Political Animal


October 20, 2012 2:59 PM Some Strange Fed Scolding

By Ryan Cooper

Ever since the Federal Reserve started its latest round of monetary stimulus, the scold brigade has struggled for something to find wrong with it. The latest entry comes from Henny Sender at FT:

But there is little hard evidence of either a recovery in the broad economy or a connection between “quantitative easing” and any hopeful signs of improvement in the economy. The economic activity that was supposed to be sparked by the third round of quantitative easing has yet to materialise.
Indeed, the impact of this latest round of unconventional monetary policy is already fading. Analysts at Morgan Stanley this week decided that returns in the high-yield market were no longer attractive in the face of deteriorating fundamentals. The stock market is struggling to make further headway, while yields on mortgage-backed securities have started to turn up after an initial drop. A drop in third-quarter capital expenditure suggests the Fed policy hasn’t been a catalyst for corporate investment at all.

Conflating the fortunes of Wall Street with those of the broader economy may be common, but it is rarely correct. The point about the stock market is particularly ridiculous—more than 80 percent of stock wealth is held by the top 10 percent, and the figures for mortgage-backed securities are even more skewed. Besides, the Fed action was announced only a month ago. It will surely take longer than that for increased demand to spark additional corporate investment.

Bill McBride over at the indispensable Calculated Risk gives us an update from the real economy:

The US economic data clearly improved last week. This was the third week in a row with mostly better than expected data, and suggests some recent pickup in economic activity.
The week started off with a strong retail sales report for September. Although some of the increase in sales was related to higher gasoline prices, sales excluding gasoline picked up too.
And once again the housing reports showed significant improvement. Housing starts were up sharply (as were permits), and residential investment is now a fairly strong tailwind for the economy (I expect this to continue in 2013 and beyond).

Housing is up so sharply, in fact, that folks like Kevin Drum have argued the news is too good to be plausibly attributed to the new Fed action, even though monetary policy traditionally works mainly through the housing market. Whether that’s true or not, Sender’s premise is simply preposterous. Things are looking mildly up, as they have been for the past two years or so.

But this graf on the upcoming “fiscal slope” really makes clear the contradictions in the scold mentality. On the one hand all the economists reasonably argue on straightforward Keynesian grounds that should Congress fail to stop its spending cuts and tax increases, the economy will slow. On the other hand the scolds have been dedicated to actually cutting the deficit for the last twenty years and more. How do we keep on scolding? Simple, just declare inescapable doom:

Paradoxically, perhaps, the impact of cliff risk is likely to be dramatic whether or not politicians take bold action. If Congress does succeed in negotiating the deficit down to 1 per cent or 1.5 per cent of GDP from its current 4.3 per cent, the tightening impact will be significant. But if Congress fails to act, the uncertainty is equally likely to curb corporate investment and growth.

(Note the invocation of the confidence fairy in the last sentence.)

In any case, reasonable people at this point can look at the mild improvement in economic data and tenuously conclude that it is due to the Fed action, which was after all pretty small. The most important thing to do now is keep refuting the scolds, to give the medicine time to work.


Ryan Cooper is a National Correspondent at The Week, and a former web editor of the Washington Monthly. Find him on Twitter: @ryanlcooper


  • Anonymous on October 20, 2012 5:38 PM:

    On the other hand the scolds have been dedicated to actually cutting the deficit for the last twenty years and more.

    They have? Where were they when Bush/Cheney decided to get rid of the surplus?

    This is one of those things that went down the memory hole and it grieves me that no one seems to remember that a Democrat, with no help from Republicans, balanced the federal budget and was reducing the federal debt. Republicans took both in the opposite direction. Not by accident, not because there was a world-wide financial collapse, but because they don't really care about the deficit or the debt.

  • Neildsmith on October 20, 2012 5:45 PM:

    So... it's all going to be OK after all. Liberals have spent so much time badmouthing the economy that they have nearly everyone convinced "The End" is near. Conservatives were happy to go along because, well, the President is the anti-christ or some such thing.

    None of the improvement came from government policy. Time heals all wounds.

  • c u n d gulag on October 20, 2012 6:07 PM:

    Mitt will tell us, "Well, yes, we're seeing a very slight improvement.
    And that's certainly due to my gains in the polls. You want to see full confidence in the economy? ELECT ME!!! Unicorns, ponies, happy meals, jobs, and love - straight, none of that gay stuff for gosh sakes - for everyone!!!"

  • Anonymous on October 21, 2012 2:22 AM:

    Have you read Charles Schumer's interview with Ezra Klein? This is about as a liberal a Dem as you're going to find, and he knows- he just knows - that the deficit has to be brought down now. The economists who tell him otherwise are just wrong, that's all. He reasons by metaphor, and it's clear that he's an economic illiterate. It's about the most depressing thing you can imagine.

  • Keith M Ellis on October 21, 2012 4:11 AM:

    Anonymous wrote:

    "They have? Where were they when Bush/Cheney decided to get rid of the surplus?"

    You're entirely correct with regard to the GOP partisans and the tea party types (the distinction I'm implying is between party activists/politicians and the low-information rabble who show up in tri-corner hats to protest; otherwise, they're the same group): the panic about the debt is purely opportunistic and relative to its utility as a club to attack a Democratic President.

    That said, this would never amount to much in terms of political or policy influence, partly because of their patent hypocrisy, if it weren't for the centrist Very Serious People, including a great many Democrats, who enable them and who, contrary to your assertion, have been consistent as deficit/debt scolds for thirty years.

    Simpson-Bowles is exemplary of this. It's not the product of the hypocritical right, it's purely centrist (and that's why the GOP rejected it). The partisan right is opportunist about criticizing the debt, and is inconstant in it, but the center and its mouthpieces have been repeating the same message for years. And while there's not much of a center anymore among national politicians, a very large portion of the media and policy wonks remain centrist in this sense. The editorial pages and such is where you chiefly find this scolding. It's then utilized opportunistically as cover and for credibility by the partisans.

    Which, by the way, also includes Democrats and the left. I've watched parts of the left exactly mirror the right in this respect. That is, disregard the large deficit/debt under Democratic Presidents while obsessing about it under Republican Presidents. And the converse: celebrating the reduction of it under Clinton.

    A truly informed, policy-centric counter to these centrist (mostly irrational) alarmism about the debt would be a legitimately Keynesian attitude toward it. That is, an explicitly, deliberately counter-cyclic policy. But you'll find that this is almost non-existent. Clinton's debt reduction was mostly the simple, happy result of a booming economy coupled with a restraint of GOP-driven attempts to reduce revenue via tax reductions. It wasn't so much the deliberate result of policy; and certainly not within the context of a Keynesian analysis. Likewise, while progressives and Dems and others may now be embracing Keynesianism with regard to the deficit, it's certain that the vast majority will abandon this approach during the boom times when it would argue that funds be diverted to pay down debt.

    Because, ultimately, in practice pretty much everyone across the political spectrum intuitively believes that government is like a household and therefore debt is inherently bad, always, but practically behave as if it is not, and therefore are unwilling to make any sacrifice to reduce it, bad times or good.

  • Robert Waldmann on October 21, 2012 9:36 AM:

    Very good up until the end when you claim that the Fed's action was fairly small. In fact compared to all Fed actions not in 2008 or 2009 it was extremely huge.

    Compare especially with QE II which consisted of buying 600,000 of Treasuries (itself the hugest Fed intervention not in 2008-9). How much will they buy this time ? There is no number. The sky's the limit. QE III is open ended to be continued for as long as it takes.

    The Fed issues base money and buys assets and makes loans. I think a good way to look at what the FOMC has done is to look at the rate of growth of the monetary base (yearly growth rate so that inflation and real GDP growth don't make recent numbers dwarf old numbers). My claim that QE II (definitely unmistakably smaller than QE III) was the second biggest Fed effort is based on this graph.


    Yes Kevin Drum is very smart and yes he said that QE III was a test of monetary policy via expectations management because the amount of money involved was not very big. But that last claim is totally utterly absurdly false. We are talking about an operation which, by the Fed's standards, will involve a huge huge amount of money.