Blaming Easy Money for Alien Invasions
Sometimes I feel like if aliens opened a wormhole and invaded the solar system tomorrow, there are people who would immediately start writing articles blaming the incursion on the Federal Reserve's program of quantitative easing.
Niall Ferguson, Harvard historian and outspoken political and economic commentator, might be one of those people. On Oct. 24, Ferguson penned a column in the Wall Street Journal blaming QE for the stock market volatility of Oct. 15. Ferguson writes:
I suspect that the return of volatility has relatively little to do with poor growth data or political turbulence. Instead, it is mainly about monetary policy...
QE offers a "tradeoff between more stimulus today at the expense of a more challenging and disruptive policy exit in the future," as the authors of a recent paper, put it. "Stimulus now is not a free lunch, and it comes with a potential for macroeconomic disruptions when the policy is lifted."...
Like the "taper tantrum" of summer 2013, this year's October volatility has shown that there is indeed no smooth way out.
The paper Ferguson cites, by economists Michael Feroli, Anil K Kashyap, Kermit Schoenholtz, and Hyun Song Shin, presents an interesting conjecture, and shows some evidence that monetary policy changes can disturb the financial system. That's not at all surprising. based on a large body of research.
But Ferguson takes this evidence and draws two conclusions that seem like a stretch to me. His first conclusion is that this is a big worry, and a reason to avoid QE. This doesn't seem to fit the findings of the May 2013 paper, "Taper Tantrum," which is the example of financial instability cited by the Feroli, et al. Here is a picture of the VIX, an index that represents expectations of stock-market volatility, during the past five years:
As you can see, the taper tantrum didn't coincide with a lasting rise in the VIX. In fact, the whole episode looks minor compared to the huge surges of 2010 and 2011. For that matter, the recent events of Oct. 15 don't even look very serious on this graph.
Nor did the real economy seem particularly hobbled by the taper tantrum. Here is a picture of quarterly real U.S. gross domestic product growth during the past three years:
As you can see, there was no immediate drop in growth after the taper tantrum, and growth has been generally robust since the taper was announced.
Ferguson's other questionable conclusion is that the tapering of the Fed's asset purchases was responsible for the events of Oct. 15.. But unlike in the case of the taper tantrum, there was no major Fed announcement in the two weeks before the market's sudden freak-out.
No doubt Ferguson sees Oct. 15 either as a delayed reaction to earlier indications of tightening, or a sign of a sudden shift in the market's expectations regarding future tightening. But he presents no evidence for either of these. And furthermore, if financial pundits are allowed to wave their hands and invoke unobserved expectations or long and variable unobserved delayed reactions, then there is basically no discipline whatsoever on the claims that pundits can make.
As for Ferguson's own thought processes, it is clear that he has been dead set against QE from the beginning. Ferguson was one of the people who predicted back in 2010 that QE would cause high inflation. But unlike more circumspect inflation-warners such as hedge-fund manager Cliff Asness, Ferguson never admitted that he had been wrong about his inflation prediction. Instead, he cited the bogus website ShadowStats .com to claim that inflation in 2010 was actually in the double digits -- a claim that most of the signatories of the inflation-warning letter were wisely unwilling to make. (For a thorough debunking of ShadowStats, see James Hamilton and John Aziz.)
Ferguson's use of ShadowStats, along with his questionable claims about Oct. 15, suggest that his reasoning starts with a conclusion -- that QE is bad -- and grabs hold of any available justification to support this conclusion. It just goes to show that some people will always despise QE, no matter how benign it turns out to be in practice.
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