Why do you think QE didn’t work?


“Aren’t there any Republicans left who can ask a useful question?

Maybe you have heard a line that goes something like this: The weak recovery is proof that the Federal Reserve’s program of asset purchases, otherwise known as quantitative easement, doesn’t work…If you were the one saying those words, you don’t understand the counterfactual.

That is the only conclusion I can draw from this common criticism of the Fed’s policies of zero interest rates and QE.

This flawed analytical paradigm has many manifestations, and not just in the investing world. They all rely on the same equation: If you do X, and there is no measurable change, X is therefore ineffective.

The problem with this “non-result result” is what would have occurred otherwise. Might “no change” be an improvement from what otherwise would have happened? No change, last time I checked, is better than a free-fall.

If you are testing a new medication to reduce tumors, you want to see what happened to the group that didn’t get the test therapy. Maybe this control group experienced rapid tumor growth. Hence, a result where there is no increase in tumor mass in the group receiving the therapy would be considered a very positive outcome…

We run into the same issue with QE. In the absence of a functional Congress or an adequate post-recession stimulus program, the Fed is the only game in town. Neither you nor I truly know what the impact of QE has been. Without that control group, we simply don’t know. I have my suspicions, you have yours. But neither of us truly knows…

The counterfactual seems to get loss in most discussions of QE. Those engaged in the debate — either ignorantly or disingenuously — make claims such as “Look how few jobs have been created, and look how high unemployment is.”

But because there is no control group, the right question to ask is “How many fewer jobs would have been created? How much higher would unemployment be?”

RTFA to examine the question in more detail. Lots of folks don’t know much about modern economics. Times I feel the number who have no appreciation of logic in the world of material reality is even larger.

Barry Ritholtz is one of my favorite financial analysts. He has a habit counter to American pop culture of relying on historic fact. Sometimes, even [gasp] mathematics.

He describes himself as a Recovering Republican.

2 thoughts on “Why do you think QE didn’t work?

  1. Joseph E Rathjen says:

    I think if you have a problem, being a brain tumor or a stagnating economy, offering or testing no solution at all is worse than criticizing the results of one. On the other hand, you can monitor an unruptured, aneurysm until it reaches close to the bursting point, but how far do you go before surgery?

    I think a lot of what is happening in America today, not only in the financial world, but also in the social and cultural aspects, is giving much credence to the theory that “Hope and change” is not something to be toyed around with haphazardly.

    The person who criticizes a result is no different than the person who offers none and is happy to leave things as they are (usually because it suits them.) Both of them are simply “fence-sitting.”

    I don’t know what the answer is, but hopefully, one day, we can all find common ground, or dare I say, that magic formula that works for both sides.

  2. Pox says:

    July 10, 2011: “On Fox News Sunday Senate Minority Leader Mitch McConnell (R-KY) maintained that the Republicans’ number one goal remains the defeat of President Obama in 2012. In an interview with Bret Baier of Fox News, McConnell was asked about a charge made by Democrats that the Republicans are purposefully sabotaging the economy for political gain in 2012. McConnell at first seemed to admit the charge, saying “Well that’s true” before going on to claim that Republicans want to fix the economy first.
    Democrats have long accused Republicans of seeking political gains over the good of the country. As evidence they point to McConnell’s quote from October 2010 in which he said,
    “The single most important thing we want to achieve is for President Obama to be a one-term president.”
    McConnell did not back down from those remarks when given an opportunity to do so this Sunday, but did attempt to differentiate between the “political” goal of Republicans and other, broader goals. Republicans argue that they can still work to defeat President Obama while trying to also improve the country, and that, in fact, the two goals may be entirely consistent.”
    http://www.examiner.com/article/mitch-mcconnell-r-ky-maintains-gop-s-priority-is-defeating-obama-2012

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