What Did Quantitative Easing Accomplish?
The Federal Reserve’s post-financial-crisis strategy of adding to the money supply hasn’t been successful at improving the economy, so it is curious that it continues to pursue that approach, an AIER trustee said at a recent conference in Washington.
Walker F. Todd sat on a panel discussion at the 34th Cato Monetary Conference. The focus of the conference was “Central Banks and Financial Turmoil.” It posed the question of what would be the long-run impact on financial markets of the Fed’s quantitative easing policies in the wake of the 2007-08 financial crisis.
The conference featured such speakers as Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corporation; former Sen. Phil Gramm, R-Texas; former BB&T CEO John Allison; former Fed Governor Robert Heller; and former Cleveland Fed President Jerry Jordan.
The conference also held a panel discussion questioning the effectiveness of the Fed’s monetary policy on improving economic conditions. Sitting on this panel was AIER Trustee Walker Todd, in addition to Jordan and Johns Hopkins economics professor Steve Hanke, as well as moderator George Selgin, director of the Center for Monetary and Financial Alternatives at Cato. Selgin is also a former summer visiting research fellow at AIER.
Todd said monetary policy failed to measurably improve the economy after the crisis, while government spending has done quite nicely. Since 2008, Todd said, two key financial indicators have shown weakness: the velocity of money, or the frequency of financial transactions; and the M1 money multiplier, or the expansion of a country’s money supply through banks being increasingly able to lend.
With this weakness, Todd questioned how the Fed has used its tools to help the real economy.
“For all the exotic measures attempted by the Fed after 2008, none have delivered,” Todd said. He said this failure includes no meaningful expansion of bank credit or expansion of the overall money supply, amid relatively modest growth in Gross Domestic Product.
So, Todd asked, “Why do they keep on doing it?” He also questioned why other countries are pursuing the same approach.
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