Nomura’s Richard Koo is back and he is attacking Federal Reserve Chairman Ben Bernanke’s quantitative easing 2 as nothing more than antique shopping:
To use the analogy of an antique market, it is as though someone who had previously shown no interest in antiques suddenly began buying them in large quantities. While those purchases could drive up the price of antiques, the positive impact of the higher prices on the real economy would be quite small in relation to the amount of money spent buying the antiques.
In other words, there will be a positive impact on GDP if people who received more than they expected by selling their antiques to this new buyer used some of their profits to engage in additional consumption. However, such expenditures will necessarily be quite small in relation to the selling price of the antiques.
So, the Fed’s decision to buy U.S. treasuries from banks does not actually add much to the economy. And it’s made worse, according to Koo, by the fact that the U.S. is in what he describes as a balance sheet recession. Those banks receiving cash from the Fed in exchange for treasuries are not loaning it out because loan demand is not there as consumers and businesses repair their balance sheets. And even if they buy assets (antiques) price increases aren’t adding much to GDP.
Beyond his regular theory, Koo points out that even Bernanke has admitted defeat on QE and low interest rates reviving the U.S. economy. Instead, Bernanke now knows, as Koo has suggested before, that only with fiscal stimulus too can the U.S. economy move forward.
After stating that the Fed alone could not cure the recession, Mr Bernanke said “the Federal Reserve is nonpartisan and does not make recommendations regarding specific tax and spending programs. However, in general terms, a fiscal program that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits would be an important complement to the policies of the Federal Reserve.”
This represents a major turnabout from a year ago. Then Mr Bernanke was arguing that fiscal policy had fulfilled its role, that it was time for fiscal consolidation, and that any adverse economic impact could be offset with monetary accommodation from the Fed. In this way, the Fed chairman appears gradually to be revising the views he formed as an academic. But he has yet to acknowledge that monetary policy is basically ineffective during a balance sheet recession.
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