Monday, March 11, 2019

Unintended Consequence of QE Policies?

Over the last ten years, we have witnessed history as central banks led by the US Fed launched massive easy money policies in an effort overcome the 2008-2009 financial crisis. We have covered all that here in depth and the debate continues as to whether this will prove to be good or bad policy over the long term.


This article attempts to explore what has perhaps turned into an unintended consequence of what we have seen happen during this process. Did the creation of massive amounts of liquidity by the Fed acting as lender of last resort create the impression in the general public that government spending and government debt don't matter anymore? This idea was discussed recently on CNBC by Rick Santelli and Jim Bianco (watch the video here).

There is no doubt that this whole ordeal has created an widespread impression that the emergency powers of the Fed and the US Government were brought into play in a way that saved some large financial institutions at the expense of the average citizen. We have already discussed how that is now playing out in the political arena in this recent article

It's hard to imagine that those who implemented these emergency bailout programs ever expected to see the day when large segments of the public might wonder why we cannot just print up any amount of money we need since that seemed to work for the big banks and it does not appear that we (or they) suffered any major consequences so far. 

Ideas that once seemed completely off the radar (like the Modern Monetary Theory discussed in the video linked above) are now taken quite seriously by a large segment of the voting population. 

Honestly, you can't blame people for raising these ideas and questions after what we have been through. It now seems perfectly reasonable to ask: If we can conjure up trillions of dollars to save large financial institutions and it appears no one involved in the poor decision making leading up to the crisis was ever punished; Why can't we print up trillions or even tens of trillions to provide all manner of benefits to the general public? (who got stuck with the taxpayer portion of the bill from the last crisis)

Again, I suspect that no one involved in trying to deal with the last crisis had in mind that this is how things would turn out. But it is a reminder for us all. There are always unforeseen consequences whenever major policy decisions like this are made. The best idea is to be transparent with the public, fully explain every decision made, work hard to justify how the public interest was served, and be willing to take some blame where appropriate if it is deserved. Of course, no one likes this alternative very much and it is no doubt very difficult to actually do in the heat of battle under crisis conditions. I do understand that.

But we also have to understand that if we are not going to take the harder path to try and gain the public trust by openly discussing the problems and issues (instead of using them as political weapons), we should not be shocked when a large segment of the public gives up on the system and starts looking for radical changes. It's fair for people to ask why some people are chosen as winners and others losers once we go down that path. The answer may be that it was the only path available to avoid a systemic collapse (see excellent added comment below from an expert I hear from).

But that has never been very well explained or justified to the average person on the street who has no Fed to bail them out when times get tough. This blog continues to believe that public understanding of these issues is as important as anything else our leaders might be engaged in. Unfortunately, there does not appear to be much in interest in making that effort at this time with no immediate crisis on the horizon and yet another election cycle upcoming.

Excellent comment from an expert who previewed this article for me:

"In discussing QE, it's good to distinguish between QE1 (a needed liquidity response to a panic) and QE2/QE3 (an experiment by Bernanke in portfolio channel effects). Lumping them together lets the QE crowd off the hook by claiming they needed to "save the system." That was over by late 2009. Give credit for QE1 and then ask for accountability on QE2 and QE3. That's a more rigorous approach."

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