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November 19, 2014


My followers know that I am an unapologetic Keynesian who does not hesitate to back government’s intervention in the marketplace to provide economic equilibrium and stimulation. Indeed I do not even consider such “intervention” to be intervention in the conventional sense of the word. The economy, after all, is the government’s business as well as that of private enterprise, so since when is it “intervention” to attend to one’s own business? Properly understood, there is room for both private enterprise and government to act and interact in a market system under the rubric of capitalism. I am neither for nor against what either may do or not do in carrying out their roles in our economy, being guided only by ethical considerations and a purely pragmatic test of what works and what doesn’t – no other ideology need apply.

Given this confessional prelude, I now ask in retrospect whether the Fed’s just ended gigantic four trillion dollar bond-buying spree (aka quantitative easing, or QE) worked, and if so, for whom? It certainly amounted to “intervention” in every sense of the word, and intervention by an arm of government run by unelected officials, suggesting a lack of political responsibility to the people in whose name and on whose ultimate credit they made such massive investments.

It could be reasonably argued that my question is premature, that we really haven’t had enough time yet to assess the impact of this unparalleled purchase of U.S. Treasuries and mortgage-backed securities.  Preliminary results (which I will outline later) are encouraging, assuming they are in fact results of such a massive buying of paper and might not have happened anyway. An economy that is recovering on its own needs no stimulation, so a preliminary question has to be whether our economy was in such bad shape that stimulation was necessary to prevent what some economists at the outset of the program were predicting – the  worst of economic outcomes, i.e., a deflationary spiral (soft phrase for depression).

The program was and is Keynesian in that an arm of government clearly invaded the sacred preserve of private enterprise (aka “the market”) but was nevertheless welcomed by Wall Street (which temporarily shelved its pretended free enterprise ideology) because it gave the investment and corporate class virtually free money to operate as well as an opportunity to unload sub-par mortgage securities at par, thus bringing equilibrium to their balance sheets. The program began at the end of 2008 under the auspices of Republicans George Bush and the Fed chair in the first round of QE. (Heavens! Keynesianism sponsored by Republicans, those vicious guardians of private enterprise?)

The first round (which I supported as an alternative to depression) was designed to buy $600 billion in bonds backed by mortgages and other debts tied to the then-crumbling housing market. Bush had already put a patchwork of rescue programs for insolvent Wall Street banks in place, so there was little resistance to the Fed’s program. By that time in the Wall Street bank-caused international financial crisis, bailouts and Keynesian intervention in the economy had become commonplace.

However, the Fed’s second round of QE, called QE2, attracted a lot more attention, much of it Republican and hostile, probably because a Democratic president had been elected during the interim between QE1 and QE2 (as in, it’s O.K. for Republican presidents to play the Keynesian game, especially when it is so helpful to our Wall Street patrons, but it’s not O.K. for you socialist Democrats to play our game). Republican Ben Bernanke, Fed Chair, who to his credit was listening to economists rather than politicians, economists who were telling him that the economy was barely above water and that falling prices and wages could bring us into a spiral of deflation (aka depression), courageously announced that the Fed would be buying $600 billion in U.S. government bonds starting in November, 2010, and the rest (all the way to four trillion dollars and yet another round later) is history. Republicans protested. QE3 followed the next year and the angry rhetoric increased even more. Perhaps Republicans were afraid that such a series of Keynesian responses to emergency would work, thus validating one of the central tenets of Keynesianism, that government investment in a failing economy can bring it back to life.

Boehner, Speaker of the House, thundered that the Fed risked “hard-to-control” inflation, a weak U.S. dollar and market bubbles. Texas governor Rick Perry, a candidate for president at the time, said it would be “almost treasonous” if Bernanke “prints more money” ahead of the election, even telling an Iowa crowd during his campaign that “we would treat him pretty ugly down in Texas.” So how did the politicians’ predictions of inflation and a weak dollar and near treasonous adventures in printing money  fare as a result of all this “government intervention into the realm of private enterprise?

None of such predictions came true; it was just another case of Republican politicians’ feeding red meat to their frenzied adherents. Thus (per AP): (1) The unemployment rate has fallen to 5.9 percent, the lowest level since July, 2008. Back in August 2010, it was 9.6 percent, (2) The stock market has soared. The S & P index has returned 101 percent, (3) The dollar is stronger than ever, so strong that its value is adversely affecting export businesses and foreign tourism, and (4) Inflation, in spite of Boehner’s uninformed diatribe, has remained tame, only climbing 1.7 percent over the past year, well below the Fed’s target of a 2 percent increase.

Republican politicians were wrong across the board, but in fairness, it should be noted that we still don’t know how much QE had to do with such good results, whether a lot or a little, results which may have occurred anyway. I personally think QE had a lot to do with our (still slow) recovery since its effect was to lower borrowing costs, encourage consumer spending (demand), and revive an economy that was plainly headed for recession, or worse. It is hard to argue with success, and since all of the jobs lost during the financial crisis have been recovered, the stock market has more than doubled and inflation hasn’t even met the 2 percent Fed target, something must have happened, and I think a large part of what happened was the result of application of the QE program to a moribund economy headed south.

So now what? So on to the next crisis which could come in this world of globalization from the slowdowns in the EU (due to their austerity policies) and their consequent weakened demand for our exports, a situation made worse by our strong dollar, and one already noted by economists with the fall of our exports in September which have caused some of our economists to reduce their predictions of our economic growth from earlier predictions. Since faltering global growth reduces our export market, economists have also noted that (and as the government has reported) we are looking at an increase in the trade deficit, one that is already confiscating our wealth from here to various “theres.”

So did QE work and if so, for whom? It worked in varying degrees for Wall Street AND us.    GERALD   E

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