Since 2008 the U.S. Federal Reserve has been printing money like nobody’s business, more than $4 trillion of it. It’s not actually printed, of course. It flows electronically into the economy by way of the banking system, much of it buying up frail mortgage-backed securities backlogged on bankbooks from the housing bubble. “Quantitative easing” is the current term for this loose monetary policy.
For most people, a money-printing spree seems an alarming activity, maybe even un-American. So, in the middle of the sixth year of this policy, we check in to see what the rest of the world and our own experts here in Alabama think.
For the larger worldview, we begin with some disturbing comments made by William White, the former chief economist of the Bank for International Settlements, based in Basel, Switzerland. His quotes are from an April 11 interview in the Swiss weekly financial newspaper Finanz und Wirtschaft. He’s concerned with the policies of central banks around the world, as well as the U.S. Fed. Selected excerpts are from the English online edition.
Our Alabama experts include the top banking/finance professors at the University of Alabama and Auburn University, a partner in one of Birmingham’s leading wealth management firms and an economist with the Ludwig von Mises Institute, headquartered in Auburn. We asked them to comment on White’s observations.
WILLIAM WHITE, former chief economist of the Bank of International Settlements
The honest truth is no one has ever seen anything like this. Not even during the Great Depression in the Thirties has monetary policy been this loose. And if you look at the details of what these central banks are doing, it’s all very experimental. They are making it up as they go along.
After Lehman, many markets just seized up. Central bankers rightly tried to maintain the basic functioning of the system. That was good crisis management. But in my career, I have always distinguished between crisis prevention, crisis management and crisis resolution. Today, the Fed still acts as if it was in crisis management. But we’re six years past that. They are essentially doing more than what they did right in the beginning. There is something fundamentally wrong with that. Plus, the Fed has moved to a completely different motivation. From the attempt to get the markets going again, they suddenly and explicitly started to inflate asset prices again. The aim is to make people feel richer, make them spend more and have it all trickle down to get the economy going again. Frankly, I don’t think it works, and I think this is extremely dangerous.
When you talk about crisis resolution, it’s about attacking the fundamental problems that got you into the trouble in the first place. And the fundamental problem we are still facing is excessive debt. Not excessive public debt, mind you, but excessive debt in the private and public sectors. To resolve that, you need restructurings and write-offs.
Investors try to attribute the rising stock markets to good fundamentals. But I don’t buy that. People are caught up in the momentum of all the liquidity that is provided by the central banks. This is a liquidity driven thing, not based on fundamentals.
Maybe all this monetary stuff will work perfectly. I don’t think this is likely, but I could be wrong. I have been wrong so many times before. So if it works, the long bond rates can go up slowly and smoothly, and the financial system will adapt nicely. But even against the backdrop of strengthening growth, we could still see a disorderly reaction in financial markets, which would then feed back to destroy the economic recovery.
JAMES BARTH, Lowder Eminent Scholar in Finance at Auburn University
The United States recently suffered the worst financial crisis and the deepest recession since the 1930s. In response to this developing situation, the Federal Reserve engaged in several unprecedented rounds of quantitative easing, in which private- and government-issued securities were purchased to lower interest rates. This has been an attempt to stimulate economic growth and reduce the unemployment rate. It also led investors to reach for higher yielding assets in the form of stocks and bonds.
However, as William R. White, the former chief economist of the Bank for International Settlements, points out, while these actions by the Federal Reserve may have been appropriate early on, they were continued far too long. The problem now facing us is that such a loose policy is likely to lead to higher consumer prices and interest rates, resulting in a potential collapse in security prices. This, in turn, could adversely affect growth and employment.
TOMMY SMITH, founding partner with Birmingham Capital Management
[White] does make provocative statements, and I think he is right in basically all of the prognostications. The problem is the timing. Yes, the Fed has pursued its policy of quantitative easing to an unprecedented degree, and it’ll come home to roost. He will be right. It’s just a matter of when. It’s dangerous in the long run, absolutely dangerous and unnecessary. But the Federal Reserve doesn’t have the ability to do more than what they are doing. They just don’t have the tools to do what needs to be done. White says what needs to be done is a restructuring of the financial system, but that would cause even bigger write-offs, so that is not going to happen. If the Federal Reserve did restructure the financial system, it would help. But all they can do from a practical standpoint is what they are doing.
They just pour more money into the system, and it’s not doing what the Fed intended. The Fed intended that banks would lend to businesses to build plant and equipment and inventory. But what has happened is that the banks do not have demand for that money, and the banks go right back in and buy mortgages, which the government turns around and buys back. This liquidity is basically a circle between the banks and the Federal Reserve, and the trickle-down effect has not happened. GDP has grown only 10 percent in 4 1/2 years. We have had the slowest economic recovery since the ’30s. Median real household income is 10 percent lower than in 2007. The economy may be growing, but more than 90 percent of the people have not benefited from that growth.
BENTON CUP, Robert Hunt Cochran/Alabama Bankers Chair at the University of Alabama
So far the Fed’s policy is working to expand the economy, although slowly, and having a slow expansion is less risky than one with abrupt changes in the markets. This is a fairly unique situation we have at the present time, but they are not going to stop what they are doing. The economy is growing. They did the right thing at the right time. Just like any other policy: You’re going to find people for it and against it. But there is no consensus that they should back off. As interest rates continue to rise, you may see some slowdown in the rate of growth. You’re starting to see that slowdown in the housing area right now: not booming, but moving at a slow pace, which is a good thing. We don’t need another housing bubble. They want the economy to grow at a moderate pace, and they can’t target a specific industry, such as housing: It’s not their job.
The economy is expanding, although slowly, and some sectors are currently slowing because the housing sector is slowing down somewhat. The reaction of the stock market to quantitative easing has been generally favorable. There are a lot of things going on in the stock market. One of those things is that the basic nature of day-to-day trading is increasingly dominated by high-speed traders and not long-term investors. So, in the short run, you have a lot of volatility in the market that doesn’t reflect the underlying long-term trends. If the Federal Reserve backed off from their monetary policy quickly, it could have a nasty effect on the stock market. But they could back off gradually if they should decide to.
MARK THORNTON, economist with the
Ludwig von Mises Institute
Economist William R. White, formerly chief economist at the Bank of International Settlements, is correct to view the world economy as a series of central bank-created bubbles and that central banks’ monetary policy is fundamentally misguided and dangerous. The BIS is the only international financial institution that pays any attention to the Austrian School of economics. We argue that banks and financial firms should never have gotten a bailout in the first place, that current monetary policy is counterproductive, and that central banks — including the Federal Reserve — have already planted the seeds of future economic crises. The Fed is taking from lower- and middle-wage classes and giving to the rich and powerful.
Chris McFadyen is the editorial director of Business Alabama.
Interview by Chris McFadyen