As read his “Confession” to America regarding his involvement as an official at the New York Fed in the execution of the QE that Andrew Huszar published in The Wall Street Journal today, I didn’t have go far to get the first inkling that he’s either insincere or fell off the boat from Germany just prior to joining the Fed.
Here’s the very first paragraph, first sentence even, where there is a glaring red hot error:
I can only say: I’m sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed’s first plunge into the bond-buying experiment known as quantitative easing.
I suppose he forgot all about the loads of Fed bond buying in the 1930s. When, for similar reasons as now, the Fed tried all sorts of nibbling around the edges of the effects of deflation to no avail. Why? Because it was terrified of steeping out of the box of the gold standard. The Fed of today is similarly deranged in fighting the Great Inflation of the 1970s; they all have their own versions of phantom crosses to bear. Apparently, he’s also forgetting that those who forget history are bound to repeat it.
Aside from that, however, it appears to me that Mr. Huszar is apologizing for the entirely wrong act. What he should apologize for is the period from 2007 through the tail end of 2008 on the graph below (one of my new favorite graphs from Christina Romer) when the Fed sterilized all of the extra loaning needs. I have no knowledge as to whether he was directly involved in that, but guilt by association appears to have relevance here, as this is most likely directly related to the “Great” being put into the “Great Recession.”
I had left the Fed out of frustration, having witnessed the institution deferring more and more to Wall Street. Independence is at the heart of any central bank’s credibility, and I had come to believe that the Fed’s independence was eroding. Senior Fed officials, though, were publicly acknowledging mistakes and several of those officials emphasized to me how committed they were to a major Wall Street revamp. I could also see that they desperately needed reinforcements. I took a leap of faith.
Which mistakes might those be? Making policy mistakes that eroded its independence? I wonder. How about zigging instead of zagging or putting the left shoe on the right foot? This is just silly fluff; and instead he misses a golden opportunity to elaborate on one of the greatest monetary blunders in 80 years. Apparently, he’s also requiring readers to take a leap of faith that he has a point.
It wasn’t long before my old doubts resurfaced. Despite the Fed’s rhetoric, my program wasn’t helping to make credit any more accessible for the average American. The banks were only issuing fewer and fewer loans. More insidiously, whatever credit they were extending wasn’t getting much cheaper. QE may have been driving down the wholesale cost for banks to make loans, but Wall Street was pocketing most of the extra cash.
This is vague. Perhaps he should elaborate on the circumstances of the cash hoarding – something people do in a deflationary environment; and banks do it under IOeR. It just couldn’t be… Perhaps all that inflation we’ve heard was coming is lurking in the bushes.
He goes on:
You’d think the Fed would have finally stopped to question the wisdom of QE. Think again. Only a few months later—after a 14% drop in the U.S. stock market and renewed weakening in the banking sector—the Fed announced a new round of bond buying: QE2. Germany’s finance minister, Wolfgang Schäuble, immediately called the decision “clueless.”
So officials in the EZ have it well enough together to have an opinion about QE. Mr. Huszar wanted to start a conversation about cluelessness, and, as you can see, I am very happy to oblige. It is very difficult to see through the non sequiturs to understand his point. His liberal use of rhetoric with no golden thread of logic running through it makes this mea culpa almost pointless.
Even though pointless, he continues his rant:
Where are we today? The Fed keeps buying roughly $85 billion in bonds a month, chronically delaying so much as a minor QE taper. Over five years, its bond purchases have come to more than $4 trillion. Amazingly, in a supposedly free-market nation, QE has become the largest financial-markets intervention by any government in world history.
Having racked up hundreds of billions of dollars in opaque Fed subsidies, U.S. banks have seen their collective stock price triple since March 2009. The biggest ones have only become more of a cartel: 0.2% of them now control more than 70% of the U.S. bank assets.
Perhaps the severity of the financial crisis, that worsened as the Fed was sterilizing, reducing its share of Treasury holdings to the lowest level in decades had nothing to do with creating a cartel out of the survivors… Or the fact that TARP provided the government with a considerable interest in most of the major banks. There’s always the holistic view that so many fail to take into account. And I think that if Mr. Huszar knew anything of importance, he’d be telling a much different story.
QE is just one of those nibbles around the edges and not a major cause of much worth talking about. The damage was done in early to mid-2008 by monetary policy error. All of this other stuff is chaos in the aftermath. The bottom line is, if you don’t like big government, you don’t want tight money.
Scott Sumner also commented on Huszar’s op-ed here. I highly recommend it.