Former Treasury Secretary Larry Summers’ August 26 op-ed in the Washington Post is an excellent commentary of the Federal Reserve’s policy of “quantitative easing.” Under quantitative easing, the Fed buys bonds, which keeps down interest rates and adds more money to the economy, greasing the wheels of commerce. Summers says that this was necessary during the financial crisis of 2008 and during the first shock of the Covid crisis in 2020, but not now. Quantitative easing tends to benefit the wealthy, pushing the stock market and other asset prices, like homes, higher, but not doing much for regular people.
Furthermore, because of the way Fed borrowing works, quantitative easing tends to shorten the term of the debt. Summers says that with interest rates so low at present, the Fed and Treasury should be financing long term debt, locking in the current low interest rates. Summers is not convinced that interest rates will stay low forever. Inflation is a bigger threat than the Fed currently acknowledges.
Summers warns that the Fed has followed the course of quantitative easing without examining where it is going. He fears that following the easy path of the status quo will lead us into a financial quagmire similar to the way our continuation of unexamined policies led eventually to disasters in Vietnam and Afghanistan.
I think that Summers is right on. But Wall Street and most people love quantitative easing because it is good for almost everyone in the short term, just better for the rich. However, the question is whether there is a problem in the longer term. While inflation is the immediate concern, there might be other disruptions of the market, a stock market crash, or problems in the labor market, or failure of supply chains for food and other daily needs. It’s also possible that nothing bad will happen. We are in uncharted territory by letting quantitative easing and “easy money” run so long.
China is tightening up its financial markets. Most people think this is political, to reign in the power the Chinese billionaires vis-à-vis the government. I think the Chinese may also be worried about dislocations in their economy. They may think that tightening up now may prevent worse consequences in the future. If so, I share their concerns. I wish the Fed did, too. I think Larry Summers does.