Confessions of a Quantitative Easer

Interesting opinion piece by a gentleman named Andrew Huszar.  Mr. Huszar is a former Fed official who was actually responsible for the $1.25 trillion dollar QE bond buying that occurred in 2009.

As Mr. Huszar states in his piece:

My part of the story began a few months later. Having been at the Fed for seven years, until early 2008, I was working on Wall Street in spring 2009 when I got an unexpected phone call. Would I come back to work on the Fed's trading floor? The job: managing what was at the heart of QE's bond-buying spree—a wild attempt to buy $1.25 trillion in mortgage bonds in 12 months. Incredibly, the Fed was calling to ask if I wanted to quarterback the largest economic stimulus in U.S. history.

 This was a dream job, but I hesitated. And it wasn't just nervousness about taking on such responsibility. I had left the Fed out of frustration, having witnessed the institution deferring more and more to Wall Street. Independence is at the heart of any central bank's credibility, and I had come to believe that the Fed's independence was eroding. Senior Fed officials, though, were publicly acknowledging mistakes and several of those officials emphasized to me how committed they were to a major Wall Street revamp. I could also see that they desperately needed reinforcements. I took a leap of faith.

It didn't take long for Mr. Huszar to see that nothing changed as he states:

 It wasn't long before my old doubts resurfaced. Despite the Fed's rhetoric, my program wasn't helping to make credit any more accessible for the average American. The banks were only issuing fewer and fewer loans. More insidiously, whatever credit they were extending wasn't getting much cheaper. QE may have been driving down the wholesale cost for banks to make loans, but Wall Street was pocketing most of the extra cash.

As for the results:

 And the impact? Even by the Fed's sunniest calculations, aggressive QE over five years has generated only a few percentage points of U.S. growth. By contrast, experts outside the Fed, such as Mohammed El Erian at the Pimco investment firm, suggest that the Fed may have created and spent over $4 trillion for a total return of as little as 0.25% of GDP (i.e., a mere $40 billion bump in U.S. economic output). Both of those estimates indicate that QE isn't really working.

The most interesting part of the article is towards the end of the piece where he states:

 As for the rest of America, good luck. Because QE was relentlessly pumping money into the financial markets during the past five years, it killed the urgency for Washington to confront a real crisis: that of a structurally unsound U.S. economy. Yes, those financial markets have rallied spectacularly, breathing much-needed life back into 401(k)s, but for how long? Experts like Larry Fink at the BlackRock investment firm are suggesting that conditions are again "bubble-like." Meanwhile, the country remains overly dependent on Wall Street to drive economic growth.

I for one am still on the fence trying to figure out which side of the argument is valid.  Did QE help our economy or  has it put us in quite a bind right now.  My suspicion is that it could be a bit of both.  there is no question in my mind that as rates bumped against the zero lower bound the Fed was forced to try something a lot more exotic in order to try to help the economy.  Many people say that the best thing the Fed could have done would have been to significantly increase inflation rate targets in order to show that the Fed would not be getting in the way of a recovering economy even if it hit that 2% target but since that wasn't on the table QE was a valid option.

The big problems with QE are threefold:

1. Since the big winners in the QE extravaganza are the banks that caused this mess in the first place has the Fed placed it's credibility in doubt with the general public?
2. Will the Fed be able to time the "taper" correctly and allow market forces the necessary time to adjust?
3. How ugly will the market adjustment be when the Fed tries to mop up the liquidity?

All good questions.  I keep searching for answers.