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Interesting to see an article that recognises the role QE has played in driving inequality and disrupting political landscapes, but I wonder why Mr Lanchester doesn't consider the alternative policies that could have been enacted. i.e. if governments had focussed on spending money into the real economy instead, through infrastructure spending and real nation building projects - creating jobs, real (not paper) wealth and the platform for further economic growth - rather than spending funny money into existence supporting markets that blow up prices without any real addition of value.

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> if governments had focussed on spending money into the real economy instead, through infrastructure spending and real nation building projects

The Federal Reserve is an independent agency. It repeatedly implored Congress to increase fiscal spending. That didn’t happen, so monetary policy had to attempt to compensate.

> creating jobs

At least in America, we did a good job of this. Ben Bernanke navigated us away from an alternate history in which the GFC was a second Great Depression. In New York, the Hudson Yards are coming up as one of the biggest public works project since the Great Depression. Things could have been better, but they could easily have been a lot, lot worse without QE.

We've done a pretty bad job at bringing back jobs. Labor force participation rate has fallen, while people are retiring later. Retirement/aging doesn't even help explain the drop. Especially since the younger generation has more than replaced the older one, and the older one isn't retiring at the same historic rate.

We're not in great shape, employment wise.

https://data.bls.gov/timeseries/LNS11300000

>Labor force participation rate has fallen, while people are retiring later. Retirement/aging doesn't even help explain the drop

Retirement/aging explains the largest component of the drop.

Much of the drop was predicted decades ago by Census based solely on demographics. The single largest factor in the current drop is exactly demographics. Here [1,2,3] are FRED papers on the topic with more references.

[1] https://www.stlouisfed.org/on-the-economy/2017/january/disse... [2] https://files.stlouisfed.org/files/htdocs/publications/revie...

[3] https://www.stlouisfed.org/publications/regional-economist/o...

> We're not in great shape, employment wise

Almost everyone who wants a job has one. And real wages have been rising for a decade. That’s pretty good shape.

Labour force participation is a complicated question deeply intertwined with the opioid crisis, increased rates of college attendance, the mis-use of federal disability insurance and other factors. Quoting labour participation without reference to demographic shifts creating more retirees, moreover, mischaracterises the statistic. Demographically, there is no world in which 2018 LFP would have been higher than 2008.

Does your analysis account for quality of jobs available? I know a lot of overeducated/underemployed 30-40 year olds here in the Midwest.

> Does your analysis account for quality of jobs available?

I was responding to a claim that the government should have focussed on "creating jobs". In that context, the employment-unemployment line seemed most significant.

Real wages have been rising for a decade, so the central tendency for employed persons is better than it used to be (or than it was pre-crisis). There is still unemployment, particularly among the undereducated [1]. But from an average worker's perspective, it's one of the best economies we've seen in years.

[1] https://www.bls.gov/cps/cpsaat07.pdf

Have wages - cost of the same housing - cost of the same healthcare been rising?

From the worker's perspective, what you get paid is only half the story.

This part of what you say is true:

"It repeatedly implored Congress to increase fiscal spending. That didn’t happen, so monetary policy had to attempt to compensate."

This part is not true:

"At least in America, we did a good job of this."

High unemployment should have been brought down in 2009 but instead did not come down till 2013. Labor force participation remains suppressed. Wages for men have been in decline for most of the period since 1973, and that only includes their monetary wages -- if you consider the decline in what's covered by health insurance, then the situation is even worse.

The situation since 1973 has been bad, and the situation since 2000 has been awful, and the USA has yet to show the political regeneration that will be necessary to turn this situation around and resume the broad based prosperity that the USA enjoyed during the mid-20th century.

> High unemployment should have been brought down in 2009 but instead did not come down till 2013

That doesn't match any graph I've seen. The unemployment rate shot up in 2008 and continued in early 2009, but from that point forward, it was a pretty regular, almost linear drop in the unemployment rate to today. Nothing special happened in 2013.

https://www.statista.com/chart/8974/us-unemployment-rate/

They could have been worse, but QE could have been constructed very differently to move funds to people first while still bailing out the banks. e.g. you get xx% of fed money on a mutual required refinance at a now lower principal. The bank gets some money, people keep the property with still loan, but now a much smaller payment & principal. It would have spent/printed a similar amount of money, but left a lot more wealth in the hands of people. Instead the QE program resulted in more mortgage defaults while transferring down pmts & other equity from people to the financial system.

> the Hudson Yards are coming up as the biggest public works project since the Great Depression

It'd be impressive if a development project in NYC ends up costing more than the interstate highway system.

Ben Bernanke was responsible for the financial crisis of 2008. He was part of the group of people that wilfully and knowingly created the conditions for the crisis to erupt, becoming handsomely rich in the process. The suffering of billions of people is on his hands and those of similar ilk.

> people that wilfully and knowingly created the conditions for the crisis

This is unnecessarily conspiratorial. Particularly given the proximate causes of the crisis erupted from domains over which the Federal Reserve had pretty much zero pre-crisis oversight (broker-dealers and insurers).

Did Greenspan's policies throw fuel on the fire? Yes. Was that done to create a crisis? No.

I think a legitimate question is whether there was political motivation to inflate W's economy, and whether he should have known the consequences.

From wikipedia (and Barrons):

His dissertation is not available from the university[17] since it was removed at Greenspan's request in 1987, when he became Chairman of the Federal Reserve Board. In April 2008, however, Barron's obtained a copy and notes that it includes "a discussion of soaring housing prices and their effect on consumer spending; it even anticipates a bursting housing bubble".[18]

2002:

> To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

https://www.nytimes.com/2002/08/02/opinion/dubya-s-double-di...

The funny money goes on the central bank balance sheet and not onto the national debt. Therefore the national debt interest cost remains constant, therefore taxation isn't pushed up. In addition government is not well placed to make the investment decisions required; the hope was/is that bank lending would effectively make these decisions by keeping businesses open and facilitating new projects organically.

If the FED is a USA government institution and new money was created by that institution:

why the money doesn't add to the national debt and doesn't change its cost?

> If the FED is a USA government institution and new money was created by that institution

The Federal Reserve is a quasi public-private institution. It has a separate balance sheet from the U.S. government. Central bank liabilities are money--a dollar bill is a Federal Reserve Note and a dollar in a bank's reserve account is wirable cash.

National debt is debt accrued by politicians to pay for goods and services. Adding the money supply to the national debt would produce a meaningless number, so we don't do it.

Wait, then what is the debt measured in?

I get the difference between "money" and value, but if you magic money into existence, you've caused inflation of your currency, increasing the amount of currency it would take to add up to the pre-magic "value" of your national debt number as measured in dollars. Therefore increasing it by definition.

Just saying it's meaningless sounds a bit disingenuous unless I'm missing something.

I smell a rat.

It's counterintuitive, but inflation is a good thing. It incentivizes people to invest their money into the economy in businesses and government projects (bonds) instead of hoarding away their money in a bank account.

Unfortunately how our economy works is a highly complex topic, so for most people the gut reaction is "hrmmm, that doesn't make sense at first glance to me, so it must be wrong." Thankfully, average Joe American doesn't even know the Federal Reserve exists, so the FED is able to operate with a level of sanity found no where else in government.

The fact is, the FED is one of the only institutions we have that actually works because it is largely managed by subject-matter academics and not politicians, most of whom are lawyers/pastors/TV stars and war heroes...a group generally dificient in their understanding of modern economic theory.

Do central banks make mistakes? Of course. Japan is a great example. But a quick look at history shows the world is better off with them than without.

"It's counterintuitive, but inflation is a good thing."

Inflation is neither bad nor good - it has costs and it has benefits and we as a democratic society need to decide where we would like to (attempt to) set that dial.

"Thankfully, average Joe American doesn't even know the Federal Reserve exists, so the FED is able to operate ..."

The degree to which average citizens are unaware of the fed is the degree to which it can behave outside of the bounds of our democracy - and that is negative.

Further, their ignorance which you so deride does not keep them from noticing when they are getting screwed. A great many elderly folks on fixed incomes and inflation adjusted COLAs have felt just that way for a decade.

The thing that bugs me is the idea that money is best handed to someone else to do something with.

The more one blindly invests with only seeking ROI with actors maximizing around the same metric is how you generate business landscapes that would seem incredibly hostile to competition if run to their logical conclusion.

> but if you magic money into existence, you've caused inflation of your currency

No, you've increased the amount of money. That's not the same as inflation.

Let's say I've got an economy with $1000 in it. That means that my GDP adds up to $1000, by definition. (I'm ignoring velocity here.) $1 has a certain value. Now Intel turns on a new manufacturing facility, and we have an economy just like it was, except it contains a lot more state-of-the-art chips. If we stay with $1000, then each dollar is worth 1/1000 of the economy, and since the economy now contains more stuff, the value of each dollar grew. To maintain the value of each dollar at a stable amount, we need to grow the total number of dollars as the economy grows.

2008 was different. In 2008, $4 Trillion had just evaporated. The Fed injected $4 Trillion into the economy to try to stabilize things. It more or less worked.

> That means that my GDP adds up to $1000, by definition. (I'm ignoring velocity here.)

That's not the definition of GDP.

I know. I was, essentially, assuming velocity = 1 for simplicity, because velocity was tangential to the point I was trying to make.

Private banks also create money, not just the Federal Reserve. Look up fractional reserve banking. The system is implicitly inflationary.

That doesn't really detract from my point though, and there seem to be some critics of fractional reserve banking that seem to home in on the exact point I'm calling out.

Every time a currency "inflates" any values measured in that currency by definition change.

Or is that what's meant by it's meaningless, since the value is now basically what it was plus the fraction by which the money supply just grew? I.e. V=value final v=initial value F=fraction of money supply ex nihilo'd V=v+(v(1÷(F)))

Edit: I think I got that right...

>>"Adding the money supply to the national debt would produce a meaningless number, so we don't do it."

If the money created by the FED is just a meaningless number , why don't they finance the government directly and the USA would avoid to pay bond interests?

> If the money created by the FED is just a meaningless number

Money supply is not a meaningless number. The sum of money supply and the national debt is a meaningless number.

It would be like taking my checking account balance and adding it to the amount of cash JPMorgan Chase has on its balance sheet. Independently, they're meaningful figures. And one is related to the other. But the sum doesn't do anything useful.

> why don't they finance the government directly and the USA would avoid to pay bond interests?

This is called running the printing presses. Wherever it has been tried, historically, rampant inflation follows. The independence of the Fed is to ensure rate-making (and money supply) decisions, which have broader economic implications than the U.S. government's interest costs, are made apolitically. (That said, the Federal Reserve is the largest buyer of U.S. Treasuries and remits its profits to the Treasury.)

>>"This is called running the printing presses. Wherever it has been tried, historically, rampant inflation follows."

My understanding is that most of the cases of hyperinflation (Germany Weimar Republic, Zimbabwe..) were due to problems in the real economy, not to the printing of new money.

Anyway, it seems that, related to inflation, the important thing is the money that is spend in the economy in the current period, not the public debt (the money that has already been spent).

A big public debt doesn't mean inflation, as the case of Japan (or the USA) show. Public debt an inflation are two very uncorrelated variables.

@JumpCrisscross how independent are they really? The fact that they will not entertain a thorough audit is in itself instructive. Perhaps central banking is too "centralized" and susceptible to corruption even in a well-run system like the Fed (the fact that the dollar is the reserve currency and they fight inflation ruthlessly too the detriment of employment). Perhaps a p2p software system could help ;)

> they will not entertain a thorough audit

The Fed is audited by the GAO, the OIG, outside auditors, and its Board [1]. Its balance sheet is published weekly and closely scrutinized by the investing public as well as every bank.

> they fight inflation ruthlessly too the detriment of employment

The Fed has a dual mandate. Its post-crisis journey has been one of trying to stoke inflation.

[1] https://www.federalreserve.gov/faqs/about_12784.htm

You're right when I used the word I was referring to "Audit the Fed" slogan à la Bernie Sanders & Ron Paul. The bill in question that was striked down is here [0].

The bill's purpose

> ...If enacted, the bill would also have ensured that the

> audit results would be available to Congress. The audit

> would include the Fed's "discount window", its funding

> facilities, its open market operations, and its agreements with foreign bankers. [1]

[0] https://en.wikipedia.org/wiki/Federal_Reserve_Transparency_A...

[1] https://en.wikipedia.org/wiki/Federal_Reserve_Transparency_A...

> audit results would be available to Congress

This would effectively end the Fed's political independence. Agreements with foreign bankers seems acceptable, though even then it would be better to release it to a committee after a delay.

> Its post-crisis journey has been one of trying to stoke inflation.

Well, “avoid deflation” would probably be more strictly accurate.

The problem is that they're a gnat's whisker away from deflation. They want to stoke (some) inflation to give them a bit more maneuvering room.

Wasn't QE only such a big part of the strategy because relentless political opposition to more stimulus spending, especially once the Democrats lose control of the legislature?

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