During his testimony before the Senate Banking Committee, Federal Reserve Chairman Ben Bernanke has a heated exchange with Senator Bob Corker. Corker stated that the Fed was subsidizing the big banks at taxpayers' expense. Bernanke countered with the claim that it was necessary, however, his defense was based on belief rather than evidence.
During his testimony before the Senate Banking Committee on Tuesday, Federal Reserve Chairman Ben Bernanke had a heated exchange with Tennessee Senator Bob Corker.
Senator Corker leveled a valid (although poorly articulated) charge that the Fed was subsidizing the big banks at taxpayers’ expense. Bernanke countered with a claim that what the Fed was doing was necessary to support economic recovery. Unfortunately, the Fed Chairman’s defense of his “QE3” program was based on belief, rather than evidence. It was also disingenuous.
We seem to be living in an era of faith-based economics. Proponents of “fiscal stimulus” and “quantitative easing” don’t even seem to notice when their policies fail in the real world.
As described here, it is clear that the Fed’s QE2 program, which ran from November 2010 through June 2011, actually retarded the growth of both GDP and employment. Now we have evidence that suggests that QE3 is failing in exactly the same way.
QE3 was unveiled on September 13, 2012. The Fed announced that it would buy $40 billion/month of mortgage-backed securities until such time as the labor market improved “significantly” (which many believe means an unemployment rate of 6.5% or lower), or the expected inflation rate rose above 2.5%.
On December 12, 2012, the Fed announced that it was going to expand QE3 to a total of $85 billion/month, by adding purchases of $45 billion/month of longer-term Treasury securities.
So, how is this QE3 thing working for us?
During three months of QE3, 4Q2012, nominal GDP (NGDP), which is precisely the variable that QE3 is supposed to stimulate, hit a wall. Annualized NGDP growth slowed sharply, falling from 5.78% in 3Q2012 to only 0.46% in 4Q2012. This was the lowest quarterly NGDP growth rate since the recession ended in 2Q2009.
The growth of total employment, which was 526,000 during 3Q2012, fell to 331,000 in 4Q2012.
The most unconventional thing about QE3 is that the Fed is conducting monetary policy against a “real” variable, the unemployment rate, rather than against “nominal” variables, such as interest rates or the size of monetary aggregates. Well, during the first four months of QE3, our unemployment rate actually rose, from 7.8% to 7.9%.
Strike three! QE3 is out! (Or, at least it should be.)
But wait, there’s more!
Between quantitative easing and “Operation Twist”, the Fed has been obsessed with pushing down long-term interest rates. However, the yield on 10-year Treasuries actually increased from 1.77% on September 12, 2012, the day before QE3 was announced, to 1.88% on February 26.
Remarkably, QE3, which amounts to printing money on a massive scale, has even been a failure at promoting inflation.
The total size of the Fed’s balance sheet had been essentially constant (at approximately $2.9 trillion) from the end of QE2 to the beginning of QE3. Then, during the 23 weeks between September 14, 2012 and February 22, 2013, the Fed’s assets rose by $271.6 billion. Despite this, the price of gold, which is the best indicator of the value of the dollar, actually fell by 11.2% during this period.
Clearly, the Fed’s “quantitative easing” is based upon a flawed model of how the economy operates. Both QE2 and QE3 have been harmful to the real economy. To continue QE3 is to ignore the evidence, in favor of faith-based economics.
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