Quantitative easing

Obviously, the crash of 2008 constitutes a moment of rupture for economic policy and for so many other areas of life in the Western and global economies.

What challenges did that crash, the great financial crisis across the world, pose to the way that central banks had been functioning before it? And what were the social consequences of the policy of QE that was adopted in the leading capitalist economies?

So...

Before the GFC, this ideology of central bank independence and the idea of the great moderation, they enjoyed a great deal of legitimacy.

What is the signal? The signal is that we are going to intervene in the bond and the and the currency markets to keep them stable that's that's the signal that they're sending you know he did that at what i think it hit 5.31 was the level i don't know if that's necessarily the red line he didn't say that was the red line it was just this is the signal like we're gonna we're gonna participate in this to do what to suppress yields and provide liquidity

yeah and that's why it's interesting because people were sort of wrongfully defining what he said as either yield curve control or QE.

And I get that it can be those things by a different name, but it's neither.

Because it would only be yield curve control if he had said 5.3% is our pain point and we're buying everything we need to buy to stop from going above that level, right? That's Japan.

Right.

And QE is the Fed.

Right.

So he made it very clear.

It's different in terms of the transmission mechanisms of liquidity.

Liquidity is flowing through, you know, it's a treasury driven liquidity cycle and they've allowed the banks to once again participate and grow credit where they haven't, you know, where they didn't in the QE era.

The QE era was great for asset prices, wasn't good for economic growth.

were constrained the you know post gfc liquidity requirements and constraints really didn't allow the banks to get too involved in credit creation we had very low economic growth that's all changed um so that's changed the dynamics it's driven the ai's um capex build out it's driven corporate earnings uh it's driven the technology boom um and so that's changed where capital flows and bitcoin doesn't have a yield it doesn't have earnings So it's been different from that perspective.

And also, you know, here we are sort of in the fifth year when things should get really dicey, when things should get very, very volatile because debt has grown a lot faster than liquidity.

The Federal Reserve is supposed to stay out of it.

And so if, and that's a big if, you want to, quote unquote, mess with the markets by doing QE, by doing Operation Twist or Treasury Twist, let the politicians have it where there is political accountability.

What you don't want to have is that the Federal Reserve does these things to draw political attention.

And that is the Walsh Fed, if I read it correctly, the Walsh Fed wants to get out of QE.

They want to get out of paying interest on reserves.

They want to get out of buying mortgage-backed securities even.

There's definitely...

Again, we could come back to Besson, you know, 6 billion in buybacks, every auction seems like a lot, but you know, during COVID we were spending, what was it? 50 billion a month alone on QE.

Uh, we expanded the balance sheet of the fed by 3 trillion in like eight months.

Like, you know, inflation came, but we somehow got through that.

So there is a liquidity effect in that you're taking long bonds that are currently sitting on the Fed's balance sheet and you're putting them back into open circulation.

On the other hand, to the extent that you signal that you are not going to monetize future debt and you reassure markets that you are an inflation hawk and that you are going to not engage in a further round of QE, I'm not sure that those two don't offset each other.

Exactly.

John Carney, you have a

thought on that? Yeah, I think that's absolutely right.

One of the ways we think QE might have worked if it worked at all was by signaling that the Fed was going to stay loose for longer.

If you start to do reverse QE, which is accelerating, bringing down the balance sheet, that should actually send the opposite signal to the market, which is that we are actually going to be very hawkish on inflation, and that should bring down all of the rates,

frankly.

So there is a liquidity effect in that you're taking long bonds that are currently sitting on the Fed's balance sheet and you're putting them back into open circulation.

On the other hand, to the extent that you signal that you are not going to monetize future debt and you reassure markets that you are an inflation hawk and that you are going to not engage in a further round of QE, I'm not sure that those two don't offset each other.

Exactly.

John Carney, you have a thought

on that? Yeah, I think that's absolutely right.

One of the ways we think QE might have worked if it worked at all was by signaling that the Fed was going to stay loose for longer.

If you start to do reverse QE, which is accelerating the bringing down the balance sheet, that should actually send the opposite signal to the market, which is that we are actually going to be very hawkish on inflation.

And that should bring down actually should bring down all of the rates, frankly.

The Federal Reserve is supposed to stay out of it.

And so if, and that's a big if, you want to, quote unquote, mess with the markets by doing QE, by doing Operation Twist or Treasury Twist, let the politicians have it where there is political accountability.

What you don't want to have is that the Federal Reserve does these things to draw political attention.

And that is the Walsh Fed, if I read it correctly, the Walsh Fed wants to get out of QE.

They want to get out of paying interest on reserves.

They want to get out of buying mortgage-backed securities even.

And so it seems like rates are set to realize their target.

And then the other thing that I think you and I have talked about is why did Kevin leave the Fed in the first place? It was because of quantitative easing.

The reason that we got inflation during the Biden administration was not because rates should have been a quarter point higher.

They should have been higher, like the Fed was way late in raising rates.