Ben Bernanke probably feels pretty good about himself right about now. After navigating through a treacherous financial collapse and near economic meltdown, things are looking pretty steady at the moment. After passing the reins of arguably the most powerful institution of the world to his successor, and instituting the much anticipated bond taper in place, he’s ridden off into the sunset seemlingly with a good plan in place.
The Federal Open Markets Committee (FOMC) spearheaded by Fed chair Janet Yellen meets this week. Almost all Fed watchers expect a continuation of current Fed policy of increasing the taper by another $10 billion, drawing Fed asset buying down to $45 billion a month. The tapering of Fed asset-buying was welcome on the street, but Paul Schatz of Heritage Capital stands in stark contrast to the conventional wisdom.
In the attached video, Schatz isn’t claiming to be a huge Keynesian devotee; in fact it’s quite the opposite. A man who actually thinks printing money is “despicable,” he believes once you go down the path of central bank asset buying, as bad as it is in his eyes, the policy must be given time.
Schatz examined past instances of similar quantitative easing programs, whether it’s Japan (where the Nikkei 225 is down 56% since the start of 1999), post-Great Depression U.S. or Argentina. “The problem is the central bank tapers too early or they stop QE too early,” he notes. “Once it’s started, if you look historically, you’ve got to see QE through to the other side of the next recession, not just getting by the crisis."
The question then becomes how far does the a central bank go; when is the program considered at the end of its efficacy? “Post-financial crisis recoveries are slow and stodgy,” he says. In Schatz’s eyes we need to see trend growth in GDP, something which we have yet to see in five years since the beginning of the current recovery.
“If we don’t see it through to the end of the other side of the next recession, that’s when you begin to pull things back,” he concludes. “You’ve got to go through an entire business cycle.”
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