Thursday, February 2, 2012

Quantitative Easing: Threat OR Menace?

Reader Ysaac sends me the above you-tube video and asks: "You've seen this, right? What answers to these questions do you have?" Let's see!

Quantitative Easing Explained
The video is two animated talking rabbits discussing or 'explaining' "Quantitative Easing"--the monetary policy the Federal Reserve is taking to increase the money supply. It's about six minutes long and funny (or, well, kind of funny). If you want to take a minute and watch it, go ahead: I'll wait.

The allegations break down as follows:

  1. Quantitative Easing (QE) means "Printing a ton of money" and the euphemism is used because doing that is the last refuge of failed empires and banana republics!
  2. The Fed is doing it because we are in "The Deflation" which means that prices are going down so people can buy more stuff! The Fed thinks that's bad for some reason--in a depression don't we want to be able to buy more stuff? And hey--aren't a bunch of prices (taxes, subway fares, taxes, gas, etc.) higher than a year ago!? How is that 'The Deflation'?
  3. The Fed is wrong about everything: it helped fuel the Internet Stock bubble, the housing prices, and thought everything was peachy with Lehman Brothers!
  4. The Fed is run by "The Ben Bernanke" who has no business experience, has never won an election, and so on. Maybe his qualification to play God with the economy is a "nice beard?"
  5. QE is done by buying Treasury Bonds from "The Goldman Sachs" at a very high price because "The Goldman Sachs" makes its living ripping off the American People. The Fed is okay with this "blatant theft from the American People."
  6. The first QE helped no one but "The Goldman Sachs!"
  7. Wasn't Obama supposed to bring the change? 

1. What IS Quantitative Easing? Is It Printing More Dough?
Before I was married to a doctor, I used to watch and enjoy the medical TV show House (Okay, okay, Karma, I give--yes--YES, it was annoying when I carped on how TV shows portrayed computers and hacking. I GET IT ALREADY!! I GIVE!). In House the patient would be dying of some bizarre infection and the hapless doctors would give the guy antibiotics and he'd get better for a second but then his kidneys would start shutting down. They'd go to Dr. House and go "His kidneys are shutting down" and House, being House, would be all "Who needs kidneys--kidneys are overrated anyway--" but the important point was this: medicine can sometimes have bad very bad side effects.QE is a kind of medicine for, specifically, very dire straights. It doesn't always work as intended and it can have nasty side effects.

Quantitative Easing is done when a central bank buys financial assets (Treasury Bonds in this case) to inject a pre-determined quantity of money into the economy. This is compared to the usual policy of buying or selling government bonds to keep market interest rates at a specific target value. The buying is done from private banks using electronically created money. Creating more money risks inflation and, therefore, if QE goes wrong you can get a lot more inflation than you bargained for.

However, unlike what the video says, QE is not the same as "printing more dough." The use of QE money in buying bonds or financial assets is very different from just using the money to directly finance government deficits or pay off government debt--something that is illegal for central banks in developed nations. This is because, at least in theory, the created money is used by private banks to stimulate the economy rather than to finance government spending.

Who has done QE? The Bank of England, The European Central Bank, the Bank of Japan, and the US Central Bank--the Federal Reserve. Banana Republics, all!

Analysis: Quantitative Easing is not just "printing more dough" and it is certainly not the mark of a failed economy or a banana republic. The IMF thinks that the first round of QE did mitigate the collapse of Lehman Brothers so whether it always works or not, apparently it works sometime (according to some people, anyway).

SCORE: INCOMPLETE (but not a total lie)

2. What About 'The Deflation?'
If there is anything the video is actively deceptive about it is Deflation. Deflation is not just "when prices come down" but when prices come down due to shrinking demand because of economic contraction. Basically, when prices drop because people aren't buying anything because they are hording money as they are out of work or scared of losing their jobs. Deflation is bad. It is a "vicious circle" or 'positive' feedback loop (which is not positive at all but is meant in the sense of a loop that amplifies whatever behavior is being discussed).

Deflation is not when everything "goes on sale" but rather when the economy is in a death spiral. It is correct that QE is a good response to deflation. What about that CPI stuff?

The Consumer Price Index is a measure of price changes in the costs of household goods and services. It rates the cost of a "market basket" of these goods at a given time. As such it should be a measure of how much "pain" a typical household is in. The items in the basket do not include things like stocks and bonds or taxes (which the video indicates they do).

Are we seeing deflation? I don't know--I hope not.

Analysis: By ignoring the vicious cycle to collapse part of deflation the video is, I think, willfully ignorant or intentional misleading.


3. Is The Fed Asleep At The Switch?
This is a bit of a non-sequitor: the Federal Reserve is the central bank. It does have a "role" in these bubbles but the bubbles themselves are the result of aggregate behavior on the part (largely) of a number of private actors. Yes: Freddie and Fanny did help high risk people get loans--but they did not, for example, push those loans on people by taking a phone book and calling every, uhm, 'black name' on the list and then presenting them with an offer they couldn't understand (something the front-line mortgage sellers have basically admitted to in some cases). It didn't have the ratings agencies (private agencies) rating the collections of mortgages as "good as paper." It didn't make Bear Stearns buy those things hand-over-fist. And so on.

The Fed has been blamed for not seeing the financial crisis coming but, to be fair, no one else did either.

Analysis: This is a weird thing to critique the Federal Reserve or QE on.

SCORE: Okay. They can criticize the Fed for this but it doesn't make much of a point.

4. What About 'The Ben Bernanke'?
Ben Bernanke, chairman of the Federal Reserve, is a technocrat. That's the term for an "expert" who runs policy (government policy). Today we see Greece and Italy having entire technocratic governments brought in by the European Economic Union because they need to enact policy their citizenship will not allow elected politicians to do.

I will note that Greece is in the dire straights it is in because it cannot print its own money. If it could it would be threatening its own future--but not the whole EU and therefore the world.

One of the best arguments for the Federal Reserve is that it can do things that politicians--elected politicians--cannot. Ben Bernanke is a fairly bad-ass economist and he's probably the right guy to aim at these problems as much as anyone else is. As the Fed chairman must be approved by Congress I think we can take some comfort that he's not there "because of his beard."

Analysis: There's not much here.


5. What About 'The Goldman Sachs'?
It's true that The Fed does buy its Treasury Bonds through the open market instead of directly from the government--but, unlike what the video suggests it (a) buys them from all primary dealers (JP Morgan Chase, Morgan Stanley, Citigroup, etc.) and has always done that--not just when some guy from Goldman Sachs took over in the NY branch. There's an implied conspiracy that isn't there.

Secondly, there is a reason for this: the transparency makes outside observers more confident in the value of the created money. In other words, this isn't (as stated by the video) 'The Goldman Sachs' ambushing the Federal Reserve and screwing the public. This is part of the plan and is another reason why QE isn't just "printing money." NOTE: these primary dealers are all mega-banks who own stock in the Federal Reserve.

Analysis: The Fed performs its acquisition and disbursement of money in a transparent fashion to ensure both us and 3rd parties (other countries with an interest in the stability of the dollar) that we are not using the funds to pay off government debt. This is a feature, not a bug.


6. Who Benefited from QE1?
The question as to who benefited from QE 1 (and 2) is pretty clear: the big banks. They're sitting on massive cash reserves as a result. Because risk is now sky high--they're having a hard time loaning (try buying a house today without 20% down--let me tell you--)  and I'm pretty sure one reason they have all that cash is because they are trying to protect themselves from the coming collapse of the Euro--but still?

Analysis: Yes. This didn't work out the way the architects hoped. 

SCORE: True!

7. It's Obama's Fault! Isn't It?
Obama was supposed to bring the change, eh? Well, okay--Obama did re-appoint Ben Bernanke but congress still had to approve him and the big complaint about the Fed? That it does not require governmental approval to act. You can't have it both ways: either it's OMG! NO ONE CONTROLS THIS THING --or-- IT'S TEH PRESIDENT'S FAULT!! Not both.

Analysis: The creator is a Ron Paul voter is my analysis.


In its totality I think this video is misleading and misinformed. It tries to present some very complicated concepts in a simple way--but it wears its bias on its sleeve and takes an "attack ad" approach to the explanation rather than any attempt at being even-handed. In short, it's a propaganda piece and you should be careful about giving it too much credence.


  1. I thought the video was pretty funny; however, I was blown away by your analysis. How ever do you find the time to keep up with and research your blogs? Do you use your evil twin to make up for the time paradox? Do you use your combined superpowers to make the world safe from ignorance and political wrong-doing? If so, have you figured out who will become THE ONE?

  2. Me, of course--after I DEFEAT HIM!

  3. "Ben Bernanke is a fairly bad-ass economist and he's probably the right guy to aim at these problems as much as anyone else is."

    Entire post invalidated by this statement. Bernanke isn't an economist, he's a Keynesian.

  4. This is a good point. It deserves it's own post. Let me address that: