Danger signs surround quantitative easing solution

If the unavailability of credit is not the source of the US economy’s problems then the quantitative easing solution put forward by the US Federal Reserve could be ineffective at best, and at worst full of danger, according to broker and quantitative research firm, H.C. Wainwright & Co Economics.

In its interest rate outlook for December, written by president and director of research, R David Ranson, Wainwright Economics says there is no empirical evidence to support the Federal Reserve’s claim that quantitative easing (QE) will jump start the US economy.

The article said Americans need to be provided with the evidence that this policy tool can work, evidence, according to Wainwright, that doesn’t exist.

“Its claims seem to be no more than theoretical expectations; there doesn’t seem to be a empirical basis for them. In our opinion, the Fed is an emperor without clothes,” the paper said.

According to Wainwright Economics, QE 1 did not live up to expectations and while the monetary base was doubled in the fall of 2008 with the Fed purchasing hundreds of billions of dollars of debt, in the form of mortgage-backed securities, bonds of housing-related federal agencies and Treasury bonds, there is little or no evidence that any of this newly-created money went into circulation, pulling into doubt the idea that QE can jumpstart an economy.

Wainwright Economics is not alone in questioning Fed chairman, Ben Bernanke’s, strategy of QE which will effectively flood the economy with cheap money. The head of the Philadelphia Federal Reserve, Charles Plosser, is one Fed member who isn’t happy with QE 2.

“I am still somewhat sceptical that we will see much of a stimulative effect from this new round of purchases,” Plosser has said.

These internal criticisms of the policy are providing hope there will be a premature end to the scheme which has been labelled by some as “money printing.”

While Wainwright Economics acknowledges that the Fed responds to economic weakness by boosting the monetary base and to economic strength by curbing it, they claim there is no evidence that an increase in bank reserves is helpful to the health of the economy. Rather it suggests an increase in the monetary base can be strongly associated with increased inflation rather than an improvement in the economy or an increase in money in circulation.

Quantitative easing is a theory yet to be proven successful with empirical evidence, according to Wainright Economics, and with Bernanke not denying the possibility of a future QE 3, the Federal Reserve looks set to remain an “emperor without clothes.”