And even that is doubtful.
A paper written by two staff members of the Federal Reserve Bank of Atlanta tried to quantify what all the Fed’s new money creation and related measures have accomplished. They conclude that unemployment today would be 0.13% higher without the radical measures and 1.0% higher if nothing at all had been done.
For some time, the Fed has been trying to demonstrate what its quantitative easing (new money creation in plain language) has accomplished. This has not been easy. In the first place, the results have been poor, far below what the Fed hoped for. In the second place, the Fed did not even have a theory to explain why it would work. Without a theory, it has been difficult to build a quantifiable model that would evaluate results.
After many false starts, a few papers have emerged arguing that the Fed’s actions helped. But even these papers don’t argue that they helped much. And the story isn’t yet over.
Economist John Hussman has likened the Fed’s current financial policies to a Roach Motel, easy to get into, impossible to get out of. It will be interesting to see how the Fed tries to get out.
The Fed paper boasts that consumer prices have not soared, as some critics feared they might because of the flood of new money. But that is far from a complete account. Even government indices, which understate consumer price inflation, are rising now, and a significant proportion of the new money created over the past six years has simply flowed into assets rather than consumer goods. This is blowing up new bubbles on top of the destructive dot-com and housing bubbles of the recent past.
The Atlanta Journal-Constitution wrote about the new Fed paper: “Without the Fed and its low interest rates, the jobless rate would have been higher these past few years—pretty much all economists agree on that.” But this is not accurate. Many economists believe that the Fed itself created the dot-com and housing bubbles and that the Fed’s most recent and most massive intervention has just made things worse, right now, but especially in the years ahead when the new bubbles burst.
An easy way to think about this is to compare the Depression of 1920 with the Depression of 1929. They were equally bad to start, but the first depression was over in little more than a year, while the second depression lingered for more than a decade into World War Two. The difference was that the Fed and the government did not intervene during the 1920 depression, while they did intervene during the Great Depression.
If the Fed and federal government had not intervened in 2008 to arrest the crash which their own policies had created, unemployment would no doubt have been higher in 2008 or 2009. But by now our economy might have recovered and many more jobs created. Moreover our future might be bright, not clouded by the Fed’s current Roach Motel problems and the government’s massive debt.
This is the difference between short term and long term thinking. Environmentalists are always reminding us that we need to consider long term results of how we treat our planet. We also try to teach our children to consider the long term, not just the short term, but the government always seems oblivious to anything but the next election.
The Fed’s chairman, Janet Yellen, will be testifying again in Congress. Perhaps some senator or representative will ask her how she plans to conduct monetary policy in the future, since the Fed Funds rate, the key tool of past Fed policy, has been rendered increasingly irrelevant by recent Fed policy excesses.
We know that the Fed plans to lean heavily on the interest it pays on bank reserves, a new tool that was slipped into the TARP bill in 2008 without most members of Congress knowing. It might also be useful to ask how much of this interest is now being paid to foreign banks, which we are in effect subsidizing.
Another, related issue is whether the federal home-loan banks, which are not supposed to be eligible to “earn” this money, are evading the rule by lending to foreign banks who then “earn” it for them.
What all this illustrates is that the Fed operates in secrecy, and not even Congress has much of a clue what is going on.