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The Financial, Economic, Social, and Political Impact of Quantitative Easing in the United States

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The Financial, Economic, Social, and Political Impact of Quantitative Easing in the United States The Financial, Economic, Social, and Political Impact of Quantitative Easing in the United States Client: The Markets Room, United States Department of the Treasury Faculty Advisor: Seamus O'Cleireacain James Cashman John Olderman Yiling Pan Maxime Terrieux Audrey Yu David Zhang Shahnoza Zhumanova May 2016 School of International and Public Affairs | SIPA Columbia University in the City of New York 1 ACKNOWLEDGEMENTS This report represents the collective efforts of a team of graduate students at Columbia University's School of International and Public Affairs. Our Capstone assignment—to partner with the Markets Room at The United States Department of the Treasury in an examination of the financial, economic, social and political impacts of quantitative easing—has proved to be an unparalleled learning experience for us. Of course, none of this would have been possible without the Markets Room. We are especially grateful to John Fagan and Albert Lee for designing the terms of reference for this fascinating project and for generously sharing their time, experience and insight with us as we embarked on this unique academic odyssey. Similarly, the resultant research would have been far less rich without the contributions of the many distinguished scholars and industry experts who graciously agreed to be interviewed by the Team for this project, along with the technical expertise of Alexandre Goncalves, PhD candidate, who assisted with our data analysis. Finally, we are indebted to the leadership of Professor Seamus O'Cleireacain, our avuncular faculty advisor. Professor O'Cleireacain served as the ideal moderator for regular team debates on this controversial subject. His profound technical expertise and abundant reservoir of patience were much needed and often tested! In the end, any errors or oversights appearing in the final report belong to the Capstone team and the Capstone team alone. Happy reading! 2 TABLE OF CONTENTS ACKNOWLEDGEMENTS ........................................................................................................................... 2 TABLE OF CONTENTS .............................................................................................................................. 3 EXECUTIVE SUMMARY ............................................................................................................................. 5 1. INTRODUCTION ...................................................................................................................................... 6 1.1. Monetary Policymaking in an Era of Quantitative Easing ............................................................................. 6 1.2. Capstone Project Focus, Methodology, and Outline ................................................................................... 10 2. FINANCIAL MARKETS IMPACT ANALYSIS ....................................................................................... 12 2.1. QE’s Success: Reducing Long-Term Rates .................................................................................................. 12 2.2. QE’s Unintended Consequences: Six Areas of Concern ............................................................................ 13 2.2.1. Asset Market Dependence on Monetary Policy .......................................................................................... 14 2.2.2. Diminishing Returns to QE Due to Lack of Policymaker Coordination ........................................................ 14 2.2.3. Illiquidity in Key Financial Markets .............................................................................................................. 16 2.2.4. Systemic Risk ............................................................................................................................................. 17 2.2.5. International effects ..................................................................................................................................... 20 2.2.6. Risks of Unwinding ..................................................................................................................................... 22 2.3. Conclusion: QE and the Financial Markets, a Mixed Success .................................................................... 22 3. REAL ECONOMY IMPACT ANALYSIS ................................................................................................ 23 3.1. Consumption .................................................................................................................................................... 23 3.1.1. Expected Results and Transmission Mechanisms ..................................................................................... 23 3.1.2. Observed Outcomes ................................................................................................................................... 23 (i) Consumer Credit: Improved Availability and Conditions .................................................................................................... 23 (ii) Impact on Consumer Confidence ...................................................................................................................................... 25 (iii) Overall: Steady, Solid Consumption Recovery ................................................................................................................. 25 3.2. Investment ........................................................................................................................................................ 26 3.2.1. Expected Results and Transmission Mechanisms ..................................................................................... 26 3.2.2. Observed Outcomes ................................................................................................................................... 26 (i) Financial Conditions for SMEs ........................................................................................................................................... 26 (ii) Impact on Investor Confidence .......................................................................................................................................... 28 (iii) Overall: Partial Investment Recovery ................................................................................................................................ 28 3.3. Government Spending .................................................................................................................................... 28 3.3.1. Expected Results and Transmission Mechanisms ..................................................................................... 28 3.3.2. Observed Outcomes ................................................................................................................................... 29 3.4. Net Exports ....................................................................................................................................................... 31 3.4.1. Expected Results And Transmission Mechanisms ..................................................................................... 31 3.4.2. Observed Outcomes ................................................................................................................................... 32 3.5. Putting Things Together ................................................................................................................................. 33 3.5.1. Mixed to Positive Impact of QE on Aggregate Demand and Inflation ......................................................... 33 3.5.2. Mixed Recovery in the Labor Market: Any QE Effect? ................................................................................ 35 (i) Unemployment ................................................................................................................................................................... 35 (ii) Wages ................................................................................................................................................................................ 37 3.5.3. QE and the Real Economy: Unintended Consequences ............................................................................ 39 4. SOCIAL IMPACT ANALYSIS ............................................................................................................... 40 4.1. Assessing Inequality ....................................................................................................................................... 40 4.2. Trends in Inequality ......................................................................................................................................... 41 4.2.1. Income Inequality ........................................................................................................................................ 41 4.2.2. Wealth Inequality ........................................................................................................................................ 43 3 4.2.3. Wealth and Racial/Ethnic Inequality ........................................................................................................... 44 4.2.4. Debt and Consumption Across America ..................................................................................................... 44 4.3. Transmission Mechanisms ............................................................................................................................. 45 4.3.1. The Conventional Channels .......................................................................................................................
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