April 24, 2011
This is one of the things that readers of an article discussing the impact of the Fed’s quantitative easing policy might conclude. The article indicates that the second round of quantitative easing (QE2) has had little effect in boosting economic growth.
While this is likely true — it had a limited effect in keeping interest rates at already low levels — the policy of quantitative easing has had a substantial impact on the deficit. As a result of the fact that the Fed holds a large amount of assets, interest that otherwise would have been paid out to the general public is instead paid to the Fed. This money is then refunded to the Treasury.
Last year the Treasury refunded almost $80 billion to the Treasury, an amount that is approximately twice the size of the deficit reduction in the agreement reached earlier this month between President Obama and Congress on a continuing resolution. If the Fed were to continue to hold around $3 trillion in assets it would reduce the deficit by close to $1.5 trillion over the course of the next decade. (It can offset the inflationary impact of the increased reserves in the financial system by raising reserve requirements.) Given the obsession of the media with the budget deficit, it is remarkable that the NYT did not mention this implication of quantitative easing.
This article also wrongly referred to the downturn as a financial crisis. The main reason why the economy is suffering from high unemployment and weak growth is the collapse of the housing bubble. Large firms can now borrow money in financial markets at historically low real interest rates. Few small firms cite credit availability as a major problem in their business. It is difficult to see how the economy would be any different right now if the financial crisis had not occurred.
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