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.
I am very skeptical of the narrative “mark to market” was the sole key event, though I think that and fact market came to believe government was not going to nationalize banks. As to second point, that regulation, taxes and wealth redistribution had a meaningful effect on reducing GDP growth coming out of recession, I think there can be little doubt. Think of your prior post, Scott Winship on labor force participation. His finding was that increased welfare state reduced labor force participation, any question it reduced GDP growth? I just bought a new car, has all sort of features, like stop/start, to increase fuel economy. These features are in place of things I would want (lower price, more reliable, better drive) and so reduce GDP. These are just 2 examples, but there are thousands, and together they reduced GDP growth. Also, think fracking. I have seen estimates that about 1/3 of GDP growth since great recession was from fracking. Think how bad GDP growth would have been but for that?
So, why did stock prices rise and unemployment fall?
Because the economy crashed and during 2009:
1) The bank winners and losers were fairly well decided and investors could have more confidence.
2) Natural gas and oil production increased
3) Smartphones were popular.
4) Real wages and benefits fell.
5) The Fed had a minor point.
Again, as one and done Keynesian, the government drew a line in the sand of falling asset prices and investments, and by early 2010 the animal instincts took over. I don’t see how the Great Recession disproves basic Keynesian framework.
Also, in terms of slower growth rates, I put money on general population growth as the the primary cause here.
Regarding point 3, it’s not at all clear to me that there’s some natural 3.5-4% rate of growth that should be expected to continue indefinitely as long as we don’t screw it up. Maintaining a constant rate of growth requires solving a different set of technical challenges every year, over and over, forever. Why should we expect that every year we’ll do exactly what’s needed to get growth in that range? Especially when demographics were working in favor of growth in the 80s and 90s and are now working against it?
The Fed is just another bank? Just another bank can’t create dollars at will.
Federal taxes as fraction of GDP have not changed much from the 1990s or in the postwar era, for that matter.
Some industries, such as finance, telecommunications and transportation are much freer today than before the 1970s-1980s (remember Reg Q anyone)?
Property zoning is much more restrictive today than earlier eras. Many cities are choking. How you tackle that one…
QE probably worked, by giving bondholders fresh money to invest or consume.