Feldstein on quantitative easing

In a WSJ op-ed last Friday, Harvard economics professor Martin Feldstein casts serious doubt on whether the fed's quantitative easing (QE) policy is doing much good.  Frankly, I have wondered this myself, since it is hard for interest rates (short or long) to get much lower.  But lower long-term rates are but one of a host of mechanisms through which QE is supposed to stimulate the economy.  Another key part, Feldstein argues, is a "portfolio-balance" effect.

Here is how it works: the Fed buys so many long term securities (government bonds and mortgage-backed securities mainly) that investors have to buy stocks in search of yield.  This raises stock prices, makes people wealthier and (in theory) they should spend more. 

Feldstein shows that even if ALL of the recent run-up in stock prices between 2009 and now has been caused by QE, the impact on spending would be small (0.3% of GDP) because one dollar of stock wealth is associated with only four cents of extra spending.  It is highly unlikely QE is the only factor behind the stock market, other things like earnings per share and new savings also are at play.  So the real net impact has to be even smaller than 0.3% of GDP, he claims.