QE-outlook dims as Summers brightens

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The QE outlook has started to dim, as Lawrence Summers firms as favourite to replace Bernanke next year.  This seems to be a bearish bonds / bullish USD development.

Yesterday, Hilsenrath published an article in the Journal suggesting that Summers was pulling into the lead as favourite to replace Bernanke (on account of his relationship with Obama and team).

Today, the FT’s Robin Harding published a note in which he quotes some dismissive remarks Summers made about QE:

“QE in my view is less efficacious for the real economy than most people suppose”

My read of this is that Summers is keener to end QE, as it has less benefit (and presumably the same costs).  In any case, he’s bullish on the growth outlook, so QE under his chairmanship doesn’t have great prospects

“I think the market is underestimating the pace at which the Fed will alter its current course and the consequences of that for interest rates”

On the subject of Summers’ prospects, Harding reports that:

Mr Summers has emerged in recent days as a leading candidate to succeed Ben Bernanke as head of the world’s most important central bank. People briefed on the process say the Obama administration has framed its selection criteria in a way that makes Mr Summers, a former Treasury secretary, the obvious choice.

Mr Summers – who served as President Barack Obama’s chief economic adviser from 2009-2010 – has seldom spoken in public about monetary policy. Markets have little sense of his current thinking and may be surprised by his apparently hawkish stance on QE.



  1. Rajat you are mixing up monetary policy and fiscal policy.

    I still favour Yellen but Larry would be good..

    This of course made IT!

    I hope you got a lot of people looking at that last article

    1. No I’m not. Have a look at this:

      Government output does decline slightly in 1937, but is still far higher than 1934 and 1935. If you apply a multiplier of 1.6, it should have reduced GDP by about 1%. But RGDP rose more than 5% in 1937. Then in 1938 government output rises by twice as much as it fell in 1937, and RGDP plunges by almost 4%.
      The 1938 depression had two causes, or perhaps one proximate cause and two deeper causes. The proximate cause was a sharp increase in real labor costs. Nominal labor costs rose sharply in 1937, due to a powerful union drive after the Wagner act, which rapidly doubled union membership and led to a wave of major strikes. The payroll tax also slightly boosted nominal labor costs (I believe by 1%, but am not certain.) Because wholesale prices were pretty high in the spring and summer of 1937, at first the wage boost merely led to a sharp slowdown in growth. But then prices plunged due to a worldwide bout of gold hoarding, which increased the purchasing power of gold. This tightened US monetary policy and caused the WPI to fall about 9% between mid-1937 and mid-1938. Now two factors were driving up real wages, higher nominal wages and lower prices. A supply shock and a demand shock. Output plunged. Severe slumps almost always have multiple causes

  2. The US is off the gold Standard in 1933. It is fiscal policy that was tightened in 1937 foolishly and it was the sharpest change in the Structural side of the budget at anytime.There was no real change in monetary policy at this time.

    Bernanke has said QE will finish when it is not needed.

    1. Bernanke,s term ends soon.

      I agree the US tightened both fiscal and MP in late 30s. Bernanke also agrees that this occurred and this was a mistake.

  3. If people are thinking the tightening in MP occured because of what Friedman and Schwartz alleged then you are wrong!!

  4. Remarks by Governor Ben S. Bernanke
    Before the New York Chapter of the National Association for Business Economics, New York, New York – October 15, 2002

    Asset-Price “Bubbles” and Monetary Policy
    etc. etc.
    … … … … … … …
    Problems with the Proactive Approach to Bubbles
    If we could accurately and painlessly rid asset markets of bubbles, of course we would want to do so. But as a practical matter, this is easier said than done, particularly if we intend to use monetary policy as the instrument, for two main reasons. First, the Fed cannot reliably identify bubbles in asset prices. Second, even if it could identify bubbles, monetary policy is far too blunt a tool for effective use against them.

    The Identification Problem
    Let’s first discuss the identification problem. Aspiring bubble poppers cannot get around the fact that their strategy requires identifying bubbles as they occur, preferably quite early on. Identifying a bubble in progress is intrinsically difficult. Though the price of (say) a share of stock is readily observable, the corresponding fundamentals–such as the dividends that investors expect to receive and the risk premium that they require to hold the stock–are generally not observable, even after the fact.
    Of course, one can always try to estimate a fundamental value for stocks and other assets–I will discuss some possible indicators of fundamental value and overvaluation in a moment. But there is the additional difficulty that the prices of equities and other assets are set in competitive financial markets, which for all their undeniable foibles are generally highly sophisticated and efficient. Thus, to declare that a bubble exists, the Fed must not only be able to accurately estimate the unobservable fundamentals underlying equity valuations, it must have confidence that it can do so better than the financial professionals whose collective information is reflected in asset-market prices. I do not think this expectation is realistic, even for the Federal Reserve.

    *****************************>>>>>>> Moreover, I worry about the effects on the long-run stability and efficiency of our financial system if the Fed attempts to substitute its judgments for those of the market. Such a regime would only increase the unhealthy tendency of investors to pay more attention to rumors about policymakers’ attitudes than to the economic fundamentals that by rights should determine the allocation of capital. <<<<<<<<< *******************************

    etc. etc.


      1. It works both ways however…. if monetary policy should not be used to target Asset-Price “Bubbles” (for all the reasons Bernanke gives in the speech), it should also not be used with the goal to ‘inflate’ asset prices (and create bubbles?). But if the main transmission mechanism of monetary policy IS via asset prices, then ….. the Fed are being extremely careful in not upsetting the markets, but they shouldn’t if it’s “the economic fundamentals that by rights should determine the allocation of capital”.
        This speech was from 2002, probably no longer Bernanke main view, after the GFC debacle and QE.

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