Global Crisis/Innovation Blog

QE2 Fails – So Let’s Go for QE3 !

By Shlomo Maital

   Ben Bernanke’s bond-buying rampage, known as QE2, or Quantitative Easing #2 (after the smash hit of QE1), has brought a deluge of criticism, global instability, and renewed fears of inflation, with no discernible impact on the US economy. 

     Writing in Bloomberg Business Week, Prof. Scott Shane [Case Western Reserve Univ.] shows that small business – the same small businesses who created nearly all the new jobs in America in the past decade, while big businesses were firing and laying off workers – will not benefit, while big business (yes, the ones firing and laying off) will.  Even if QE2 does lower interest rates,  it will not help small businesses, who have trouble getting loans at any rate, and who, moreover, refrain from borrowing because of weak demand for their products.    

     Prof. Shane notes what is completely obvious to everyone: The banks will continue to use the liquidity created by QE2 to shore up ravaged balance sheets (which continue to record losses, as banks ‘mark to market’ and write down their assets) by keeping every dollar the Fed pumps in, rather than lend it. 

“QE2 is unlikely to get banks to lend. Banks have weakened balance sheets as a result of the financial crisis and are more likely to use the money created by the Fed’s asset purchases to shore up their reserves than to lend more.”

  Faced with overwhelming evidence against QE2, and widespread protest from business economists (those who really know what is going on), Bernanke has thought carefully and deeply, and apparently – decided to try a third round of quantitative easing, QE3.  And, doubtless, a fourth and a fifth, until the dollar collapses and inflation recurs. 

     The Obama Administration is clearly desperate.  It cannot use fiscal policy, because capital markets now seem to demand a cut in budget deficits rather than an increase. So its message to the Fed is, don’t just stand there, do something!   With monetary policy also having shot its wad, the right message to the Fed should be:  Don’t just do something, anything, stand there!   Hasty ill-advised policy will prolong Americans’ travails, rather than cure them.  And that is precisely what is happening.