The weak recovery is proof that the Federal Reserve’s program of quantitative easement does not work.”


You do not understand the Counter-Factual.

That is the only conclusion I can draw from what the very common criticism of the Federal Reserve policies of ZIRP and QE (above), and its inherent analytical error.

The most common version goes something like this: If you do X, and there is no measurable change subsequently, X is therefore ineffective.

The problem with this “non-result result” is what would have occurred otherwise. Might “no change” be an improvement from what otherwise would have happened? Flat, last I checked is better than freefall.

If you are testing a new medication to reduce tumors, you want to see what happened to the group that did not get the tested therapy. Perhaps the control group saw tumors grew; maybe they were metastasizing throughout the body. Hence, a result where there is no increase in tumor mass or spreading would be considered a very positive outcome.

We run into the same issue with QE. In the absence of a functional congress or traditional post-recession Keynesian stimulus, the Fed is the only fgame in town. Neither you nor I truly know what the impact of QE has been.

continues here

Category: Federal Reserve, Philosophy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

22 Responses to “The Counter-Factual & the Fed’s QE”

  1. DeDude says:

    The funny thing is that we actually have other countries that either instituted a stimulus that was the same size as the projected fall in demand (China) or failed to do any stimulus because they could not afford it (Spain, Italy, Greece). In those countries you got the predicted outcomes of either no downturn or much worse downturn than the US with its underpowered half-measure stimulus. The GDP formula is fifth grade math, yet millions of people and a substantial number of economist seem to have a hard time understanding it.

  2. VennData says:

    OK! I got it now. So It wasn’t the Fed all along, it’s Obama’s socialism that sent us into this recession we are in! Fear of having your job creation nationalized. Right?

  3. Concerned Neighbour says:

    Surely econometrics can help us answer this question. I would be very surprised if the Fed – and academia – hasn’t conducted in-depth econometric studies on this very issue.

    My observations from the first Yellen policy announcement:

    - ZIRP is unlikely to ever end. As many suspected, that 6.5% target was not… forthright. With this announcement the criteria for raising interest rates is now rather nebulous. They’re making it up as they go along. We know they can’t ever raise rates, because aggregate debt has shot up over the last five years of “recovery” at a much higher percentage than cumulative economic growth. That debt is totally unsustainable at even slightly higher interest rates. With this statement they’ve opened the door to not raising interest rates even if inflation goes above target. So after five years of royally screwing disciplined savers, they’re preparing to issue the final “screw you” by letting high inflation do its damage.

    - Given their main policy lever these days is pumping the S&P 500 and all other asset “markets” to the stratosphere, one would think the statement would at least pay lip service to runaway inflation in asset prices. Are they really that clueless, or do they think another massive bubble is really what we need to push the “recovery” over the top?

    - It was the first Fed announcement day where the “markets” actually finished down that I can recall in years. Of course the BTFATH’s (whoever “they” are) were out in force to correct that inefficient market price the next day.

      • RW says:

        Probably not sarcasm unfortunately: this is the more “moderate” narrative from the echo chamber, it gets worse from there and even more passionately sure of itself.

        Unfortunately it makes the necessary policy moves supported by mainstream economics politically difficult if not impossible.

        The Timidity Trap

        …Yeats had it right: the best lack all conviction, while the worst are full of passionate intensity.

      • Concerned Neighbour says:

        “When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. ”

        They are clearly fine with inflation running over 2 percent for “some” time.

        “With the unemployment rate nearing 6-1/2 percent, the Committee has updated its forward guidance. The change in the Committee’s guidance does not indicate any change in the Committee’s policy intentions as set forth in its recent statements.”

        For how long did the Fed say they were targeting 6.5 unemployment as a trigger to start increasing rates? Now that we’re essentially there, quelle surprise, that trigger is consigned to the dustbin. Is this kind of policy making supposed to engender trust and confidence in the institution?

    • DeDude says:

      Of course “they’re making it up as they go along” and thank God for that. If they were the type of morons that would not change their policy as the conditions change, then we should all be very afraid. The old 6.5% “rule” was based on presumptions about U3 as a marker of labour market tightness and a predictor of wage pull inflation – those presumptions turned out to be wrong and the Fed responded as they should (revise the rule).

      Yes disciplined savers are paying the price but the price for what? The price for the fact that we have a GOP house that is blocking any and all expansive economic policies, so the Fed is forced to do the heavy lifting with the only tools they have. A lot of those “disciplined savers” are whining about government spending/taxes and keep voting for those GOP representatives. Sorry folks the disaster that Bush left us is going to be expensive to fix, and you don’t get a freebee. Can’t have your cake and eat it too. So they have rammed a stick up their own dumb a** and now they are whining that it hurts???

      • Concerned Neighbour says:

        I agree re: the ineptitude of Congress. I’ve argued here and elsewhere that QE 1 was necessary to put an emergency floor under the financial system. It was unpalatable, but we were in an emergency situation and monetary policy was the only thing that could work quickly enough. From there, discretionary fiscal stimulus should have carried the bulk of the load. I agree that the Republican house is largely to blame here.

        All that said, here we are five years later and not only do we still have that same emergency, unpalatable monetary policy in place, but now it’s totally open-ended! Now it’s placing an ever-increasing floor on asset prices, while economic growth remains mediocre at best. Everyone seems to have lost sight of, aside from a little lip service here and there, of the consequences of this kind of policy. There are good reasons why it has been avoided – and, in some quarters of academia – ridiculed in the past.

      • DeDude says:

        Well 5 years later we still have the same evil GOP bastards who would rather see the economy go to hell than allow history to record that it is just fine to send a black democrat into the white house (the world did not end). The emergency is that we have a blocking GOP majority in both Senate and House who consider it as a feature not a side-effect that the FED is forced to blow a bubble in asset prices. As long as asset prices are increasing they don’t care that the economy is recovering at a snails pace. The masters of these little sock puppets make money by asset price increases, not by good paying jobs. They are perfectly aware of the consequences of these policies and they don’t give a hut – because they have domiciles all over the world and plan to harvest their loot and get out of here before she blows.

    • @Concerned Neighbour, regarding your second post: “They are clearly fine with inflation running over 2 percent for “some” time.”

      I believe “were” would be the appropriate tense of the verb in that statement. Filtering what the Fed is actually doing and saying (vs. the news/noise that comes out of The Media) is a big part of my business so I would replace “clearly fine with” with something like “willing to tolerate”. I base this both on an ongoing awareness of the debate within the FOMC and more specifically on Dr. Yellen’s explanation during the press conference.

      The “Evans Rule” language was added to the FOMC policy statement at the December 2012 meeting, slightly earlier than some analysts that were following the discussion had anticipated and in the final days of Operation Twist (where The Fed sold short term Treasuries with face value equal to the long term Treasuries they were purchasing). No less than Charles Evans himself (President of the Chicago Fed who proposed the rule) has advocated removal of that language in 2014.

      I find Dr Yellen’s explanation at the press conference satisfactory. What she said was that in 2012 the committee was faced with the very real potential for divergence in their two policy objections: maximum employment and price stability (2% inflation). They recognized the possibility that inflation could begin to climb while unemployment was still unacceptably high. My opinion/interpretation is that they wanted to formalize how they would respond to that situation should it materialize and with “disinflation” dominating the monetary side of that equation, it has not.

      Other than a bit of nuance, this meeting cycle seems to me to be essentially unchanged from the December meeting. The bit of nuance is that once lifted off zero-bound, rates could rise more slowly toward the 4% Fed Funds target than they have in the past. Personally, I think that would be a good thing for too many reasons to list here.

      Information is not knowledge. And most media presentations are not even information; far too often they are ill-informed opinion (IMHO). The “six month” comment for the first rate rise? NOT new and in fact mid-2015 matches the consensus of economists I have seen. The other bit I mention was new (I think) and note how the market sent 30-year Treasury yields back down by Friday.

      With so much original source material available here (, here ( and at the other 11 regional Fed websites, opinions can be developed on something other than the opinion of others. You can even watch the press conference at the Fed’s website. Context is important and I have build my own up over time. If you think what they are trying to acheive is simple, then you must have a very complex job.

  4. profoundlogic says:

    We do know that QE has allowed a dysfunctional and corrupt Congress to facilitate the continued operation of various control frauds (i.e. our largest banks). By that measure, I would suggest that we do indeed know what the impact of QE has been.

    The counter-factual argument doesn’t excuse the implementation of flawed policy to facilitate a broken and deeply corrupt system.

  5. rd says:

    I think the closest thing to a control group has been Europe.

    Both Europe and US have had relative austerity in their fiscal policies as both groups have tried to reduce their budgets through cutting expenditure.

    For the first few years, Europe did not do ZIRP/QE etc. while the Bernanke Fed jumped in with both feet.

    So our current tepid recovery and declining unemployment is probably largely due to ZIRP and QE as well as normal business cycle recovery elements. If the US government had been counter-cyclical in their fiscal policies (pay down debt in boom times and increase spending and cut taxes in recessions) then we would probably be further ahead in the game right now and might not even have had as big a recession in the first place. The closest thing we have seen to the counter-cyclical approach was the last few years of the Clinton White House where the budget actually had a surplus for a couple of years in the late stages of a boom.

  6. ironman says:

    We’ll have to revisit the earlier episodes of QE, but here’s the latest update of our counterfactual for what would have happened to GDP in the U.S. without QE 3.0 (announced in September 2012, where the Fed would buy $40 billion worth of MBS each month) and 4.0 (announced in December 2012, where the Fed would buy $45 billion worth of U.S. Treasuries each month).

    As a side note, we did the same math for the counterfactual for both Spain and Greece following the implementation of their following their austerity programs, and very nearly perfectly predicted the GDP performance of their economies. As DeDude notes, the math is simple – the question is why don’t politicians do it (and so we’re clear about what really harms GDP in the counterfactuals, tax hikes have far more negative impact on GDP than government spending cuts do.)

    • DeDude says:

      I would further clarify that the reason the tax hikes had such bad effects, was that they were specifically targeted to the consumer class (it was a hike in payroll taxes). A similar level of tax increase by a wealth tax or Tobin tax would have minimal impact on economic growth. This economy will not begin to grow seriously until some kind of Robin Hood policy is instituted. The imbalance between investor and consumer class is blocking economic growth.

  7. ancientone says:

    This is the same dumb argument that was used to say the stimulus didn’t work.

  8. san_fran_sam says:

    I think the conclusion that ZIRP did not work is an exaggeration. It just wasn’t as effective as a good stimulus package would have been.

    by not being as effective i am referring back to the liquidity trap in macroeconomics. the idea being that you can force interest rates to zero hoping to stimulate lending, but if there is no demand for loans, then the loanable funds will just sit there. How much cash are the banks and industry sitting on? Hmmm.

    we know austerity didn’t work. look at the UK. austerity kept the recession running longer and recovery slower than in the US.

    the stimulus was too small and too spread out over time to have a meaningful effect on demand and employment.

    anyway that’s my view from the bleacher seats. Play ball!

  9. Petey Wheatstraw says:

    The Fed was the cardiologist who ran to the rescue with drugs and a defibrillator when the economy suffered its massive coronary due to an overdose of creditmeth, administered by the Fed, in the first place.

    Now that the cure is causing kidney failure, the Fed doesn’t know what the F to do.

    Fed: “I’m not a kidney man!” What’s that? The patient is yellow? Jaundice, you say? Well, yellow is better than dead!

    Segue into musical number: “A Half-assed Cure From a Half-assed Whore is Better Than Nothing At All”*

    *Music by Stephen Foster, lyrics by David Allen Coe.

  10. dougc says:

    Using your logic, if the FED had not acted and the economy didn’t recover , you could argue it might of been worse if the FED had acted. Applying scientific logic to economics is a waste of time. I personally think the FED helped the economy in the short run but not so sure about the long run but I probably won’t live long enough to see the results.

    • I clearly state I DONT KNOW the impact of QE — so I would not argue either way, other than to point out that those who claim they know are fools or liars.

  11. Robert M says:

    The only game in town is still guilty on one count. It is the count of silence on fiscal policy.the mere fact that they do not mention it gives them the moral of equivalent of the Roman Catholic Church during
    WWII. A little poking at the edges; Schlinder’s list vs the Wansee Conference.

  12. long_tbt says:

    Thanks Barry,
    first intelligent article I’ve read on the Fed in a while….
    I’m interested in your views on Financial Repression and
    the Fed’s Macro-prudential Policy to reduce deficits
    as well.
    Seems to be working to me….
    I think Bernanke knocked it out of the park,
    given a ‘dead-beat’ Congress.

  13. Indeed, no telling what would have been along the path not taken. I would guess something worse, but maybe Congress would actually have stepped up to the plate absent the Fed action. It is even possible it would take the same amount of time to dig out from decades of perverse incentives no matter the ‘solution’ selected, but with a different pain distribution for each.

    NPR recently did a “counter-factual history” series. The first episode about the circumstances around the assassination of Archduke Ferdinand is at the bottom and is very interesting.