The Federal Reserve responded to the Great Recession of 2008-2009 by launching a bold experiment called quantitative easing (QE). Combined with the Bush administration's Troubled Asset Relief Program and the Obama administration's rounds of massive stimulus spending, the tools of fiscal and monetary policy were used more aggressively than ever before in U.S. history.
Results have been underwhelming. According to data from the Federal Reserve Bank of Minneapolis, it took 76 months for the economy to gain back all of the jobs lost in the Great Recession. Cumulative increases in gross domestic product (GDP) from 2008-2015 were just 14.2%. Both recovery metrics are the worst, meaning slowest, in modern American history. Does this mean QE failed?
There are lots of different angles to consider. The Federal Reserve has its dual mandate, so any Fed programs should probably be checked against these outputs. Some might just look to see if macroeconomic data improved after 2008-2009, when QE began, but that is not a satisfactory measuring stick. The U.S. economy, historically, always improves after recessions, so it is incredibly unlikely the economy would not have improved if not for QE. It is more instructive to see how this recovery differed from past recoveries when QE was not tried.
On the surface, the evidence that QE has not worked since 2008 is relatively straightforward. Why do we need a round of QE2 if the first QE worked? Or why do we need QE3 if QE2 worked? The Federal Reserve did not launch the first bond purchase program and expect it to be insufficient, only to be followed by more down the road. By its own standards, the Fed's various rounds of QE fell short of the mark.
What the Markets Say
Some analysts point to the growth in U.S. equity or housing prices as proof of QE success. The S&P 500 gained 113% between the start of QE and late 2015. The first QE plan was announced in early 2008, with the S&P 500 Index hovering around 800. The markets continued to dip down to 650 by the time QE1 was expanded in late 2008.
The markets responded to a stronger QE1, and the S&P 500 was at 900 by January 2009. Markets climbed through the first three quarters of 2009 before falling below 1,100 near the end of the year. Then-Fed chairman Ben Bernanke announced QE2 a few months into 2010, but the markets were already climbing. The S&P 500 reached almost 1,400 by July 2010. QE3 was announced in September 2012 when the S&P 500 was 1,440, but this time it dropped to 1,350 by November.
This final QE was an open-ended round. Previous QEs had a target money level, but that was not the case with QE3, and it finally halted in late October 2014 when the S&P neared 2,000. By early 2016, the S&P hovered near 1,880.
One problem with using the markets as a measuring stick is the stock market is a very poor gauge of real economic health. Stocks and bonds are priced based on human valuations and, as seen in 1999-2000 and 2004-2007, these valuations can be wildly inaccurate. Real economic health is based on productivity and standards of living. The QE has proven to be a very successful boost to asset prices but a very ineffective policy in terms of productivity and standards of living.
The Federal Reserve Admits QE Has Not Worked
In August 2015, Stephen Williamson, vice president of the St. Louis Federal Reserve Bank, published a white paper calling the theory behind QE "not well-developed" and that "causal evidence suggests that QE has been ineffective." Williamson echoes former Fed chairman Alan Greenspan, who, in fall 2014, told the Council on Foreign Relations the Fed's experimental bond-buying program fell short of its goals and had not been a net help to the economy. There is not any work, Williamson wrote, establishing a link from QE to the goals of inflation or real economic activity. He also noted similar programs have failed in Japan and Switzerland for decades.
QE Grew the Debt, Harming the Economy
The huge purchases of assets by the Federal Reserve, which mostly centered on mortgage-backed securities and government bonds, pushed down interest rates and made it very easy to borrow money. The 30-year mortgage rate fell from 6.32% in June 2008 to 3.67% in January 2015. The 10-year Treasury note fell to 200-year lows in 2012 but rose slightly until 2014.
In late 2015, the Federal Reserve owned $2.394 trillion in U.S. government debt, far more than China or Japan or any other foreign holder. More importantly, the Fed made it incredibly cheap for the government to borrow. Total U.S. debt was $9.986 trillion in 2008, just 67% of GDP. These figures skyrocketed to $18.151 trillion in 2015 and 101% of GDP.
The non-partisan Congressional Budget Office (CBO) said in June 2015 that "the long-term outlook for the federal budget has worsened dramatically over the past several years" and the debt would cause the economy to "lose trillions of dollars a year by 2040" if not addressed. Even before that, federal debt will continue to crowd out private borrowing, according to the CBO.