The case for ultra easy monetary policies has been well enough made to convince the central banks of most Advanced Economies to follow such polices. They have succeeded thus far in avoiding a collapse of both the global economy and the financial system that supports it. Nevertheless, it is argued in this stunningly accurate paper via none other than the Dallas Fed (and BIS economist William White [9]), that the capacity of such policies to stimulate “strong, sustainable and balanced growth” in the global economy is limited. Moreover, ultra easy monetary policies have a wide variety of undesirable medium term effects - the unintended consequences. They create malinvestments in the real economy, threaten the health of financial institutions and the functioning of financial markets, constrain the “independent“ pursuit of price stability by central banks, encourage governments to refrain from confronting sovereign debt problems in a timely way, and redistribute income and wealth in a highly regressive fashion. While each medium term effect on its own might be questioned, considered all together they support strongly the proposition that aggressive monetary easing in economic downturns is not “a free lunch”. Absolute must read!
As we noted earlier [10]:
Hopefully instead of setting up his own irrelevant strawmen, and then knocking them down with a Fed-dictated script, [WSJ's Jon] Hilsenrath, and his profound financial journalist experience [11], can at least pretend to tackle the questions noted above...
...well he won't. So luckily the Dallas Fed will do it for him...
Dallas Fed QE [12]