Cullen Roche Unimpressed By QE

      There's of course speculation of whether or not there will be more QE-whether there will be QE3. The most plausible explanation seems to me to be that Bernanke will do something like that only if things get decidedly worse.

     Basically he will act to prevent deflation but that is all. While there was some concern over the disappointing jobs number last month-115,000-basically there would have to be considerably more bad news for him to do more. He's not willing to inflate or stimulate but he will avoid deflation. In this sense the US response has been superior to Japan's in the 90s as they didn't even avoid deflation.

     There are however skeptics that QE works. The Market Monetarists believe it as an article of faith. Nick Rowe has his Chuck Norris Effect. Of course the CNE is all about confidence and expectations. Sumner himself seems to admit that QE by itself doesn't do all that much but it's real important for expectations of future actions-that the Fed then probably won't need to do.

    However the MMT school of course is skeptical about QE that it does much good at all. Here is Cullen Roche in a small essay he wrote back in 2010 where he quotes Richard Koo's The  Holy Grail of Macroeconomics:

    "In reality, however, borrowers - not lenders, as argued by academic economists - were the primary bottleneck in Japan's Great Recession. If there were many willing borrowers and few able lenders, the Bank of Japan, as the ultimate supplier of funds, would indeed have to do something. But when there are no borrowers the bank is powerless."

     http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1655039

      According to Koos-Roche the problem is not lack of lenders but lack of borrowers and Roche does show a chart that shows that the amount of new household debt falls off a cliff starting in 2008. Quantitative easing according to them is just an asset swap, It was tried between 2001 to 2006 to Japan with no real benefit. Indeed, the way Koos describes it here, there's no wonder it doesn't work:

      "The central bank's implementation of QE at a time of zero interest rates was similar to a shopkeeper who, unable to sell more than 100 apples a day at $100 each, tries stocking the shelves with 1,000 apples, and when that has no effect, adds another 1,000. As long as the price remains the
same, there is no reason consumer behavior should change--sales will remain stuck at about 100 even if the shopkeeper puts 3,000 apples on display. This is essentially the story of QE, which not only failed to bringabout economic recovery, but also failed to stop asset prices from falling well into 2003."

      In this very suggestive example, if it's a fair one then it's not hard to see what would need to be done to get more customers to purchase apples-lower the price. Indeed Koos argues that QE is not even inlfationary at all:

     "What is equally interesting (in addition to the fact that QE is not economically stimulative) with regards to this whole debate is that this policy response in time of a balance sheet recession is not actually inflationary at all. With the government merely swapping assets they are not actually "printing" any new money. In fact, the government is now essentially stealing interest bearing assets from the private sector and replacing them with deposits. This might have made some sense when the credit markets were frozen and bank balance sheets were thought to be largely insolvent, but now that the banks are flush with excess reserves this policy response would in fact be

deflationary."

     So is QE stimulative or not? I won't try to answer this categorically here today-honestly I'm not entirely sure. I think I have a good idea of what those who think QE is stimuluative would say. Sumner might well argue that the effect of QE in itself may indeed be smal-he might even agree that it's only an asset swap- but it's the expectational channel that is everything. Nick Rowe might mick the "People of the Concrete Steppes." I think Sumner would also argue that what proves that QE1 and QE2 was the positive market reaction to them-equities, commodities, TIPS spreads, etc.

        One last vivd quote from Koos:

       "At the risk of belabouring the obvious, imagine a patient in the hospital who takes a drug prescribed by her doctor, but does not react as the doctor expected and, more importantly, does not get better. When she reports back to the doctor, he tells her to double the dosage. But this does not help

either. So he orders her to take four times, eight times, and finally a hundred times the original dosage. All to no avail. Under these circumstances, any normal human being would come to the conclusion

that the doctor's original diagnosis was wrong, and that the patient suffered from a different disease. But today's macroeconomics assumes that private sector firms are maximizing profits at all times, meaning that given a low enough interest rate, they should be willing to borrow money to invest.. In reality, however, borrowers – not lenders, as argued by academic economists – were the primary bottleneck in Japan's Great Recession."