Not everyone loves QE

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Not everyone loves QE


Chang Ha-joon

Financial markets were glued to Capitol Hill in Washington on Tuesday as the new head of the world’s most influential central bank faced Congress for the first time in her new role. In her first public appearance since moving up to the top position at the Federal Reserve last month, after serving as its vice chair for four years, Janet Yellen addressed the House Financial Services Committee to deliver the central bank’s twice-a-year report to Congress.

Investors around the world closely watch whatever the U.S. Fed chief had to say for indications about monetary policy in the world’s largest market. But the latest hearing received a brighter-than-usual spotlight because the hands gripping the tiller of U.S. monetary policy changed earlier this month. Yellen is the first woman to head the Fed since its founding in 1913. Markets in the United States as well as around the world needed to hear her say what she would do with her predecessor’s unprecedented quantitative easing program, which started in 2008 to combat the global financial meltdown, and his unfinished mission of scaling down the bond-purchasing program that quadrupled the Fed’s balance sheet.

Yellen, the 67-year-old professor emeritus of the University of California at Berkeley, synchronized her own view with her predecessor’s and indicated she would finish off his work by smoothly paring down the bond purchases. In an unequivocal voice, she said the Fed stands committed to its plan to taper the bond purchases in “measured steps” and eventually raise short-term interest rates above the near zero level depending on how the economy improves. The Fed believes the economy will grow “at a moderate pace this year and next” but “too many Americans remain unemployed,” she said. “I expect a great deal of continuity in the monetary policy,” she concluded.

Stocks on Wall Street and other financial markets rebounded on Yellen’s reassurance about moderate growth in the U.S. economy and prospects of the Fed sustaining an ultra-loose monetary policy to keep borrowing rates low to stimulate growth in the economy and jobs. The market relief underscores how much other economies depend on aggressive monetary intervention by the United States.

In concerted efforts to fight the financial crisis in 2008, all advanced economies pushed monetary stimulus by lowering interest rates, and when rates could not go lower, central banks printed money and bought bonds to supply ample liquidity to financial institutions.

The quantitative easing was absolutely essential, especially in the early stages. The United States was confronting the worst-ever crisis since the Great Depression. But when the emergency actions continued for five years, the policy generated various ill effects.

First of all, an era of ultra-loose liquidity inflated financial assets because money continued to be pumped out even as the economy did not pick up speed. The Standard & Poor’s 500 Index in March 2013 surpassed its previous peak in 2007, but American individual incomes have not improved on 2007’s levels. Considering the asset bubbles in 2007, present stock levels cannot be deemed normal. But the benchmark index kept on climbing, gaining more than 20 percent since last year. Over the past year, per capita income rose just 1 percent.

The extraordinary stimulus stretched beyond advanced markets. Easy capital sloshed into the so-called emerging markets of Korea, China, India, Brazil, South Africa, Turkey, Chile, Columbia and Indonesia in pursuit of higher returns. Much of that trading was speculative, adding volatility to stock markets and currencies in these countries. Even the International Monetary Fund, which is vehemently against state intervention in financial markets, advised some of the emerging markets to rein in their capital markets.

Worst of all, the quantitative easing slowed down or diverted attention from much-needed reforms in the financial regulatory system. During the early stage of the financial crisis in 2008, everyone begged for tougher supervision and control over banks, credit rating agencies, derivatives and overall financial trade. But after the stimulus kicked in to help ease financial instabilities and aid the economy, that early resolve died away and financial reforms fizzled out.

The 2008 global financial crisis underscored the imperfections and follies of the neo-liberalist capitalism that champions the liberalization, free trade, opening up, privatization and deregulation that dominated the global economy for over three decades. Now the global economy has been prescribed a strict diet and more austere lifestyle after developing a serious illness demanding a major operation. It recovered through an entirely new and experimental treatment called quantitative easing. The economy believes it has fully recovered and returned to its old bad habits.

The enormous bubbles created by the stimulus over the last five years should not be allowed to burst. But the phasing out should be accompanied by reforms or stronger financial regulations. Otherwise the world will never be entirely safe from another financial malaise.

Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, Feb. 13. Page 35

*The author is a professor of economics at the University of Cambridge.

By Chang Ha-joon
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