The Federal Reserve clearly believes that large scale asset purchases of long-term bonds has a positive impact on the economy. The argument is rooted in the empirical support of event studies that show long-term rates decline when the program is announced combined with models that have investment spending as a negative function of long-term rates. In addition, the Fed has also argued that QE raises equity prices and thus spending via the wealth effect. I am not convinced and think that QE can hurt economic activity. First, the low level of long-term rates increases pension fund deficits and hurts other savers, which could force a higher savings rate. Second, companies are cash rich and do not need to borrow to fund investment, which I think depends much more on the expected rate of return rather than the cost of capital in low rate environments. Third, since 2008, equity prices and commodity prices have been highly correlated. Higher equity prices have gone hand-in-hand with higher commodity prices and inflation (note CPI inflation surged for a while after QE2), which squeezed real incomes. Then there are the long-term inflation risks from unwinding the balance sheet. Interested in the views of others.
I back up your suspicion: "QE can hurt economic activity", as well as LTRO (in EU). Between "can" and "will" is the area of government and capital owners competence.
QE buys time, the million of trillion dollars question is how much time and what does the government and businesses do with it.
I agree with your statements. I'd like to add that I think this QE-game has been going on since the advent of the NASDAQ bubble in the early 2000's. Since then, rates have been low (and then lower) and a large ammount of currency was printed to circumvent that crisis, as well as the housing bubble. I believe there will be a 'mega-crash' when the FED (and other central banks) stop printing currency and unwind their balance sheets. The crash(es) haven't been averted, just prolonged.
I accept that banking, because of its leveraged nature, is a different industry than, say, car manufacturing and needs a lender of last resort. The analysis of this goes back to Bagehot and his 1872 book Lombard Street is one of the best read's in economics going (and freely available on the web). I even arguing for a $700 billion TARP-like program in early September 2008 before TARP was conceived and for lender of last resort support for shadow banking. But that was in a crisis. All of the current actions by the Fed are outside a crisis period and are part of macroeconomic fine-tuning management of the economy, which is entirely different. There is not much by way of theoretical basis for the Fed's actions and we have no framework to evaluate the costs. I am not a fan of IS-LM but I guess in that framework my arguments could be framed as a near vertical MEI schedule at very low rates and that saving becomes an inverse function of rates (lower rate forces higher pension contributions etc.) So QE could force the IS curve to shift left rather than right. Meanwhile, the LM curve just lies above zero as a horizontal line. Bernanke makes the wealth effect argument (QE boosts asset prices and thus spending) but I think this asset repricing comes at the cost of lowering future returns to saving. The wealthy households get wealthier but other households (those who need to save from future income) get poorer. The other transmission mechanism is through the currency but with every major CB doing QE (and Japan stepping up big with its 2% inflation target), there can't be much of a currency effecct from QE.
Hi,
You may have a look to this paper:
Monetary policy, bank lending and corporate investment
International Review of financial Analysis, March 2017, vol 50, Pages 129-142
Chaiporn Vithessonthi, Markus Schwaninger, Matthias O. Müller
Best regards
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