Apologies are becoming increasingly common
these days. From the ubiquitous “Twitter
apologies” of celebrities to the mea culpas of scandalized politicians, the
public has become used to hearing them on a daily basis. It came as a surprise, however, when a former
Federal Reserve official apologized for the part he played in the ultra-loose
monetary policy known as QE.
“Confessions of a Quantitative Easer,” the Wall Street Journal published the public apology by former Fed official
Andrew Huszar. The gist of the piece can
be summarized in Huszar’s words: “We went on a bond-buying spree that was
supposed to help Main Street. Instead,
it was a feast for Wall Street.”
Huszar claims responsibility for executing the bond-buying experiment known
as quantitative easing. Despite his prior
knowledge that the Fed’s independence from Wall Street was eroding, an
observation that caused him to walk away from a previous Fed job, Huszar heeded
a call to return in order to oversee the Fed’s mortgage purchases. He described it as a “dream job.”
After the first round of QE ended in early 2010, Huszar summarized the final
results in these words: “While there
had been only trivial relief for Main Street, the U.S. central bank's bond
purchases had been an absolute coup for Wall Street. The banks hadn't just
benefited from the lower cost of making loans. They'd also enjoyed huge capital
gains on the rising values of their securities holdings and fat commissions
from brokering most of the Fed's QE transactions. Wall Street had experienced
its most profitable year ever in 2009, and 2010 was starting off in
much the same way.”
He freely admits that the Fed should have
stopped QE after the first round, acknowledging that the “flash crash” in May
2010 prompted the Fed to continue with its QE experiment. The relationship between Wall Street and the
central bank was becoming more and more entrenched and it was simply too late
to turn back, according to Huszar. This
is when he decided to return to the private sector, claiming he had been “demoralized”
by the failure of QE to lift the economy.
Nearly four years later the large financial
market intervention in world history has cost $4 trillion and still hasn’t
resulted in the predicted boost for Main Street. Wall Street by contrast continues to enjoy the
liquidity bonanza, with stocks consistently making new highs on a monthly
basis. Pimco’s CEO Mohammed El Erian
suggests that for its efforts the Fed may have received a return of only 0.25%
of GDP in return for the $4 trillion spent.
Commenting on this, Huszar concedes that “QE isn’t really working.”
Huszar concluding statement is candid: “As
for the rest of America, good luck. Because QE was relentlessly pumping money
into the financial markets during the past five years, it killed the urgency
for Washington to confront a real crisis: that of a structurally
unsound U.S. economy.”
Now compare Huszar’s frank admission with the
latest words from Janet
Yellen, the heir-apparent to chair the Federal Reserve next year. On Wednesday she stated that the Fed still
has “more work to do” to stimulate the economy.
That of course was all Wall Street needed to hear in order to boost
participant’s morale and push stock prices higher. The S&P 500 Index (SPX) ended the session
by closing at a new all-time high.
“I believe that supporting the recovery today is
the surest path to returning to a more normal approach to monetary policy,”
said Yellen. These remarks led traders
to believe that the Fed would continue its ultra-loose monetary policy well
into 2014, which is extremely desirable to Wall Street. This underscores that the Fed is committed to
pursuing a continued aggressively loose monetary policy indefinitely. Traders need not fear any attempts at “tapering”
QE, either next month or in the next few months. It will take considerably more “evidence”
before the Fed is ready to scale back its asset purchases next year.
The bigger issue in Huszar’s confession is the
failed relationship between the stock market and the economy. Prior to the credit crisis it was widely
assumed that the connection between equity market strength and domestic
economic performance was relatively tight.
That relationship is now being questioned after the last five years of continued
stimulus with little results for Main Street despite Wall Street’s record
performance. This isn’t to say the
relationship is forever broken, only that the lesson from the Great Depression
years is being repeated, viz. when the deflationary long-term cycles are down,
stocks and the economy typically move at difference paces.
