The Federal Reserve – Which CREATED Quantitative Easing – Admits QE Doesn’t Work

Even the Fed Admits QE Doesn’t Work

The Vice President of the Federal Reserve Bank of St Louis (Stephen Williamson)  writes in a new Fed white paper (as explained by Zero Hedge):

  • The theory behind Quantitative Easing (QE) is “not well-developed”
  • The evidence in support of Ben Bernanke’s views on the transmission mechanisms whereby asset purchases affect outcomes are “mixed at best”
  • “All of [the] research is problematic,” Williamson continues, as “there is no way to determine whether asset prices move in response to a QE announcement simply because of a signalling effect, whereby QE matters not because of the direct effects of the asset swaps, but because it provides information about future central bank actions with respect to the policy interest rate.” In other words, it could be that the market is just reading QE as a signal that rates will stay lower for longer and that read is what drives market behavior, not the actual bond purchases.
  • “There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed inflation and real economic activity. Indeed, casual evidence suggests that QE has been ineffective in increasing inflation. [Background.] For example, in spite of massive central bank asset purchases in the U.S., the Fed is currently falling short of its 2% inflation target. Further, Switzerland and Japan, which have balance sheets that are much larger than that of the U.S., relative to GDP, have been experiencing very low inflation or deflation.”
  • “A Taylor-rule central banker may be convinced that lowering the central bank’s nominal interest rate target will increase inflation. This can lead to a situation in which the central banker becomes permanently trapped in ZIRP. With the nominal interest rate at zero for a long period of time, inflation is low, and the central banker reasons that maintaining ZIRP will eventually increase the inflation rate. But this never happens and, as long as the central banker adheres to a sufficiently aggressive Taylor rule, ZIRP will continue forever, and the central bank will fall short of its inflation target indefinitely. This idea seems to fit nicely with the recent observed behavior of the world’s central banks.” [Background.]
  • “Thus, the Fed’s forward guidance experiments after the Great Recession would seem to have done more to sow confusion than to clarify the Fed’s policy rule.”

This is not the first time that high-level Fed officials and economists have blasted QE …

The former long-term head of the Federal Reserve (Alan Greenspan) says that QE has failed to help the economy.

A high-level Federal Reserve official says QE is “the greatest backdoor Wall Street bailout of all time”.

Ed Yardeni – a former Federal Reserve economist who held positions at the Fed’s Board of Governors and the Treasury Department, who served as Chief Investment Strategist for Deutsche Bank, and was Chief Economist for C.J. Lawrence, Prudential Securities, and E.F. Hutton – notes that economists including Ben Bernanke have known for 20 years that there is no transmission mechanism by which QE stimulates the real economy.

Several Federal Reserve also say that QE causes deflation:

Narayana Kocherlakota, the Minneapolis Fed chief, suggested as far back as 2011 that zero rates and QE may perversely be the cause of deflation, not the cure that everybody thought. This caused consternation, and he quickly retreated.  Stephen Williamson, from the St Louis Fed [the guy quoted up top], picked up the refrain last November in a paper entitled “Liquidity Premia and the Monetary Policy Trap”, arguing that that the Fed’s actions are pulling down the “liquidity premium” on government bonds (by buying so many). This in turn is pulling down inflation. The more the policy fails – he argues – the more the Fed doubles down, thinking it must do more. That too caused a storm.


Other Central Bankers Agree

The former head of the Bank of England – Mervyn King – said that more QE will not help the economy:

We have had the biggest monetary stimulus that the world must have ever seen, and we still have not solved the problem of weak demand. The idea that monetary stimulus after six years … is the answer doesn’t seem (right) to me.

William White – the brilliant economist who called the 2008 crisis well ahead of time, who is head of the OECD’s Review Committee and former chief economist for BIS (the central banks’ central bank) slammed QE:

QE is not going to help at all. Europe has far greater reliance than the US on small and medium-sized companies (SMEs) and they get their money from banks, not from the bond market.


Even after the stress tests the banks are still in ‘hunkering down mode’. They are not lending to small firms for a variety of reasons. The interest rate differential is still going up.


Mr White said QE is a disguised form of competitive devaluation. “The Japanese are now doing it as well but nobody can complain because the US started it,” he said.

“There is a significant risk that this is going to end badly because the Bank of Japan is funding 40pc of all government spending. This could end in high inflation, perhaps even hyperinflation.

“The emerging markets got on the bandwagon by resisting upward pressure on their currencies and building up enormous foreign exchange reserves. The wrinkle this time is that corporations in these countries – especially in Asia and Latin America – have borrowed $6 trillion in US dollars, often through offshore centres. That is going to create a huge currency mismatch problem as US rates rise and the dollar goes back up.”


He deplores the rush to QE as an “unthinking fashion”. Those who argue that the US and the UK are growing faster than Europe because they carried out QE early are confusing “correlation with causality”. The Anglo-Saxon pioneers have yet to pay the price. “It ain’t over until the fat lady sings. There are serious side-effects building up and we don’t know what will happen when they try to reverse what they have done.”

The painful irony is that central banks may have brought about exactly what they most feared by trying to keep growth buoyant at all costs, he argues, and not allowing productivity gains to drive down prices gently as occurred in episodes of the 19th century. “They have created so much debt that they may have turned a good deflation into a bad deflation after all.”

The original inventor of QE says that QE has failed to help the economy.

Numerous academic studies confirm this. And see this.

Many high-level economists – including  the main architect of Japan’s QE program – now say that QE may cause deflation and harms the economy in the long run.

Economists also note that QE helps the rich … but hurts the little guy. QE is one of the main causes of inequality (and see this and this). And economists now admit that runaway inequality cripples the economy. So QE indirectly hurts the economy by fueling runaway inequality.

And the “Godfather” of Japan’s monetary policy admits that it “is a Ponzi game”.

Other than that, the $4.5 trillion program has been great …

This entry was posted in Business / Economics, Politics / World News. Bookmark the permalink.
  • jadan

    Mervyn King: “We have had the biggest monetary stimulus that the world must have ever
    seen, and we still have not solved the problem of weak demand. The idea
    that monetary stimulus after six years … is the answer doesn’t seem
    (right) to me.” QE is a bail out for the banks and favored corporations. It is called “monetary stimulus”. It removes debt from bank balance sheets. The creators of all the toxic paper, the bad debt packaged as bonds, were able to sell them to the Fed at face value. This would free up money for lending, which would stimulate the economy. But it didn’t because the reduction of debt did not reach down to the mass of consumers. The people create demand, not the banks. The people are the engine of the financial system, not the banks, financiers, the gang of speculators. There is no demand creation from QE because it did not help consumers. The low interest loans are not for consumers, but for financial speculators. King is wrong to say monetary stimulus doesn’t work. Like Christianity, it has never really been tried. The 900 billion stimulus that Obama gave out in 09 work very well. It ended the recession, But it was too little and too late. These people, meaning the elite-owned Fed and Wall Street speculators, do not understand how an economy works.

    • Anyone Home?

      Ended the recession? I’m afraid you are still in the Matrix, my friend. The recession has continued for Middle-Class workers since 2004 at least. The stats for poverty, food stamps, renting costs, food banks, full-time jobs, say different.

      • jadan

        It gave a boost to the economy that they could spin into the story that the recession ended in 2009. I agree that the recession for the people did not end and will not end until we eliminate the Federal reserve……

        • Anyone Home?

          Thank you for clarifying. I agree 100%.

  • Greg Burton

    Actually the hereditary cabal that owns the fractional reserve debt-based banking have known for centuries that their system creates booms, bubbles, and busts; profits on the up side and down side, eventually destroying the middle class and whatever currency of choice dominating global finance. This time is different, as when you add the trillions of unfunded derivatives to the equation you get a scenario where, overnight, billions would begin to starve to death. The kings of finance capital must know this, so it must be part of the plan.

    • Anyone Home?

      Nailed it, my friend. Are you surprised to learn that 25% of all Federal Reserve heads are Goldman Sachs alumni? You shouldn’t be–the whole Federal Reserve system is the largest conflict of interest the planet has ever seen. Now you know why they won’t come clean on that Propublica leak.

  • MARCH 9, 2015 The Liberty Brothers interview G. Edward Griffin

    These days, it is painfully obvious to most anyone that America has been taken over by Corporations. From food, energy, medicine, entertainment, banking and so on, we are truly, as our guest G. Edward Griffin stated during his interview on The Liberty Brothers Radio Show, living in The Age of Cartels.

  • The Federal Reserve Explained In 7 Minutes

    The Inflation chart you will not see or hear about in our government run media!

    Is Inflation the Legacy of the Federal Reserve? Jan. 17 (Bloomberg) — In today’s “Single Best Chart,” Bloomberg’s Scarlet Fu displays how inflation has increased in the 100 years since the creation of the Federal Reserve. She speaks on Bloomberg Television’s “Bloomberg Surveillance.”

  • Facebook User

    We are living in an uncertain times with FED now totally confused as to the next level of actions.
    The Fed doesn’t know what to do now!!!