When the facts change, I change my mind. What do you do? -- John Maynard Keynes

Monday, May 5, 2014

The QE Delusions of the Federal Reserve

QE delusions abound at the Federal Reserve -- the wealth effect concept is deeply flawed --

Hoisington: On the Fed and the Wealth Effect | The Big Picture: " . . . Lacy Hunt and Van Hoisington of Hoisington Investment have the temerity to point out that since the Great Recession officially ended in 2009, the Federal Open Market Committee (FOMC) has been consistently overoptimistic in its projections of US growth. They simply expected QE to be more stimulative than it has been, to the tune of about 6% over the past four years – a total of about $1 trillion that never materialized. Given that dismal track record, our authors ask why we should believe the Fed’s prediction of 2.9% real GDP growth for 2014 and 3.4% for 2015 – particularly with QE being tapered into nonexistence. A big part of the reason the Fed has been so steadily wrong, say Lacy and Van, is its overreliance on the so-called “wealth effect,” which posits that an increase in consumer wealth – through higher stock prices or home values, for instance – will lead to increased consumer spending.The wealth effect has been both a justification for quantitative easing and a root cause of consistent overly optimistic growth expectations by the FOMC. The research cited below suggests that the concept of a wealth effect is in fact deeply flawed. It is unfortunate that the FOMC has relied on this flawed concept to experiment with over $3 trillion in asset purchases and continues to use it as the basis for what we believe are overly optimistic growth expectations. The effect isn’t completely absent, say the authors, but their research suggests that it may be five to ten times weaker than the Fed assumes ...." (read more at the link above)

But of course, Goldman Sachs, and Wall Street generally, are very glad that the Federal Reserve actually believes in its delusional wealth effect assumptions! It is the rest of us that suffer the consequences (intended, unintended, or otherwise) of that misguided policy.


The Big Picture

Financial Crisis - The Telegraph

JohnTheCrowd.com | The Sailing Website

Craig Newmark - craigconnects