The Market Oracle
MAR 28, 2018
One of the larger conceits (and one of the less talked about) of the Fed is that they can actually achieve anything resembling what they set out to achieve.
Remember when liquidity completely dried up, practically overnight, and the Fed flooded the banks with instant free capital so they’d lend it out quickly to those who needed it? They didn’t. Scared into paralysis, they hoarded it and let the suffering fall to those who didn’t have a direct line to the Fed spigot.
The title refers to a consensus-shattering paper that was unveiled at the University of Chicago last month before a Who’s Who of economists and central bankers.
Paul Krugman gave the keynote, but the meeting’s focus was on the paper’s authors—two Wall Street big shots, Morgan Stanley’s David Greenlaw and Bank of America Merrill Lynch’s Ethan Harris, and two academics, James Hamilton and Kenneth West. To keep it simple, I’ll call them GHHW.
The paper more or less shredded former Fed chief Ben Bernanke’s favorite defense of his quantitative easing (QE) programs—that QE lowered Treasury yields.
In fact, if you believe in the accuracy of the type of analysis GHHW conducted, QE may have actually increased Treasury yields. By parsing data and financial news more thoroughly than in prior studies, the authors found that yields rose, on average, when bond traders were presented with news about QE. (I recommend Hamilton’s blog write-up for a quick summary, although if you’re also looking for key charts, see Exhibits 4.11 and 4.12 on page 82 of the paper.)
But despite having the data to fully reverse the findings of other researchers, GHHW didn’t take it quite that far. (They were too polite for that.) Up against a strongly pro-QE crowd, they settled on the less ambitious conclusion that “the Fed’s balance sheet is a less reliable and effective tool than as perceived by many.”