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Alternative in 2008 was to let the banking system collapse, then rebuild from scratch. Personally I believe many older/sick people would have died if central b

by cthrow 9y ago

Alternative in 2008 was to let the banking system collapse, then rebuild from scratch. Personally I believe many older/sick people would have died if central banks hadn't dropped interest rates and embarked on QE asset purchasing schemes to keep the system afloat. Credit/lending would have all but disappeared for a while, many would have lost access to financial instruments necessary to secure housing, healthcare, insurance. As a young person I'm not happy that we've propped up the status quo, that my rent is stupidly expensive, and that the majority of recovery has gone to the wealthy/those who owned existing equity/assets/real estate, but I can see why it was necessary.

mempko 9y ago
QE didn't increase money supply. The reason we had recovery at all was Obama running huge budget deficits.
- shrewduser 9y ago
  QE does increase money supply by definition
  - mempko 9y ago
    No, fed bought bonds. That's like moving money from your savings to your checking account. In fact it likely decreased money supply because more money would have been created if bonds were held longer.
pishpash 9y ago
Dropping interest rates, backstopping systematically important institutions during the immediate crisis, and even the first QE were arguably necessary. The subsequent QE's and eight years of 0 interest rates were not.
- cthrow 9y ago
  While it's easy to blame CB's for the past 8 years of stagnation in developed economies, I don't think it's their fault. It's also very hard to say what exactly is the right amount of repurchasing through QE (1.3T in QE1 vs. 4.5T total). CB's just kept repurchasing until unemployment bottomed out, and now that we've hit the bottom, they will start to shrink their balance sheets. That's their mandate - maximize employment, keep consumer prices relatively stable. All CBs can really do is make sure banks have enough money to lend into the economy by adjusting reserve requirements and interest rates. They could massively screw up the economy by jamming interest rates up right now, or dumping all their purchased QE assets back on the market, but they can't really improve the economy strictly through monetary policy. That would require better fiscal and regulatory policy, such as tax code reform, increased spending on R&D and infrastructure, spend on education, etc. Even then it's not guaranteed this spending would lead to any technology-advancing breakthroughs that could raise the standard of living across the economy. Ultimately I believe that low productivity (we've hit a ceiling on the returns to the internet, computer, and smartphone for the moment), plus a lot of the rest of the world catching up in terms of infrastructure, is to blame for the stagnation.
  - pishpash 9y ago
    Unemployment would have bottomed out regardless. QE did not speed it up or slow it down, and all of it went into boosting asset prices and malinvestment instead, that much is plain to see. In pegging rates to zero and compressing credit spreads, the central bank had essentially been telling everyone that there was no return in investing in the real economy and that there was not much difference between a good and a bad investment.
    - cthrow 9y ago
      Good timing actually - a paper came out today from the Federal Reserve Board. Supports the finding that QE1 and QE3 significantly lowered lending standards and increased risk taking among banks: https://www.federalreserve.gov/econres/feds/files/2017093pap.pdf https://www.federalreserve.gov/econres/feds/files/2017093pap...
    - cthrow 9y ago

by cthrow 9y ago

mempko 9y ago

QE didn't increase money supply. The reason we had recovery at all was Obama running huge budget deficits.

shrewduser 9y ago
QE does increase money supply by definition
- mempko 9y ago
  No, fed bought bonds. That's like moving money from your savings to your checking account. In fact it likely decreased money supply because more money would have been created if bonds were held longer.

pishpash 9y ago

Dropping interest rates, backstopping systematically important institutions during the immediate crisis, and even the first QE were arguably necessary. The subsequent QE's and eight years of 0 interest rates were not.

cthrow 9y ago
While it's easy to blame CB's for the past 8 years of stagnation in developed economies, I don't think it's their fault. It's also very hard to say what exactly is the right amount of repurchasing through QE (1.3T in QE1 vs. 4.5T total). CB's just kept repurchasing until unemployment bottomed out, and now that we've hit the bottom, they will start to shrink their balance sheets. That's their mandate - maximize employment, keep consumer prices relatively stable. All CBs can really do is make sure banks have enough money to lend into the economy by adjusting reserve requirements and interest rates. They could massively screw up the economy by jamming interest rates up right now, or dumping all their purchased QE assets back on the market, but they can't really improve the economy strictly through monetary policy. That would require better fiscal and regulatory policy, such as tax code reform, increased spending on R&D and infrastructure, spend on education, etc. Even then it's not guaranteed this spending would lead to any technology-advancing breakthroughs that could raise the standard of living across the economy. Ultimately I believe that low productivity (we've hit a ceiling on the returns to the internet, computer, and smartphone for the moment), plus a lot of the rest of the world catching up in terms of infrastructure, is to blame for the stagnation.
- pishpash 9y ago
  Unemployment would have bottomed out regardless. QE did not speed it up or slow it down, and all of it went into boosting asset prices and malinvestment instead, that much is plain to see. In pegging rates to zero and compressing credit spreads, the central bank had essentially been telling everyone that there was no return in investing in the real economy and that there was not much difference between a good and a bad investment.
  - cthrow 9y ago
    Good timing actually - a paper came out today from the Federal Reserve Board. Supports the finding that QE1 and QE3 significantly lowered lending standards and increased risk taking among banks: https://www.federalreserve.gov/econres/feds/files/2017093pap.pdf https://www.federalreserve.gov/econres/feds/files/2017093pap...
  - cthrow 9y ago