Quantitative easing (QE) and monetary policy don’t truly work except in the limited context of a placebo effect. Sophisticated business managers and investors plan around avoiding being manipulated by these activities, thus these manipulations don’t work. The ones who are unaware of the manipulation are the naïve working people who leapt to the conclusion they should buy a car or a house using low rate loans. Now look what happened where it was reported that the number of people with a 90 day delinquency on their car credit loans is the highest ever. If the economy is so good then why such a high default rate?
The asymmetric nature of QE is that it does worse damage to the consumer confidence of those hurt by deflation (retirees living on bond interest), than the benefits received by those who are borrowers. When rates drop borrowers still have to pay amortization of principal, property tax, insurance, etc. As the interest rate drops the proportion of principal repayment on a mortgage increases so that the drop in rates is not a linear reduction in the total monthly payment of principal and interest. Thus a drop in rates may induce X number of people to buy a home but it could also induce 1.3 X retirees to panic and feel starved of yield and result in them reducing consumption and reducing their consumer confidence. People react to fear of loss and bad memories with greater intensity than they do to memories of positive outcomes, thus the damage done to savers is greater than the increase in consumption by borrowers. People who own bonds are not merely retirees but also prudent people of working age who seek to diversify or to get ready for retirement, thus driving them out of bonds and into high risk junk bonds, etc. hurts them and may encourage them to adapt a deflationary panic mindset (where they decide the only way to prepare for retirement is to reduce consumption and save more – thus creating a deflationary downward spiral.)
The act of the Federal Reserve to buy bonds in the QE program resulted in them buying bonds held by banks where the cash received was deposited by the banks at the Federal Reserve so as to meet reserve requirement rules. Thus the QE funds printed up by the Fed to do QE were stored inside the Fed after the bonds were purchased (they were stored in the Fed in the form of reserve requirement deposits) and thus didn’t do anything!!! They were a placebo!
The QE actually raised rates when the programs were in place and when they ended rates came down. This can only be explained by fear that QE would cause inflation, thus the end of QE caused bond markets to relax. Some experts claim QE lowered rates by 0.5%; Bernanke says it was lowered by 0.85%. But the Lehman Agg bond index yield used to be around 5.875% before the 2008 crash, now it is 3.0%. Why is it 2.875% lower, even though QE made rates drop 0.5%? The reason is because the global economy is fundamentally worse than in previous eras, with a significant probability that both the EU and China fall into a Japan-style soft deflation and negative yield era. QE certainly failed in Japan and in the EU.
QE offered people near the top 10% of society some partial component of opportunities to borrow and invest. But simply creating a new asset bubble wasn’t enough to motivate these intelligent, high achiever status people to leap to conclusions and engage in development of job creating expanded business facilities, etc. The people in the top 10% hold careers that are in demand and lucrative, so they weren’t hurt by the Lehman crash of 2008 that much and thus QE alone wasn’t why the economy rebounded. Much of the story of personal economic loss and recovery since 2008 was that of moderate income blue collar workers. If they own the average house worth $240,000 with a $200,000 mortgage and QE cut the rate 0.5% they saved $1,000 a year or $750 after tax, a savings of $2 a day. Why would anyone get excited about saving $2 a day? QE certainly didn’t really help those at the bottom 90% of society who can’t afford to buy significant stock and bond investments.
The point is that since QE is a near worthless placebo, and this time in the next crash the placebo won’t work because people found out its fake, thus recovering from the next crash will be harder. Thus stock investors must realize they are sitting on top of a contingent risk of a significant crash from which they may not get a working, effective bailout next time. Bernanke said QE works in practice but it doesn’t work in theory. Well, in the next crash it may not “work” in practice, in a world full of burned out cynics who feel central bank zero rate policy doesn’t work.
Investors need independent financial advice about the risks of QE.