Bernanke on QE3: “Not a panacea”

In: Blog

16 Sep 2012

by Andrea Terzi

What’s the logic behind Ben Bernanke’s last announcement of more Quantitative Easing (QE)?

The Fed sees QE as having effects on the price of assets (real property and stocks) so households feel richer and spend more, thus creating jobs.
Let’s explore more carefully the logic of this transmission mechanism.

One problem is that aggregate demand depends on private sector’s net financial assets, and these can only be raised by more net exports and more government net spending, not by rising prices of property and stocks.

Sure, we all agree that the price of property and stocks affects individual households. And yes, they may decide to spend more if the rise in prices of property and stocks lowers their desired net financial savings.

This all boils down to the following:

The Fed is hoping that with higher stocks and housing prices, households will be willing to increase their financial leverage, or financial obligations ratio (debt payments to disposable income).

And the Fed has no better option: If fiscal policy does not get more expansionary (such as with a full FICA suspension), all the Fed can do is to encourage households to increase their leverage.

2 Responses to Bernanke on QE3: “Not a panacea”

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warren mosler

September 18th, 2012 at 17:57

not to forget the fed will be earning even more interest income that would otherwise be earned by the economy. That’s why the old textbooks always called reserves a bank tax.

;)

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circuit

October 10th, 2012 at 18:15

Nice post. Very succinct.

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