Sooner or later the Fed's innovative monetary policy tool, quantitative easing, will be retired. As QE wraps up there have been plenty of op-eds recently about its effectiveness. Perhaps one of the most persuasive op-eds about QE, however, comes from the man behind it, former Federal Reserve Chairman Ben Bernanke, who published an editorial in the Washington Post in November 2010 about what the Fed did and why. Back then I wrote a letter to the Washington Post (, which remained unpublished) that may well summarize my view on how effective QE has been. It follows below.
"I would like to comment on two of the channels through which quantitative easing is intended to support economic growth that Federal Reserve Chairman Ben Bernanke outlined in Thursday’s Post: lower mortgage rates and a rise in the stock market, spurring aggregate demand via confidence and a wealth effect.
According to the Fed’s 2007 Survey of Consumer Finances (SCF) only 5.5% of families in the lowest income quintile own stocks. The median value of these holdings is $3,800 (measured in 2007 dollars.) 10.7% of families in this income stratum have retirement accounts with a median value of $6,500. Compare this to 47.5% of families in the highest income quintile who own stocks with a median value of $75,000 and almost 90% of families with retirement accounts with a median value of $200,000 (Table 6B). Similarly, around 15% of families in the lowest income quintile hold a mortgage. The median value of these mortgages is $40,000 while over 75% of families in the highest income quintile hold a mortgage with a median value of $201,000 (Table 13B).
Lowering mortgage rates therefore asymmetrically benefits higher income strata as is true for the stock market rally engendered by QE2, making QE2 an regressive policy—particularly considering that lower income strata have already been hit especially hard by the financial crisis. Additionally, given the well-established fact that higher income strata have a lower marginal propensity to spend than do lower income strata, the wealth effect from lower mortgage payments and gains from the stock market is likely
smaller than Dr. Bernanke (and the rest of us) hopes."
While I think QE was the right policy I also believe that it was regressive and therefore a second-best. QE therefore likely supported the effect that I have talked about before: in good times wealthier strata benefit more but it is not very noticeable as the rising tide lifts all boats... some just more than others. In recessions, then, lower income strata get hit hardest, as I have pointed out here, losing out again. More progressive taxation should be considered, in my view, to safeguard the level playing field that is such a necessary building block for the efficient allocation of resources that makes capitalism such a powerful and overall beneficial system (as I have argued here.)
"I would like to comment on two of the channels through which quantitative easing is intended to support economic growth that Federal Reserve Chairman Ben Bernanke outlined in Thursday’s Post: lower mortgage rates and a rise in the stock market, spurring aggregate demand via confidence and a wealth effect.
According to the Fed’s 2007 Survey of Consumer Finances (SCF) only 5.5% of families in the lowest income quintile own stocks. The median value of these holdings is $3,800 (measured in 2007 dollars.) 10.7% of families in this income stratum have retirement accounts with a median value of $6,500. Compare this to 47.5% of families in the highest income quintile who own stocks with a median value of $75,000 and almost 90% of families with retirement accounts with a median value of $200,000 (Table 6B). Similarly, around 15% of families in the lowest income quintile hold a mortgage. The median value of these mortgages is $40,000 while over 75% of families in the highest income quintile hold a mortgage with a median value of $201,000 (Table 13B).
Lowering mortgage rates therefore asymmetrically benefits higher income strata as is true for the stock market rally engendered by QE2, making QE2 an regressive policy—particularly considering that lower income strata have already been hit especially hard by the financial crisis. Additionally, given the well-established fact that higher income strata have a lower marginal propensity to spend than do lower income strata, the wealth effect from lower mortgage payments and gains from the stock market is likely
smaller than Dr. Bernanke (and the rest of us) hopes."
While I think QE was the right policy I also believe that it was regressive and therefore a second-best. QE therefore likely supported the effect that I have talked about before: in good times wealthier strata benefit more but it is not very noticeable as the rising tide lifts all boats... some just more than others. In recessions, then, lower income strata get hit hardest, as I have pointed out here, losing out again. More progressive taxation should be considered, in my view, to safeguard the level playing field that is such a necessary building block for the efficient allocation of resources that makes capitalism such a powerful and overall beneficial system (as I have argued here.)
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