Tags: Greenspan QE2 Didnt Affect Economy Very Much

Greenspan: 'There is No Evidence' Fed Tactics Have Helped Economy

Friday, 01 Jul 2011 11:39 AM

The Federal Reserve's recent quantitative easing program, a $600 billion bond buyback program designed to stimulate the economy and the latest in a series of similar assets purchases, really didn't help the economy that much, says former Fed Chairman Alan Greenspan.

Easing did weaken the dollar somewhat, which was good for U.S. exports.

"There is no evidence that huge inflow of money into the system basically worked," Greenspan tells CNBC.

"It obviously had some effect on the exchange rate and the exchange rate was a critical issue in export expansion."

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Alan Greenspan
(Getty Images photo)
"Aside from that, I am ill-aware of anything that really worked. Not only QE2 but QE1."

QE2 is the popular abbreviation for the $600 billion bond buyback program, while QE1, the first round easing, involved the Fed's purchase of mortgage-backed securities and other assets, both of which ended up swelling the Federal Reserve's balance sheet by trillions of dollars.

The programs were designed to pump banks full of money so they would facilitate stock-market gains, lending and ultimately job creation.
Greenspan said he "would be surprised if there was a QE3" because it would "continue erosion of the dollar."
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Some current Federal Reserve officials have expressed concern with the size of such asset purchases especially at a time of near-zero interest rates.

Bubbles can form.

"An extended zero-interest rate policy is producing new sources of fragility that we need to be aware of," says Kansas City Federal Reserve Bank President Thomas Hoenig, according to Reuters.
"Monetary policy is not a tool that can solve every problem."

In fact, interest rates need to eventually climb, says Hoenig, one of the Fed's more hawkish board members.

"The longer we leave interest rates at zero, the more asset values will be defined by these low rates and the greater the negative impact will be once the inevitable move up in rates begins."

Some say quantitative easing was a mistake.

Buying back assets involves printing money, which weakens the dollar and pumps up inflation rates.

Furthermore, a lot of that fresh money shooting off the Fed's printing presses has gone abroad and disrupted exchange rates, pumped up food and other commodity prices while doing nothing to create jobs back home in the U.S.

"If you come at it from the point of view that you think deflation risk was significant last summer and you want to avoid that, QE2 was a success," says Michael Gapen, senior U.S. economist at Barclays Capital, according to the Washington Post.

"If you look at it from the point of view that you wanted to make the recovery stronger and more durable, you would have a lingering bad taste in your mouth."

Others weren't so diplomatic.

"QE2 was a terrible mistake, and I think it has been counterproductive for economic growth," says John Ryding, chief economist of RDQ Economics, according to the AFP newswire.

"It has gotten inflation up, and that has squeezed the people most in need of paying off their debts."

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The Federal Reserve's recent quantitative easing program, a $600 billion bond buyback program designed to stimulate the economy and the latest in a series of similar assets purchases, really didn't help the economy that much, says former Fed Chairman Alan Greenspan. Easing...
Greenspan QE2 Didnt Affect Economy Very Much
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Friday, 01 Jul 2011 11:39 AM
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