It has been almost eight years since former U. S. President George W. Bush warned the world that ‘without immediate action by Congress, America could slip into a financial panic and a distressing scenario would unfold.’ The government’s response to the crisis was a $700 billion rescue package that would prevent U. S. banks from collapsing and encourage them to resume lending, which was soon to be followed by a series of Quantitative Easing (QE) packages injecting money into the economy. The rationale of government intervention was to boost spending, restore confidence in the market and revamp economic growth to everyone’s benefit – but did it succeed in doing so?
QE: Faith-Based Monetary Policy
With QE still ongoing (albeit tapered), it is no longer part of a ‘rescue’ package – it has now become the new normal – despite a complete lack of positive results. Since end-2007, the Federal Reserve’s balance sheet expanded from about $890 billion to more than $4.5 trillion! And yet, U. S. growth rates have remained in the vicinity of 2 percent since 2010 (see chart below). Europe is no different. The European Central Bank (ECB), which first embarked on QE in March 2015, raised the monthly amount for asset purchases from EUR60 billion to EUR80 billion, and expanded the range of assets to include corporate bonds – but despite that, the growth outlook remains dim with 1.4 percent in 2016, and 1.7 percent in 2017 (source: Bloomberg). So why are governments still clinging to an approach that simply doesn’t deliver?
This post was published at Ludwig von Mises Institute on Sept 7, 2016.