We Hear Fed’s ‘Mission Accomplished’ but It’s Not OverNo monetary policy can be reckoned a success until we have accounted for all of its costs. Published at The Wall Street Journal
Austan Goolsbee, former chairman of President Obama’s Council of Economic Advisers, is on dubious ground in declaring Fed Chairman Ben Bernanke’s QE era a success and the QE critics wrong (“Bravo for Bernanke and the QE Era,” op-ed, Jan. 11). There are always tradeoffs and harm from price controls, and quantitative easing has been the most ambitious and far-reaching price-control policy ever attempted. QE’s massive bond purchases and money creation eroded market confidence and sidelined capital for many who attributed a phony recovery and an artificial economy to QE. Mohammed El Erian, the CEO of Pimco, the world’s largest bond fund manager, points out that Fed creation of money in $4 trillion of QE bond purchases added a mere quarter of 1% (0.25%) to GDP growth — a lousy tradeoff considering the heightened risks of inflation from QE money expansion and the risks of Fed insolvency from the attendant precipitous fall in bond prices.
In spite of the rise in asset prices of stocks and real estate from QE policies, it may turn out that far less new wealth was actually created if those prices deflate when QE liquidity is withdrawn.
QE has been accompanied by the worst post-recession recovery on record since the Great Depression in terms of GDP growth and a 40-year low in the labor-force participation rate. By maintaining interest rates at abnormally low levels, QE masks the real cost of the growing entitlement state while it also helped bailout and re-elect President Obama, resulting in a continuation of failed fiscal policies and the postponement of the day of reckoning on national debt and entitlement reform, which are essential for sustainable economic recovery.