The Chart That Explains Everything
It’s the policy, stupid. And here’s the chart that explains exactly what the policy is.
(Richard Koo: The ‘struggle between markets and central banks has only just begun’, Business Insider)
What the chart shows is that the vast increase in the monetary base didn’t impact lending or trigger the credit expansion the Fed had predicted. In other words, the Fed’s madcap pump-priming experiment (aka– QE) failed to stimulate growth or put the economy back on the path to recovery. For all practical purposes, the policy was a flop.
QE did, however, touch off an unprecedented 6-year bull market rally that pushed stocks into the stratosphere while the real economy continued to languish in a long-term slump. And the numbers are pretty impressive too. For example, the Dow Jones Industrial Average, which bottomed at 6,507 on March 9, 2009, soared to an eye-popping 18,312 points by May 19, 2015, an 11,805 point-surge in just five years. And the S&P did even better. From its March 9, 2009 bottom of 676 points, the index skyrocketed to a record-high 2,130 points on May 21, 2015, tripling its value at the fastest pace in history.
What the chart shows is that the Fed knew from 2010-on that stuffing the banks with excess reserves was neither lowering unemployment or revving up the economy. The liquidity was merely driving stocks higher.
It’s worth noting, that the Fed knows that credit does not flow into the economy without a transmission mechanism, that is, unless creditworthy borrowers are willing to to take out loans. Absent additional lending, the liquidity remains stuck in the financial system where it eventually creates asset bubbles.
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