9 thoughts on “The effectiveness of large-scale asset purchases

  1. pgl

    Interesting discussion. Let me expand a bit on this:

    “The most important announcement concerning QE1 came at 2:15 pm EDT on 18 March 2009, when the Fed declared its intention to purchase up to an additional $1,150 billion in mortgage-backed securities, long-term Treasuries, and agency debt beyond those previous announced. Figure 2 tracks the interest rate on a 10-year US Treasury bond every minute of that day. Within minutes of the announcement, this interest rate fell by nearly 50 basis points.”

    QE in part was sort of like old Operation Twist – lower long-term government bond rates relative to short-term rates. But wasn’t another part of the reasoning to lower the incredibly high credit spreads at the time? Did not the long-term interest rate on BBB rated corporate bonds fall relative to the interest rate on long-term government bonds? I thought this was part of Bernanke’s overall reasoning. What does the evidence say on this metric?

    1. James_Hamilton Post author

      I gather your question is a follow-up to the claim I have made elsewhere (and often) that recessions are different from expansions not just quantitatively but also qualitatively. The forces that cause output to grow in a typical year– growing population, bigger capital stock, better technology– are in my view fundamentally different from the forces that cause output to fall for an extended period. None of those three forces suddenly go into reverse to produce a recession.
      I take your question to be, are the forces that cause output to fall in an episode we would characterize as a depression (say an output drop of more than 15% over more than 2 years) fundamentally different from those that produce an episode we would characterize as a recession (say, a 4% drop over 1 year)? My answer to the second question is I don’t see evidence to support the claim that a depression is a qualitatively different event. The Great Recession looks in many ways like a typical recession– modestly declining consumption, much bigger drop in investment– just scaled up and continuing for longer. And the Great Depression looks in many ways like a scaled up Great Recession. I think there are forces– namely financial turmoil– that caused the Great Recession and Great Depression to be scaled up compared to normal recessions. But I don’t think we need a fundamentally different model to talk about the underlying mechanisms in recessions compared to depressions. By contrast, my model of either a recession or depression is not the standard long-run growth model with a negative sign thrown in.
      My view is it’s a matter of semantics to decide how big a recession has to be to call it a depression. By contrast, I believe that recessions or depressions are fundamentally different from expansions.

      1. baffling

        jim, as i understand your argument as stated, you are basically saying the cause and drop occurring during a recession or depression are basically the same, except in magnitude. in more nuanced terms, do you feel that the magnitude of any of the forces creating the problem are biased towards either a recession or depression (is debt burden more important to one or the other?). further, do you believe there is any fundamental difference between the transition from a recession or depression into an expansion? should the recoveries behave the same, simply scaled differently? or do they each impact how an expansion begins differently? we seem to have had a variety of recoveries through the decades, just curious as to how you would justify their differences within this framework.

      2. 2slugbaits

        I realize that it’s dangerous to disagree with JDH on these matters, but I’m not convinced that there isn’t a qualitative difference between a recession and a depression. I suspect that part of the problem is that we’re trapped by our own language in having taken to calling it the “Great Recession”. Having given it a name with the word “recession” we’ve cornered ourselves into concluding that the difference between a recession and a depression is just a matter of magnitude. We might view things a little differently if we had dubbed the 2007-2009 downturn as the “Lite Depression” rather than the “Great Recession.” Way back when I learned stone age macro the usual distinction between a recession and a depression was some old fangled notion of a liquidity trap. Graphically this was represented by a horizontal LM curve, so monetary policy was powerless in a depression. The 1982 Reagan recession was very deep, but there was never any risk of a liquidity trap. Same with every recession except the “Great Recession.” So it seems to me that depressions are characterized by liquidity traps whereas recessions are not.

        1. baffling

          agreed 2slugs, which is why i questioned jim-but i certainly would not be in a position to call him wrong. my thought is, if it is only magnitude which is the difference, then the recoveries and solutions to recoveries should be the same for both a recession and depression. and i am not sure this is true.

      3. Steven Kopits

        Forgive me for taking so long to reply.

        On the graph linked here (https://www.princetonpolicy.com/ppa-blog/2018/10/20/remittances-to-mexico-and-the-fed-funds-rate), you can see the Fed Funds rate and one particular indicator, remittances to Mexico. I could use other measures (I will, in fact), but remittances represent a material portion of the savings of a particular societal segment, and therefore can be taken as a kind of barometer of their economic health.

        Note that in the 2001 recession, remittances to Mexico actually rise and keep on rising thereafter. By contrast, for the Great Recession (the China Depression, to my way of thinking) remittances peak in Dec. 2007 (which you could have guessed) and in real terms do not regain this level until this past June!

        Whereas the undocumented Mexican population rose quickly prior to the Great Recession, it fell by an astounding 1.1 million (-16%) in its aftermath and stabilized only in 2016 or 2017 (we don’t have a 2017 estimate from Pew yet). Thus, by these metrics, the Great Recession lasted far longer than the ostensible 2008-2009 recession per NBER score-keeping. Undocumented Mexicans didn’t even notice the 2001 recession; they were savaged by the Great Recession, and indeed, have only been emerging from it in the last year or two, and by some measures, only in the last few months.

        So how should we date the Great Recession (the China Depression)? Of course, we can date if using the official NBER dates, but if you do that, they’ll you miss almost all of the action subsequently.

        Alternatively, we could date the end of the Great Recession to Q2 2013, which is the trough (the second trough) of the down cycle. This involves acknowledging the Arab Spring as an oil shock, something which I have long contended. The Arab Spring (not the ECB’s 25 basis point rate increase) precipitated a second, prolonged recession in Europe (because they lack shale oil).

        One could also date the end of the China Depression to the point at which the FFR lifts off the zero bound. For example, per capita remittances in real terms (off a smaller undocumented base) bottom here. The decline in the undocumented Mexican population also appears to end here.

        The ELB is an important indicator, I think, because — notwithstanding such analyses as Menzie may have in a subsequent post — it’s hard to avoid the impression that the real interest rate should in fact have been negative during the 2009 – 2015 period. I can’t find another period back to 1955 when the rate stayed within such a narrow range for more than a year. In this case, the FFR was effectively at zero for seven years. Was this just the right rate for that entire stretch? Almost certainly not. For almost all of it, the FFR, even at zero, was too high.


        That in turn implies, it seems to me, that the interest rate transmission mechanism was ineffective during that period. You can QE all you like, but at the ELB, it doesn’t deliver much bang for the buck — which seems to be both your conclusion and that of other Fed studies I have read. Because the transmission mechanism is ineffective, recovery is painfully slow. In essence, it comes down to main street slowing paying down their mortgages to eliminate accumulated negative equity.

        The ineffectiveness of interest rate policy in turn calls into question the competence of policy makers, leading the population to turn in the second half of the depression to populist leaders or solutions or other outsiders, to wit, Trump, Macron and Brexit.

        Importantly, however, the depression does eventually end, and the appeal of populism accordingly fades. By this line of reasoning, the clash between the far right and left at Charlottesville to the firing of Bannon in August 2017 represents the high water mark of the populist era. It is ebbing, and will continue to do so, at least until the next oil shock. Indeed, remittances to Mexico are rocketing up, increasingly by 10% in real terms in the last year (through August). The good times are beginning to roll again, and US citizens will be increasingly looking for hands to help with work rather than worrying about more mouths to feed. The fascist mood is dissipating, and it is this which is the most important consideration of economic policy-making in the wake of a depression.

        I’d add that, if you believe this and you’re a British, pro-EU policy-maker, then you look to put Brexit back to a new popular vote. This model says the British will reject Brexit if offered to them now.

  2. PeakTrader

    Perhaps, the Fed on March 18th signaled the bottom of the downturn is not in, and on April 29th signaled the rebound is underway. And, the bond market expected a further fall in March and expected a stronger rebound in April.

  3. Moses Herzog

    One of the contentions that I have held strongly and for YEARS now, and some mainstream economists also hold, is that monetary policy should not be a replacement for, and has nowhere near the positive effects of expansionary fiscal policy. And to me, it’s kind of a dumb process where we sit around arguing what is the effect of square wheels on a wagon, when we know circular wheels work much better. But we have academics writing papers on “What Is the Increased Speed Generated By the Use of Square Wheels??”

    Maybe the better policy papers, instead of discussing how much square wheels benefit us, might ask “Why Are We Discussing Square Wheels, When We Already Know Circular Wheels Work Better??” Also why aren’t more economists writing about the Fed’s decades long failure to use its regulatory powers?? Is it because “we” (economics professors) won’t get invited to Jackson Hole or be offered nice jobs at the Fed if we discuss an area in which the Federal Reserve has been a GRAND FAILURE in performing its duties??

    The only such example of the Fed doing its damned job that I can remember in recent history (when not doing it as window dressing for an already in progress crisis) is Yellen’s literally last act as Fed Chair.

    When I read about the Fed performing this rare and once in a lifetime application of its regulatory powers, I nearly fainted and went into a coma. I swear to God, if I had the power to have awarded Yellen the Congressional Medal of Honor that same day the Wells Fargo punishment was handed out, I would have walked across this country from West coast to East coast just to hand Yellen the medal.

    I wonder if the “novel concept” has ever “dawned on” the Fed Board and other government agencies that ENFORCING their regulatory powers might avoid bad credit (bad loans), large defaults, or en masse defaults and other “events” which induce the panic filled necessity to lower rates to the ZLB to begin with?? Then we might have enough intermittent time between crisis-to-crisis for rates to rise enough to when we hit the next crisis, we aren’t already “butted up against” the ZLB.

    Oh, gosh golly darn it—I just entered another one of my utopian fantasy daydreams. Please excuse me people.

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