Bernanke Knew Back in 1988 that Quantitative Easing Doesn't Work → Washingtons Blog
Bernanke Knew Back in 1988 that Quantitative Easing Doesn't Work - Washingtons Blog

Friday, October 1, 2010

Bernanke Knew Back in 1988 that Quantitative Easing Doesn't Work

Ed Yardley notes:

Two economists, Seth B. Carpenter and Selva Demiralp, recently posted a discussion paper on the Federal Reserve Board's website, titled "Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist?" [Here's the link.]

[The study states:] "In the absence of a multiplier, open market operations, which simply change reserve balances, do not directly affect lending behavior at the aggregate level. Put differently, if the quantity of reserves is relevant for the transmission of monetary policy, a different mechanism must be found. The argument against the textbook money multiplier is not new. For example, Bernanke and Blinder (1988) and Kashyap and Stein (1995) note that the bank lending channel is not operative if banks have access to external sources of funding. The appendix illustrates these relationships with a simple model. This paper provides institutional and empirical evidence that the money multiplier and the associated narrow bank lending channel are not relevant for analyzing the United States."

Did you catch that? Bernanke knew back in 1988 that quantitative easing doesn't work. Yet, in recent years, he has been one of the biggest proponents of the notion that if all else fails to revive economic growth and avert deflation, QE will work.

Yardley is right. But he's only got half the story.

On a deeper level - as I pointed out in some detail in March - the Fed is intentionally locking up "excess bank reserves" so that they will not be loaned out into the economy. Specifically, in an ill-conceived attempt to prevent inflation, the Fed has been paying sufficiently high rates of interest on reserves deposited at the Fed by the big banks to encourage banks to lock up their reserves at the Fed instead of lending that money out to borrowers who need it.

So on this level, all the quantitative easing in the world won't increase lending, because the banks will just continue to stockpile their money.

(On the deepest level, banks actually create credit out of thin air. See this, this and this. In other words, the commonly-accepted process for money creation is false, and banks don't need any reserves to create credit).

Indeed, multiple lines of evidence demonstrate that quantitative easing helps the biggest companies, but not the little guy or the American economy as a whole.


  1. In effect, the fed writes itself a blank check, uses that check as income collateral to purchase treasury bonds, lends out the 'money' from the bonds at a higher rate of interest, then uses that as income collateral to purchase more bonds.

    You know, if I were to do this, I'd likely be compared to Madoff, if I were lucky, and doing it at this scale?

    It breaks my imagination.

  2. Economics is science.

    Bernanke is a scientist.

    Bernanke has simply changed his mind about what is important to his science. In so doing, Bernanke is using the common-puffery-and-chicanery made ethically possible and even completely necessary -by his belief in his science.

    Bernanke remains in the stream, and indeed at the headwaters of the stream -of the science of economics.

    So this begs the question -what IS science?

    "Debunking The Scientific Process - An Introduction to Monism and Categorical Knowledge"

    "Science is NOT logical."

  3. “It's no wonder that truth is stranger than fiction. Fiction has to make sense.”
    Mark Twain

  4. Don said: “Economics is Science”

    Your opening premise is wrong; Economics is a Philosophy of allocation and distribution of resource. That is why there are many different economic models.

    The difference between Adam Smith’s “Free Market” and Keynes’s “Free Market” is a good example.

    The foundation of Science is Logic.

  5. "Your opening premise is wrong; Economics is a Philosophy of allocation and distribution of resource. [...]"

    That's some pretty brilliant stuff. Tell Bernanke he's a philosopher, a philosopher-fed-chairman. LOL

    Economists consider themselves scientists, the lay formulas, and equations, -deductions based on scientific trial and error. No self-respecting philosopher would claim an economist.

    If economists have a political or social bent, they base those ideologies on a scientific and personal ethical understanding leading to their own personal choice, not on anyone's philosophy.

    There is something called the "political science", and the "social science". And there is also something called the "science of economics".

    Regardless, Windcatcher is but a silly child.

    Here is a quote from the anonymous "Windcatcher" from another site.

    "Ha. Ha. What an ignorant, uneducated FOOL!! Ha. Ha."

    -the eighth comment.

    The commenter Windcatcher, is a better judge of reality than even a god could be. He makes up his mind, and like an Eighteenth Century thinker, when he knows he's right, that's all the reasoning and proof required.

    Windcatcher degrades everything he touches -if he doesn't like it, or, if it upsets his small mind.

    -BUT Windcatcher is just dying to impress everyone with the notion he's a scientific genius of some sort, -and- a literal superhuman-genius-gift-to-the-world, here to make the world over better than it was when he got here.

    Time is wasting, Windcatcher. Good luck!

  6. Help me understand this. I can see how the Fed creates money by keystroke. This is the modern equivalent of printing money on a printing press.

    But we still use paper money. So when I take out a loan from the B of A to buy a home from Joe Schmoe, and write a check to Mr. Schmoe based upon my new bank balance, Mr. Schmoe deposits this check into his Wells Fargo account and I have purchased his home.

    If Mr. Schmoe wants to withdraw all of this money as cash, paper dollars, what does Wells Fargo do? Do they say, well sorry Mr. Schmoe, but the armored car from the B of A has not yet shown up to transfer the money from my account to Mr. Schmoe's and so Mr. Schmoe cannot wirthdraw the money? Or do they pay him? And if they pay him, does physical cash dollars ever get transferred from the B of A to Wells Fargo?

    The alternative explanation, I suppose, is that Wells Fargo accepts B of A's digital credits, because they are also lending money to folks who deposit their digital creditsw into the B of A, and so that we have cancelling obligations between the two banks. Is that how it works?

    I'd really like to understand this, thanks.

  7. Blurtman-

    Your assumption is only faulty in believing the banks have been writing loans for someone's house that might be for sale.

    The banks -all of them- are generally ONLY financing houses THEY have for sale, not yours or mine. Why would they do that?

    This trend began in about 2003-2004. It spelled-out plainly the coming housing-crash debacle, as homeowners who had free-and-clear residential real estate were sending buyers to a bank to get financing, -only to lose the deal and watch helplessly as those buyers got switched by a financing deal -on a bank-owned property.

    Residential real estate is no longer about the property. Residential real estate is ALL about the financing package the housing-consumer is being sold. (You can live HERE for so-much-a-month.)

    Prices plummeted at that point, because the financing packages being sold to the consumer were utterly rapacious. (So-much-a-month is more-literally hand-to-mouth debt-slavery.)

    Credit causes inflation by creating an excess of non-existent demand. That demand proved a mirage when the economy tanked due to failing collateralized-finance-package-results.

    In the mean time and since the bailouts -the whole residential real estate market has been transformed into a marketplace in which financing packages are sold to the consumer, not housing.

    The credit economy is part and parcel of the so-called New World Order everyone keeps wailing about. People who talk about the NWO just don't recognize it for what it is.

    The NWO -just like the OWO- will be a hodgepodge of swindles-that-work for a while, when upon their-failure, they will receive government mandates, -like auto and now health insurances.

    Today everyone is force-fed the grid and axis of their perception of reality via the Internet.

    When I was a kid, we were all being force-fed the grid and axis of our perception through (the then new) FM radio.

    In both cases, none of it is worth the bandaids and bubble gum that held it together.

    Life is too short -too precious.

    The only way to fight back is to resurrect the barbarian within, and wreck the place.

    And the sooner the better. The stench alone is becoming lethal. People are becoming anxious and obnoxious.

    In the last week I've been called a bigot and a moron for writing that this isn't working out as it was thought to have been planned.

    This comes mostly from people who have never read a book in their life. They are trendy and get all their information from the Internet today.

    The truth is, one has to read well-dated books to recognize trends. Without that view, the mind floats in today's river -unaware of the downstream movement.

    Beware the falls.

    The truth is, there is no plan. For consciousnesses working out a plan, there's you, me and that other guy over there who won't leave the girls alone.

    The social psyche is a complete myth, fabricated by those who would claim to speak with its authority.

    When people are sure about something, -anything- that's when to watch-out. You do not die from the tide coming in. You die from the stampede of people trying to escape the tide coming in.

  8. Don: That is quite a herculean task you and the other paid propagandist have taken on to debunk “Science”; especially when you think that you can do it in one short article with no citations and not one shred of evidence. Ha. Ha. Like Beck, you must think you are a genius of propaganda. Ha. Ha.

    There is ample and documented evidence that BP and the Banksters have spent millions to hire goons like you and also to falsify “Science” evidence concerning global warming and the use of Corexit on oil spills.

    The World Banksters are not only engaged in a American Class War but a War on Science as well.

    My favorite mean propaganda is planet X and the 2012 dooms day, in reality, it is not the Earth that will be destroyed, just our economy, Democracy, Independence and Freedom. Ha. Ha. So sad that there has been so many uneducated people who have committed suicide because they believed the propaganda to be the truth!

    Don, every time you open your uneducated pie hole, you expose yourself, your words are the window to your soul. Ha. Ha.


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