Did Bernanke have an alternative to QE?

January 29, 2014 07:01 AM

Alasdair Macleod provides an interesting analysis of the current money supply situation in a recent post titled, “The Fed doesn’t seem worried about inflation, but should you be?”

In it he raises concerns over the growth of money supply and its potential impact on inflation as illustrated by the U.S. dollar Fiat Money Quantity (FMQ) measure. The FMQ measure had grown to $12.48 trillion by December, $5.05 trillion more than if it had grown in line with the established average monthly growth rate from 1960 to the month before the Lehman Crisis.

It is an interesting analysis but it begs the question, “so what?”

Most of us in the West know, or should know, that all things being equal it is best for the Federal Reserve not to intervene in the economy. We prefer market forces to work. But of course all things are not equal and they couldn’t get any further from normal than during the credit crisis that hit its apex in September 2008 with the Lehman Brothers failure.

Many knowledgeable economists says that we faced a second, “Great Depression.”

I get a little frustrated with some analysis that criticize the Federal Reserve for its extraordinary policy interventions when viewed outside the context of what was occurring. As if Ben Bernanke did all this on a whim or some flight of fancy.

Gold Guru Jim Sinclair put it quite simple in a May 2012 interview with Futures: “Anybody who says that Bernanke or the U.S. Fed acted ineptly is not a practical person. They did what they had to do. If they had not performed as they did and as they are right now, circumstances would not be tolerable. … The whole thesis of that alternative is you do save business, and business turns. And because of the positive nature of the underlying business having turned, the liquidity can be drained practically without stopping the forward progression.”

When asked how bad the situation was, Sinclair responded: “It was dire beyond your wildest imagination. The recovery they made from that dire moment at the insolvency of Lehman is an accomplishment few people recognize. It would have been worse than [the Great Depression]; $1.144 quadrillion according to BIS in unfunded liabilities. Skeleton contracts floating around the earth. The reason we haven’t had a significant recovery is budget deficit restrictions forbidding the use of fiscal stimulation. You had Roosevelt go out and build roads, build trails, build [dams]. He did everything he knew to put a chicken in every pot. We have done nothing on that side because we can’t afford to, our deficit is too big. So all that could be done is what Bernanke did. His tool box you could have put in your vest pocket. It is called quantitative easing--there is no other tool.”

The old saying goes, ‘those who cannot remember the past are condemned to repeat it.’

Yet usually it takes decades for our memories of tumultuous events to fade. For example, it wasn’t until 1998 that Congress repealed the Glass-Steagall Act, a depression era reform of banking practices. It was old and no longer needed and we were so much smarter and more sophisticated now.

Perhaps it is understandable that after nearly 70 years we would get complacent but it is more disturbing that today we have softened on some needed reforms and argue over Fed policy in response to the credit crises of just a few years ago. We shouldn’t forget how serious the situation was just a few years ago.

Of course the problem with averting a catastrophe is, after a while, people say ‘what was the big deal?’

It is true that the bill for all the extraordinary policies employed to keep the economy moving—albeit it slowly—has not fully come due and will eventually have to be paid.  The Fed will need to drain the excess liquidity but the fact that it has taken so long for the economy to recover to a point that we can begin the process of draining excess liquidity is more a testament to how serious the situation was than an argument against that policy. As Sinclair said, “Bernanke had no other choice.”

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.