Policy

New York Times: Benefits of Fed's QE2 Program "surprisingly small"

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Let me mime what it's like to carry a very small child around.

Last November, the Fed decided to generate about $600 billion in cash "essentially out of thin air," as The Washington Post explained at the time, and, through a complicated process known as quantitative easing, use that money to buy bonds and thus pack the coffers of 18 of the world's largest banks. The idea, according to Fed boss-man Ben Bernanke, was to support the economy by lowering mortgage and corporate bond rates and thereby encouraging investment. So: Fed gives money to banks, something else happens, then: Jobs! Not surprisingly, the banks seem to have come out of this OK. Everyone else? Not so much, reports The New York Times

Most Americans are not feeling the difference, in part because those benefits have been surprisingly small. The latest estimates from economists, in fact, suggest that the pace of recovery from the global financial crisis has flagged since November, when the Fed started buying $600 billion in Treasury securities to push private dollars into investments that create jobs.

As the Fed's policy-making board prepares to meet Tuesday and Wednesday — after which the Fed chairman, Ben S. Bernanke, will hold a news conference for the first time to explain its decisions to the public — a broad range of economists say that the disappointing results show the limits of the central bank's ability to lift the nation from its economic malaise.

Is anyone really surprised? Paul Krugman isn't: As with the stimulus, he thinks this round of quantitative easing might have worked better if it had been bigger, badder, more sure of itself. If only our current administration had just had a little more confidence in rolling out big-dollar, untested economic programs. 

I'm not surprised either, though. This was a risky policy from the beginning, and never likely to have a substantial stimulative effect, if only because it ends up as a sort of game of stimulus-telephone: Give truckloads of money to big banks and hope they pass it along to the next guy, who passes it along to the next guy who, if things go well, eventually uses at least some of that money in a productive way that filters out into the larger economy. But it turns out that, as with most games of telephone, by the time you get to the end of the line, the signal's weak and garbled.