Author and professor Niall Ferguson, seen Tuesday, warns that there is ‘no smooth way out’ of quantitative easing.Matthew Sherwood/The Globe and Mail
Like the tired host of a house party whose guests have lingered over the punch bowl far too long, the Fed has finally donned its pyjamas and started turning out the lights. After a lengthy farewell, the bold monetary policy experiment known as quantitative easing is finally being put to bed.
Now comes the hard part: Going cold turkey without triggering a dangerous upheaval in global financial markets and figuring out if QE actually worked, and if so, how. We're still waiting for the verdict on both counts.
What is clear is that the exit will not be nearly as easy or painless as its chief architect, former Federal Reserve chief Ben Bernanke, and other QE proponents insisted. That much has been obvious since Mr. Bernanke set off a market stampede in the summer of 2013 at the mere mention that the Fed would soon start tapering its massive asset purchases.
"QE has certainly achieved something. But what it's achieved has been essentially to drive up asset prices and that was part of Ben Bernanke's intention," said financial historian Niall Ferguson, a persistent critic of the Obama administration and Fed policies. "The implicit mandate of the Fed is to keep equity prices high and hope that that in turn generates real economic activity. So you're really playing a kind of wealth effect game."
The Harvard professor has been warning for some time that there is "no smooth way out" of QE and points to the dramatic resurgence of volatility in stock and bond markets this month as evidence of the potential pitfalls that lie ahead.
"The problem is what happens when you stop," he said in an interview. "You're really taking the patient off the medicine. We saw in the space of the last four weeks a little bit of what that implies. The exit is the moment of truth."
The peripatetic Mr. Ferguson was in Toronto this week to share his latest thoughts on another favourite topic – increasing geopolitical risk in the Middle East and elsewhere in the absence of strong U.S. leadership. This was at a private dinner attended by two dozen male Bay Street denizens at the elegant new Holt Renfrew store for men on Toronto's upscale Bloor Street shopping strip.
"It's not often that I speak at a shoe store," quipped the prolific public intellectual, who acknowledged his sartorial shortcomings.
Mr. Ferguson has famously clashed with equally prolific economist Paul Krugman and other vocal supporters of aggressive Fed intervention, especially in the absence of what they would consider an effective fiscal response to the Great Recession.
"The way the debate gets presented in the press is really misleading, because it implies that there are two sides," Mr. Ferguson says. But it's not a simple matter of being for or against QE on principle.
"In fact, there are at least five different [academic] accounts of what's been happening. At the moment, the jury is still out about what this policy has really done. You can't proclaim victory until the policy's actually been ended. The test of whether this has worked is whether it can be stopped, and I'm skeptical."
Mr. Krugman and his fellow Keynesians landed some heavy counter-punches when Mr. Ferguson, along with most other conservative critics of large-scale fiscal and monetary stimulus, turned out to be utterly wrong in their dire forecasts that the Fed's policy would unleash a wave of economy-killing inflation.
Mr. Ferguson now acknowledges "that a big expansion of the central bank balance sheet does not necessarily lead to inflation. A lot of other stuff has to happen."
What about the argument that three rounds of quantitative easing have at least kept the U.S. economy from falling into the deflationary spiral that gripped Japan for years and now threatens to engulf the euro zone?
"In present conditions, the most one can say about QE is that maybe it's reduced deflationary pressures. But even that's not 100 per cent certain," he said. "I don't think one can conclusively say one way or another that's been a successful anti-deflation policy. I don't think there's any real evidence for it, because the divergence of Europe and the U.S. is about much more than monetary policy."
Then, he can't resist a parting shot at Mr. Krugman. "I am so uninterested in his approach, because it's intellectually dishonest. He's a serious economist. He should be telling his readers there is absolutely no clear consensus on how this thing works – if indeed it works at all."