Quite what has happened to Barry Ritholtz from his days before the 2008 crisis as a champion of sound investing is beyond the scope of this blog or blogger. BR has written a seemingly intellectual piece in his Bloomberg page on why the criticism of Quantitative Easing (QE) policies of the Federal Reserve is misplaced without a ‘control group’. In other words, there is no counterfactual scenario – the world without QE. Therefore, the honest answer, according to him, to the question of whether QE has been wrong or has succeeded or not is ‘we do not know’. Perhaps, perhaps.
At an intellectual level, he is making a fair point. But, there are at least two, if not more, limitations to his argument. One is that we have precedence. That is a very powerful compensation for the absence of a counterfactual. We have the example of the history of 2002-07 period when the Federal funds rate was brought down to 1.0% and left there for a long period. It infected other parts of the world too – whether they liked it or not. We had a global bubble and then a bust.
In 1998, the Federal Reserve cut the Federal funds rate by 75 basis points and bailed out (or, orchestrated the bailout of) Long-Term Capital Management. The technology boom turned into a monstrous bubble in the following eighteen months and then collapsed.
The second counter-argument is this: we may not have a counter-factual scenario but at least, can the Federal Reserve not be honest enough to account for the current explicit costs? Can they not acknowledge the distortions they are causing and tell us how, in their heads, they are resolving the trade-offs between costs and distortions and the so-called benefits? What is the criteria and how is it justified?
Third point: Is there no time-limit to running these policies? Five years after the crisis officially ended and the policy is going strong (notwithstanding the recent tapering) and it is being replaced with fuzzier and fuzzier roadmaps that allow a free pass to unbridled and excessive risk-taking in many corners of the financial world.
Fourth point: there are also moral consequences to what the Federal Reserve has done as a monetary policymaker and a regulator. One hopes that Ritholtz read this piece in Bloomberg about a Memphis neighbourhood.
Jeremy Grantham had, earlier commented on Janet Yellen’s view that she saw no signs of overvaluation in stock prices:
“My guess is that the Fed will play its usual game till we’re in good old-fashioned bubble territory,” said Jeremy Grantham, co-founder of GMO, an investment firm. He took umbrage at Ms. Yellen’s recent arguments in Congress for why the stock market is not particularly overvalued. “Either she is ignorant about the markets,” he said, “or on the other hand she is cynical and she is manipulating the market.” [Link]
His remarks on the Fed manipulating the market are worth reflecting upon.