The great monetary experiment, as Brendan Brown calls the Fed’s quantitative easing (QE) programme, is under only minimal intellectual pressure in the US, despite modest results.
The upswing in the US economy seems robust, in stark contrast with the poor performance of its European disciple the ECB.
The Public Sector Purchase Programme (PSPP) as its first controversial QE experiment, has produced nothing but the initiation of complaints in the German constitutional court, sparking off a major debate on the prerogatives of central banks and their accountability.
While in the Eurozone scepticism towards the ECB is growing due to a lack of significant results, the chapter of QE in the US – although officially over – has been put to the intellectual test elsewhere.
Brown has challenged the principles of Fed’s QE, explaining why it is unreasonable because it brings about antisocial effects and could ruin the financial system.
The price paid for an economic upswing in the US is, according to Brown, too high. QE goes hand in hand with asset price inflation.
That is why Brown compares the benefits of saving investors – near to death – from bankruptcy with the effect of QE: inflation in the real estate market as well as in the equity market.
As prices for stock are roaring ahead independently of the state of the real economy, the great monetary experiment called QE may eventually create those bubbles which are so dangerous to financial stability. Although a zero interest policy has turned out to be inefficient, the Fed could not admit to be powerless in the face of recessionist perils.
Whereas in the US, sustained growth cannot be contested, nothing comparable can be identified in the Eurozone.
Nevertheless the ECB’s president Mario Draghi continues to extol the virtues of QE. On 3 December the PSPP was prolonged and enlarged by decision of the ECB Council. The extension until March 2017 means an additional purchase of bonds worth about €400bn and the enlargement of eligible securities concerns the purchase of refinancing instruments issued by ESM, EFSF and EFSF.
The euro rescue funds no longer need a placement of their refinancement instruments with banks. They can rely upon direct underwriting by ECB.
Will the practical results of monetary financing by ECB be brought to account?