Is There Any Appropriate Reaction to This on the Part of Eugene Fama?
Sam Ro: Fama To Santelli: QE Is A Neutral Event:
Nobel prize winner Eugene Fama was on CNBC earlier today to discuss the Federal Reserve and its extraordinary monetary policy. Santelli asked specifically about the effects of the Fed's quantitative easing program and the risks associated with it. [Fama answered:]
What they are doing... the effects are being greatly inflated by the accounts. What they've doing is issuing a lot of short-term debt--$85 billion a month--and using it to buyback long-term debt with the goal of lowering the interest on long-term debt. Now they take credit for lowering interest on short-term debt. But in fact what they've been doing should've raised rates on short-term debt.
The profound cluelessness as to what is going on in financial markets today is mind-numbing. I mean, we could understand a finance economist not understanding labor market institutions or events, or an industrial organization specialist not understanding monetary economics. But this is cluelessness about finance on the part of a finance economist.
It goes on.
Fama argued that the Fed was not affecting the economy that much. Santelli, however, continued to pursue the idea that there are risks associated with the Fed's actions. [But Fama:]
They're basically neutral events. I don't think they do very much.
But Santelli kept pursuing this line of questions, and tensions began to rise:
Let me interrupt you. If it's no big deal, then why don't all central banks just do this to the nth degree and make it a constant day to day week to week event where they purchase what's issued, keep interest low, and just target a low rate forever. Why won't that work then?
There's so much confusion in what you said it's difficult to answer.
Santelli's not too sophisticated.
But Santelli was watching financial markets in the spring, and registered the datum that when Ben Bernanke talked about shifting the future path of quantitative easing purchases, asset prices jumped. And Santelli is trying to incorporate this into his thinking--hence he sees Fama's claim that QE has no effect on interest rates as something so bizarre that it just doesn't register on his mind. Santelli is too reality based for it to even enter his mind that when Fama says "they are basically neutral events" he means not only that QE doesn't shift the chance of future disasters but also that QE doesn't affect interest rates today.
Fama, however, seems to have missed last spring--or, rather, Fama thinks that, by pure coincidence, at that exact moment when when Bernanke talked about the "taper", the market's underlying utility function shifted to be less patient and more averse to risk.