Credit QE

Although he didn’t state it specifically in his November 2010 Washington Post op-ed formally justifying QE2, it was very clear that then-Fed Chairman Ben Bernanke intended it to work through lending and especially the bank channel. Though he doesn’t explain, nor has any official ever, why a second one was needed given that the first was “quantitatively” determined, Bernanke was unusually clear about what he expected to happen for it:

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth.

If one is of the mood to be hugely charitable toward QE, you can claim that judging from this narrow benchmark it worked. According to the Fed’s Z1 statistics, bank lending resumed steady growth in Q2 2011. Since that quarter, the total of loans on the books of depository institutions has increased by 31%. It is unclear if QE was the motivation for that change, or perhaps it was the 2011 crisis which might have convinced banks to get out of the money dealing business so as to at least get back to the lending business, but again if we are being purposefully favorable we can attribute it to the Fed’s signature monetary policy.

It took a little while longer, and another two QE’s, for the other financial sectors to follow what banks were doing. The non-bank sector, after shrinking precipitously after the panic (Q3 2008), finally resumed positive numbers in the middle of 2013. Like the bank sector, it isn’t clear what motivated the change as that time period like 2011 was characterized by not just additional QE’s but also a great deal of financial turmoil.

The rest of the economy contributed positive loan growth in greater appreciation, though once again the inflection coincides with a prospective QE as well as a great many economic and financial questions (maybe lending doesn’t work the way it is theorized?).