Has QE worked in the U.S.? Were there any better alternatives?
It’s 2008. Your name is Ben Bernanke, the world’s most powerful central banker. The world’s financial system is going through its own version of the China Syndrome. Do you: a) do nothing and trust the self-correcting properties of capitalism; b) cut interest rates as far and as fast as you can in the hope that cheap money will avert catastrophe; or c) go for broke by trying something different?
Bernanke, an expert on the 1930s, chose c). He embraced the idea of quantitative easing, which involves increasing the money supply in order to stimulate economic activity. The Bank of England quickly followed suit. Neither Bernanke nor Mervyn King wanted to be known as the central banker who failed to prevent a deep recession becoming a second Great Depression.
The decision by Bernanke’s successor, Janet Yellen, to call time on QE is an appropriate juncture to ask some fundamental questions. Has QE worked? Does it mean the end of economic stimulus? Who really gained from the policy? Were there any better alternatives?
The answer to the first question is that QE has worked, up to a point. Sure, this has been a tepid recovery in the US and a non-existent recovery in Europe, but the outcome would almost certainly have been a lot worse had central banks not augmented ultra-low interest rates with their money creation programmes. The comparison between the US and Europe is telling: monetary policy has been far more proactive and expansionary in the US than it has been in the eurozone, which helps to explain the disparity in growth and unemployment rates.
It is also the case, though, that the impact of QE has been blunted in the US and the UK by the combination of unconventional monetary policies with conservative fiscal policies. There has been a tug of war between stimulus and budgetary austerity.
The unspectacular recovery means that stimulus policies will continue. Even though the UK and the US are posting annual growth rates of around 3%, there is no hurry to start raising interest rates. Many financial analysts suspect that central banks will never reverse QE by selling the bonds they have bought.
