Challenging the narrative that the Fed’s quantitative easing was a success, Brian S. Wesbury and Robert Stein write,
The Fed boosted bank reserves, but the banks never lent out and multiplied it like they had in previous decades. In fact, the M2 money supply (bank deposits) grew at roughly 6% since 2008, which is the same rate it grew in the second half of the 1990s.
So, why did stock prices rise and unemployment fall? Our answer: Once changes to mark-to-market accounting brought the Panic of 2008 to an end, which was five months after QE started, entrepreneurial activity accelerated. New technology (fracking, the cloud, Smartphones, Apps, the Genome, and 3-D printing) boosted efficiency and productivity in the private sector. In fact, if we look back we are astounded by the new technologies that have come of age in just the past decade. These new technologies boosted corporate profits and stock prices and, yes, the economy grew too.
The one thing that did change from the 1990s was the size of the government. Tax rates, regulation and redistribution all went up significantly. This weighed on the economy and real GDP growth never got back to 3.5% to 4%.
Pointer from John Mauldin. My thoughts:
1. Recall that Ed Leamer’s macro book is called “Macroeconomic patterns and stories.”
2. We should certainly be skeptical of the narrative that the Fed achieved something. After all, they simply re-arranged the maturity structure of government debt, which is something that the Treasury can do (or un-do). As I keep saying, the Fed is just another bank, playing the maturity mis-match game. So in theory their actions should have little effect. In practice, they did not hit their inflation target. So the only thing the standard narrative has going for it is that it pleases people who like to see the Fed as important and successful.
3. We should be skeptical of Wesbury’s and Stein’s narrative, also.