In the third installment of Chris' and my interview with Nobel economist Joseph Stiglitz in Paris this past Sunday, Stiglitz discusses (and explains) the Fed policy of quantitative easing.
[Previous installments:
* Stiglitz: Probabilities of a double dip recession "certainly have increased significantly"
* Stiglitz: Obama administration and Fed have demonstrated an "inability to make economic judgements".]
Stiglitz: "Monetary policy will not get us out of the mess, and all this discussion about monetary policy is a distraction.... The Fed is very good at creating problems, not so good at resolving them. QE3 won't help."
Stiglitz goes on to explain why quantitative easing didn't work (and I paraphrase what you'll see in the video below):
1. QE didn't lead to more lending, partly because we haven't fixed the banking system.
2. Lower interest rates typically do not have much effect on investment in an environment like the one we're in right now.
3. Slightly lower interest rates on bonds might have encouraged speculation in the stock market, driven up stock prices, which might induce people to consume more. But since it was pre-announced that the intervention would just be temporary, why would people go out and consume based on a knowingly volatile stock market? Only the foolish would have gone out and consumed based on a temporary boost in stock prices.
4. Competitive devaluation might have had some effect, namely lower interest rates leads to a lower US exchange rate, helping US competitiveness. Fed would never admit that this was the goal, but that was probably the only effect that was significant. But other countries responded in ways that limited the size of the positive impact. And benefits over medium term are probably negative.
5. All of this might pose the risk of higher prices back in the US - and what does the Fed do if growth remains low but inflation rises?
