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HomeIllinois NewsBiga: From ZIRP to QE to NIRP – The New Alphabet Soup

Biga: From ZIRP to QE to NIRP – The New Alphabet Soup



Federal Reserve Chairman Janet Yellen

By Frank J Biga III - 

I remember meeting Speaker John Boehner back in late 2011 at a local Chicago Republican meeting and besides his optimistic forecasts for a Republican President being elected in 2012, I also remembered his non-response to my question regarding whether the GOP had been too hard on then Federal Reserve Chairman Ben Bernanke given the very difficult economic environment he faced.   Speaker Boehner deftly avoided a direct answer but I think the question is still valid.

In fact, with the economy growing at a snail’s pace at best, and with the stock market exhibiting symptoms of recession paranoia, the question is more important than ever. Because if the government is going to do anything about an economic downturn at all, then it has two broad sets of tools at its disposal – fiscal policy and monetary policy. Since divided government has led to the abandonment of fiscal policy, the Fed itself bears the sole burden to prevent a deflationary spiral.

Since 2008, it has been very accommodative on this front. From a Zero Interest Rate Policy or ZIRP to several rounds of Quantitative Easing or QE, the Fed has sought to lower short term and long term interest rates. This fed fears of a 1923 Weimar-lie hyperinflation so we all got to watch endless commercials hawking gold on Foxnews. But like Godot, inflation never came.

This is because of the massive deflationary effects already omnipresent in our economy. More productive technology, declining demand of the aging baby boomers, globalization and the race to zero marginal wages all helped reduce the velocity of money in the economy. This means inflation is lower than it otherwise would be as each dollar is spent fewer times over the course of time.

So lowering interest rates to zero was absolutely necessary, not primarily as a means to juice the economy, but rather to prevent the economy from a serious depression. Lowering rates allowed many debts to be refinanced and homeowners with equity lines to pay lower rates. Without this, more deflation would have occurred because of higher default rates and debt destruction.  So, yes, the GOP was too hard on Mr. Bernanke.

Meanwhile, Congress and the President just sat there. No major tax reform from President Obama and no major spending bill from Congress were passed much less considered.   A grand bargain could have really helped. Those borrowers who had benefited from the lower rates and kept paying down debt needed additional stimulus of some kind to get the economy to reach escape velocity. Usually divided government is a good thing, except when it isn’t. So we just kept chugging along with subpar growth most quarters.

By 2015, the political pressure on Fed Chairman Janet Yellen to end QE and then ZIRP was so intense that I think against her own best instincts, the Fed raised rates a whole quarter point back in December. The run-up to this event was so excruciating for the markets that she had to back off several times. And it was so completely unnecessary too. The price of gold, which acts as a hedge against inflation, had run up to near the $2000 level in 2011 but has retreated consistently since getting down to under $1100 recently. Yet, we just had to get off of ZIRP, no matter what, economics be damned.

Was it the right move? The returns are still coming in but just two short months later, world stock markets are down substantially, China’s growth is slowing significantly and US stock markets are in serious trouble. The price of oil has fallen off a cliff. The odds of a recession are a lot higher than they were back in the summer.

The official unemployment rate is still only at 4.9% but evidently even this low level is not good enough as Yellen indicated this week that the Fed is looking into the possibility of negative interest rates or NIRP like some of the other central banks if the economy slows further. This is to say the least unprecedented. We are staring into the abyss. At the very least, this bodes well for serious political changes. New Hampshire proved that Tuesday night.

Illinois Review
Illinois Review
Founded in 2005, Illinois Review is the leading perspective and source of conservative news, opinion and information in Illinois. Follow Illinois Review on X at @IllinoisReview.


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  1. Fiscal policy and monetary policy amount to the same thing when it comes to the Fed. Inflation is nothing more complicated than an expansion of the money supply which the Fed does by expanding credit to the member banks. But if you or I did the same thing we would be jailed for counterfeiting. Milton Friedman said that the real rate of taxation is the real rate of spending regardless of how the spending is financed. Unless or until the Congress and the President can slow the growth of spending and debt, the Federal Reserve moves are irrelevant to the real long-term problem.

  2. We definitely need a better fiscal policy, preferably one that favors tax cuts and reduced government spending that is designed to grow the economic pie. That is what will really grow the monetary base as any form of credit is money. Money is created when lending occurs and is destroyed when debt is paid back or even worse defaulted on. The “animal spirits” have not returned to our economy and low interest rates are not going to do it. But they do at least reduce interest expense for many borrowers and this reduces debt destruction and may even boost consumption to a degree.