once the election was history, the ultra-partisan rhetoric subsided and public discourse on fiscal matters shifted toward pragmatism. Two bipartisan commissions contributed to the more constructive tone by reporting compromise plans for bring deficits steadily under control and stabilizing the growth of debt. I was privileged to serve on both of them and the experience left me fairly optimistic that our political system can pull itself together and reach a bipartisan compromise in time to avert a debt catastrophe.
The National Commission on Fiscal Responsibility and Reform, ably led by Erskine Bowles and Alan Simpson, included a dozen high-ranking Senators and Representatives from both parties. (Brookings Trustee Ann Fudge and I were among the six public members). The Commission, appointed by President Obama, was charged with crafting a plan, to be released right after the election, for reducing the deficit to manageable proportions by 2015 and controlling future debt. The Commission with the support of a small staff spent months digging into the problem. Despite the fact that most of the members were busy campaigning, they came together in a constructive and collegial spirit to discuss a broad array of spending and tax options, including all the “third rail” political no-no’s that pundits declare untouchable. Until the election was over, no votes were taken. Indeed, nothing was written down for fear some leaked draft document would be misused on the campaign trail.
Shortly after the election the co-chairs produced a bold draft plan for the Commission to discuss. It included all the “third rails”-cuts in domestic and defense appropriations, curbing growth in Medicare, Medicaid, and Social Security benefits, drastic reform of the corporate and individual income taxes to simplify the structure and raise more revenue. Commission members, all of whom disagreed with some elements of the plan, welcomed it as a courageous effort to find middle ground without copping out on the assignment. After vigorous interaction with the co-chairs a somewhat altered plan was adopted by 60 percent of the members. Most of those not voting for it, nonetheless expressed their admiration for the effort and some offered their own alternatives. There were no “deficit deniers.”
‘The situation is worse than 2007’
January 27, 2016
THE world is facing an avalanche of catastrophic bankruptcies and defaults that could lead to political and social upheaval, according to one leading global economist.
William White, the chairman of the Organisation for Economic Co-operation and Development (OECD)’s review committee and former chief economist with the Bank of International Settlements made the dire predictions to the UK’s Telegraph on the eve of the World Economic Forum in Davos.
“The situation is worse than it was in 2007. Our macroeconomic ammunition to fight downturns is essentially all used up,” Mr White said.
“Debts have continued to build up over the last eight years and they have reached such levels in every part of the world that they have become a potent cause for mischief.
“It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something.
“The only question is whether we are able to look reality in the eye and face what is coming in an orderly fashion, or whether it will be disorderly. Debt jubilees have been going on for 5000 years, as far back as the Sumerians.”
Mr White said the European banking system already has about $US1 trillion in non-performing loans, many in emerging market economies, which have massive credit bubbles due to money printing policies enacted following the GFC.
Global public and private debt has hit all-time highs, currently at 185 per cent of GDP in emerging economies and 265 per cent of GDP in the OECD — 35 per cent higher than the peak of the last credit cycle in 2007, The Telegraph reports.
Mr White argues central banks in the 1990s should have allowed deflation — caused by the flood of cheap exports from China and eastern Europe — to run its course, rather than stoking debt bubbles.
The US Federal Reserve now has no easy way out. “It is a debt trap. Things are so bad that there is no right answer. If they raise rates it’ll be nasty. If they don’t raise rates, it just makes matters worse,” he said.
Billionaire investor George Soros, meanwhile, has warned of a hard landing for China. “A hard landing is practically unavoidable,” he told Bloomberg. “I’m not expecting it, I’m observing it.”
Earlier, leading US economist Nouriel Roubini, also at Davos, warned global equities are enduring a “perfect storm” of volatility exacerbated by the “manic depressive” nature of financial markets.
“Markets tend to be manic depressive — they go from excessive pessimism to excessive optimism,” Mr Roubini said.
“A year ago [investors] were believing in this rhetoric of the Chinese government — that China could achieve a soft landing, they could maintain growth at seven per cent. The Chinese were a bunch of super-heroic technocrats who couldn’t do anything wrong and now to the other extreme of saying the policy makers are incompetent, they cannot stabilise growth, the currency, the stock market.”
Mr Soros had earlier told German magazine Wirtschafts Woche the EU is “on the verge of collapse” as squabbling governments fail to deal with the problem of mass migration.
“The Greek crisis taught the European authorities the art of muddling through one crisis after another,” he said.
“This practice is popularly known as kicking the can down the road, although it would be more accurate to describe it as kicking a ball uphill so that it keeps rolling back down. The EU now is confronted with not one but five or six crises at the same time.”
Europe is looking up – some good news to start 2016
January 01, 2016
Now we have moved into a new year, economists are peering into their crystal balls and making predictions for the next 12 months.
One of my forecasts would be for stronger European economic growth. Indeed, this could well be the strongest year for growth across the European Union as a whole since 2007.
This may be a surprising prediction. We have become used to viewing Europe as a drag on the growth of the UK and world economies. After a spurt of growth in 2010, the economies of the eurozone stagnated from late 2011 until mid-2014. But 2015 saw much a better economic performance.
Taking the 28 economies of the EU together, GDP in the third quarter of 2015 was 1.9pc up on a year ago, only just behind the 2.1pc growth achieved in the US over the same period. The EU unemployment rate has now fallen to 9.3pc - the lowest level for more than six years.
Where is this growth coming from? During the recovery from the financial crisis there have been two consistent sources of strength and resilience in the European economy. The first is northern Europe, led by Germany and the UK. Sweden is another northern European economy that has performed well, and is now growing at nearly 4pc a year.
A second area of fairly consistent economic strength has been eastern Europe – including Poland, the Czech Republic, Slovakia and the Baltic states – Latvia, Lithuania and Estonia. The 11 central and eastern European economies that joined the EU from 2004 onwards make up an economy the size of Spain. In recent years, they have exerted a positive counterweight to the drag created by the troubled economies in southern Europe.
Since 2014, however, the performance of some of the southern European economies has started to improve.
Spain has seen the biggest turnaround – with growth picking up to 3.4pc and unemployment falling by 500,000 over the past year. There has been a more modest improvement in Portugal. Italy has also seen a big fall in unemployment, and business surveys there are becoming more positive – though this is taking time to feed through into stronger GDP growth. Greece is still struggling – but it has a small impact on the overall European economy, accounting for just over 1pc of EU GDP.
Why have we seen this improvement in southern Europe – particularly in Spain? One important ingredient has been the reforms implemented by the Spanish government to employment laws and other regulations affecting business – under the government of Prime Minister Mariano Rajoy.
However, the inconclusive result of the recent Spanish election has raised question marks about the future of this reform programme.
In Italy, the government, headed by Mario Renzi, is embarking on a similar process of reform – though it will be some years before its full impact on the economy will be felt.
In addition, the European economy as a whole has felt the impact of three other favourable effects over the past 12-18 months.
The first is the big fall in the oil price, which has helped to bring down inflation to around zero. The continental European economies are large beneficiaries of this shift as none of them is a large oil producer. Zero inflation means that real incomes are rising, with wage-earners seeing modest pay increases. For example, German workers saw a 2.5pc increase in the real purchasing power of their wages last year.
Meanwhile, the fear of a damaging deflationary cycle is misplaced. In countries, like Spain, where prices are falling, it is boosting, not damaging, economic growth.