Was QE Effective? As Europe Awaits QE, Questions Remain About Its Success In The US

Questionable earnings? Quick enrichment. Quite enough! These are some of the answers you might get if you quizzed most Americans on what QE means to them. That’s because the U.S. Federal Reserve’s latest “quantitative easing” -- or QE -- program, under which asset purchases ended last fall, never touched the lives of ordinary citizens the way it was meant to, according to critics of the policy.

“The benefits have flowed to the very constituencies that don’t need it -- the wealthiest Americans and banks,” says Andrew Huszar, a senior fellow at Rutgers Business School and one of the managers of the Federal Reserve’s first round of QE in 2009 and 2010.

The textbook version of how QE is supposed to work goes something like this: A central bank buys government and private bonds, which serves to lower interest rates. The reduced rates encourage businesses to borrow and invest in growth -- building factories, buying equipment and hiring workers. All the additional cash coursing through the economy flows to consumers’ pockets. Everyone wins.

This week, as the European Central Bank announced its plan to stimulate the eurozone’s stagnant economy by spending $69 billion (or €60 billion) per month to buy government bonds and private debt, U.S. financial markets hailed the decision. The Dow Jones Industrial Average responded to the ECB’s QE plan Thursday by rising 259.70 points, or 1.5 percent, to close at 17,813.98. European and Asian markets rallied Friday.

Quantitative easing is one of many policymaking tools central banks use to revive lifeless economies, and most economists credit the Federal Reserve’s three-phase multitrillion-dollar QE effort with helping to pull the U.S. economy out of the Great Recession. The Bank of England’s QE in the U.K. is also seen as a success.

But as Europeans await QE’s arrival in March, they should be realistic about their expectations for the policy to tackle problems of employment, wages and overall economic uplift, warns Allan H. Meltzer, professor of political economy at Carnegie Mellon University. “The people who are clamoring for QE in Europe are doing it for same reasons they did it here -- to boost the [financial] markets,” Meltzer says. “But it has nothing to do with the real economy.”

In 2012, after the first two rounds of QE in the U.S., then-Fed Chairman Ben S. Bernanke said the initiative created 2 million private-sector jobs. Even so, median household income in 2014 was $51,939, nearly 8 percent lower than in 2007, before the recession. As a result, household consumption, which is responsible for more than two-thirds of economic activity in the U.S., is still at “anemic” levels, Rutgers’ Huszar says.

Huszar is so remorseful about his QE management role that in late 2013 he wrote a Wall Street Journal op-ed piece in which he apologized to taxpayers for the initiative’s failure to improve their lives. “The central bank continues to spin QE as a tool for helping Main Street,” he wrote. “But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.”

Huszar tells International Business Times that, in the beginning, the Fed’s initiative was defensible. The idea was that the central bank would stimulate lending -- to corporations, small-business owners and home buyers alike -- by infusing big banks with vast amounts of cash. The banks got the money, Huszar says, but they didn’t increase lending. Instead, large financial institutions “took that cash and invested it into stock and bond markets, healing themselves for their own benefit,” he says.

The problem with QE in Europe, as Huszar sees it, is that the effort masks the need for politicians and regulators to institute reforms that reshape economies and help them grow more organically.

“It makes the problem worse,” he says. “[It] takes pressure off of government to do more serious structural reform. It’s far easier to have the central bank to print money.”