Fed Scorecard: Where QE Worked and Where It Failed

Quantitative Easing, which ended last Thursday, has had its successes and failures.  But before we look at the outcomes of QE let's quickly review what it is.

The term Quantitative Easing (QE) describes a form of monetary policy used by The Federal Reserve to increase the supply of money in an economy where interest rates are at or close to zero.  The Fed does this by first crediting its own account with money it has created ex nihilo ("out of nothing") or some would say, by "printing money."  It then purchases financial assets, including government bonds, from banks and other financial institutions.  The purchases give banks the excess reserves required for them to create new money.  The increase in the money supply thus stimulates the economy.  That's the theory at least.  Let's see how well it worked.

Where it Worked

1. The stock market benefitted.  Since last August when Fed Chairman Ben Bernanke announced QE2 the major stock indexes have increased between 20 to 29 percent.
2. Commodity prices climbed.  When a currency is debased, it takes more dollars to buy the same product.  Commodities such as oil, precious metals, farm products, etc have benefitted.
3. U.S. exports rose.  Cheap dollars when compared to other world currencies makes our exports that much cheaper, increasing the demand for our exports.
4. It reduced our chances for deflation.  By pumping enough liquidity into the markets we have for the time being avoided the harmful effects of deflation (far worse than inflation). 
5. It created a "Wealth Effect" for some.  If you invested in the stock market, or commodities during this time chances are you did quite well.

Where It Failed

1. Housing is broken.  Bernanke assumed that lower mortgage rates would have a positive influence on the housing market.  That has not happened.
2. Jobs market is broken too.  QE2 was supposed to spur spending, which would increase demand resulting in more jobs.  This hasn't happened.
3. Inflation may not be temporary.  Bernanke called food and energy prices "transitory" and will likely reverse.  This doesn't appear to be happening.  Inflation is currently 3.6% and trending upward.
4. Dollar's potential destruction.  There is a fine line, which may have been crossed, between stimulating the economy with cheaper dollars and ruining the currency.  This is my greatest concern.
5. Interest rates will eventually go higher.  They have to.  Rates are unnaturally low.  If the U.S. continues to borrow debt at the current pace, who will buy it once The Fed is no longer purchasing it?  In order to get sell our debt, rates will have to rise, maybe dramatically in order to attract a new buyer.  

In hindsight, it's easy to see that Quantitative Easing did not accomplish the two most important things it was supposed to do: 1) correct our housing crisis; and 2) get our economy moving in any substantial fashion.  

So where do we go from here?  What other means will be employed to get our economy going again?  Is there anything that can be done?  From my perspective, neither political party has had the political will to outline a realistic plan to get our economy moving in the right direction.  Leadership is the key but no one has yet to act like a statesmen instead of just another politician pointing fingers.  No one has yet shown a willingness to yield a little on one of their pet positions in order to achieve a benefit for the greater good.  Until that happens we will have more of the same. 

Sources: Yahoo.com, CNBC, Fed Scorecard: Five Ways QE2 Worked-And Where It Failed, June 30, 2011; Quantitative Easing by Wikipedia.