Quantitative Easing succeeded in some limited sense

If there are any people out there who believes in Austrian School of Economics, he would be telling you an explanation of how the Great Financial Crisis came about, which seemed to make most sense out of many explanations. He would be telling you that the central banks left interest rates too low for too long in the beginning of a business cycle, so investors and businessmen had easy credit, investing in projects which were, at best, unprofitable in the long run, and at worse, wasting money. As the economy continued to grow, central banks tightened the policy to prevent inflation. All of a sudden, those wasteful projects cannot be sustained because the cost of capital rose, so these poor investments went bust.

People in the Austrian School of Economics would probably argue that Quantitative Easing will not work not because it is not enough. Rather, they believe that we should not have put so much money in to the system and helped those banks to survive. True, it is not a good thing. Banks should not be taking the implicit government guarantee of deposits for granted, as implicit government guarantee would deceptively lower the bank’s costs of capital, encouraging less-than-prudent lending and speculating. By taking excessive risks and gamble, bankers are actually making some perfectly rational choice because they will get all the gains, while taxpayers and shareholders would bear the losses. Austrian School believes that it is better to let the system to clean up itself by allowing bad banks and companies to fail. So by the same token, they would believe that the United States should not have bailed out General Motors, for example.

Various arguments have been put forward against quantitative easing, including my own discussion on why it would not work as money is already cheap, or it works too well to bring inflation (or hyperinflation). Although the markets seem to be rather optimistic of late, I maintain that quantitative easing would not help bringing down unemployment, which is probably the metric people on the main street use to judge the state of the economy. The hallmark of expansionary policy, in Austrian Economics terms, is that easy money will stimulate wasteful investments. In other words, making bubbles. Bubbles are good for those people who participate in the bubbles, but general public will only feel the effects of bubbles much later, if at all. In a sense, quantitative easing is just like any other expansionary monetary policy.

In a sense, to provide extra monetary support for the economy after the burst of the earlier bubble is very much like making yet another bubble to prop up the economy. Quantitative Easing I & II are just that. Even though unemployment is at 9.8%, stock prices and commodities have gone up. Fred Wilson suggested that the internet start-ups investing markets are getting overheated. Not to mention Singapore, Hong Kong, and China Property (also some more exotic places, like Turkey, for instance). Bubbles inevitably make some people richer, which, for them, would mean that they are more willing to spend. Bubbles are probably making the society more unfair, but as far as the economy as a whole is concerned, having some people richer is still better than no progress at all.

In this limited sense, quantitative easing has worked by making bubbles within and outside of the United States. But as Austrian Economists would say, it will lead to the next disaster. To me, it is a real possibility. But before the next disaster strikes, perhaps we have time to enjoy the bubbles for a bit longer.

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About Zarathustra

Zarathustra: Founder and Managing Editor of Also sprach Analyst. Once an analyst, now an investor and entrepreneur. Based in Hong Kong, but Londoner at heart.