Bernanke's QE Programs: Has This EVER Worked in History?

Bernanke's QE Programs: Has This EVER Worked in History?
Profile photo of Robert P. Murphy

Now that Ben Bernanke has handed over the keys of the Federal Reserve, there are all sorts of theoretical arguments, pro and con, concerning his bold quantitative easing (QE) programs, in which the Fed massively expanded its balance sheet:

Fed assets

Many critics, including me, have worried that this will disrupt the proper functioning of credit markets, and threatens to severely debase the US dollar. (Obviously our warnings on the latter point are either totally wrong, or have yet to be fulfilled.)

The defenders of Bernanke have argued that he spared the US (and indeed the world) from a second Great Depression. Moreover, they claim that the Fed will simply let its balance sheet unwind as the economy returns to normal. Bernanke himself discussed several “exit options” when he was still at the helm (which I criticized at the time).

One of the odd points that people raise in Bernanke’s defense is the case of Japan. They explain that Japan implemented a comparable policy, and hey, they didn’t wreck the yen in the process. So why don’t the critics learn their history and cut Bernanke some slack?

Well, hang on a second. Here is a chart (source) showing the relationship between the Japanese central bank’s “monetary base” and price inflation, both expressed as indices of the level:

Japan QE

So yes, it’s true that the Bank of Japan had a rapid expansion of its balance sheet (with the monetary base serving as a proxy), especially in the early 2000s, and yet the official consumer price index is actually lower now than it was in the mid-1990s. (This  site shows the annual CPI rates in Japan, many of which were lower than negative 1% during this interval.) I have two responses:

(1) Look at what the Japanese central bankers had to do, to contain the public’s expectations about price inflation. When their CPI stopped (gently) falling and began rising, in the mid-2000s, the central bank drastically reduced its monetary base–that’s the red line falling off a cliff. So really it seems the lesson from Japan is, “Sure you can get away with a rapid expansion of the monetary base without wrecking your currency, so long as you crash the financial sector whenever price inflation begins rising.” I don’t think any of the gold-bugs and other critics of QE denied this; that was part of their warning.

(2) Japan has not at all been successful with its strategy: It is a poster child of an economy stuck in a rut for decades, and counting. The Nikkei 225 (the major Japanese stock exchange) in 2009 was down more than 80% from its peak twenty years earlier. (Yes I wrote that correctly.) So at best, the defenders of Bernanke can say, “Hey, for all you know, we can keep our economy in the gutter for another 20 years without price inflation getting out of hand. You guys are such hypochondriacs!”

In closing, let me point out that we do have historical examples of central banks ruining their economies/currencies through massive expansions of their balance sheets (Weimar Germany, Zimbabwe, etc.). To my knowledge, this has never actually worked anywhere in history. Can anyone point to a successful example?

  • radiofreemarket

    There is no exit strategy, because the Fed does not intend ever to exit its money printing. Once initiated it is almost impossible to stop printing money. Janet Yellen may not be threatened with assassination, but she will be pressured by every special interest group to keep the money flowing…until hyperinflation wipes out everything. Does anyone think that this scenario can be avoided? If so, I'd like to hear how.

  • Jorge Borlandelli

    Government abandons measures that do not work … for them. As QE has not been abandoned, but repeated and enhanced I deduct that it works for them: Fed officials, Fed employees, bank shareholders, executives and employees and other people with access to the newly created credti.

  • Nick R. in Japan

    Bob, I think Korekiyo Takahashi successfully implemented a version of QE in Japan from 1933-1936. He had the BOJ directly purchase all debt issued by the government (and then re-sell a small amount of it into the market) and, in doing so, rapidly reversed the near 10% annual deflation.

    The 81-year old central banker was dragged out of his bed and assassinated by military rightest in Feb. '36 because he was cutting back on QE due to rising inflation. A decade later, hyper-inflation transpired. But had Takahashi gotten his way, price stability would likely have occurred.

    An important difference between the 1930s round of QE and today's is that the government actually spent the money back then. Today Japan's private sector (understandably) hoards it, in part due to the Ricardian implications of huge public debt.

  • David Maharaj

    Throughout their sordid history, the Federal Reserve gang has proven to be nothing but monetary central planners.
    Indeed, when has central planning ever worked?

  • Stefan

    Surely there must be some identifiable 'disaster threshold' level of intervention?

Profile photo of Robert P. Murphy

Robert P. Murphy is the Senior Economist at the Institute for Energy Research, and a Senior Fellow with the Fraser Institute. He holds a PhD in economics from New York University. Murphy is the author of Choice: Cooperation, Enterprise, and Human Action (Independent Institute, 2015) as well as numerous other books and hundreds of articles.

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