If You are Going to Criticize QE…

Do not do it this way or you might face the combined firepower of Caroline BaumScott SumnerJim Pethokoukis, andJoe Weisenthal. No one could survive that onslaught. But this does not mean the Fed’s large-scale asset purchasing programs are perfect. There are legitimate critiques one can make about the QE programs.
One might, for example, criticize how the QE programs have been incredibly ad-hoc and unpredictable. Even with the new “data dependent” approach of QE3, there is still confusion as to how the Fed will respond to the incoming data. A great example of this is the FOMC’s decision not to taper in September. It came as complete surprise to the market. The Fed’s clarity has not gotten any better since then. There is now talk of the Fed changing its “thresholds” for action. But no one knows for sure. This confusion does not help an economy struggling to get out of a slump. This is a good critique.
One could also critique the Fed for claiming it is using QE a way to restore full employment while at the same time it systematically keeps inflation below its target. The Fed’s large-scale asset purchases will never gain full traction if the Fed continues to place one foot on the gas and one foot on the brake. This is definitely worthy of a critique.
One might also critique the Fed for not learning from FDR in 1933 or Abenomics in 2013 that QE can be very effective ifdone right. These experiences show that QE-type programs work when monetary base injections are expected to be permanent. Temporary or sterilized injections, on the other hand, are ineffective. Though QE3 can be viewed as introducing some permanence to the injections, the Fed has clearly indicated it plans to wind down most of the growth in its balance sheet. Long-run inflation forecasts indicate the public believes it. The Fed doing QE wrong is is also worthy of a critique.
But do not criticize the QE programs by saying you are sorry they ever happened. Yes, the Fed could have let the payment system crash as it did in the 1930s instead of doing QE1. And yes, the Fed could have let the economy continue to drift into deflationary territory in 2010 instead of doing QE2. And yes, the Fed could have let the economycontinue to stumble in 2012 and face the sequester in 2013 alone instead of doing QE3. Very few observers would explicitly make these arguments, but one implicitly does if they question the inherent worthiness of the QE programs.
So if you are going to criticize QE, do it right.

 

This piece is cross-posted from Macro and Other Market Musings with permission.