Ben Bernanke has called quantitative easing a Main Street policy. But U.S. households saddled with mortgages have seen only a sliver of the $2.3-trillion (U.S.) of cheap money the Federal Reserve chairman has created so far. If the central bank is really trying to boost the economy by juicing consumption, more QE doesn't look like the way to do it.
People spend more if they have more money in their wallets. This is the effect of traditional Fed interest-rate cuts, which allow homeowners to reduce monthly outlays by refinancing their mortgages at lower rates. Toward the end of 2008, the U.S. central bank kicked off what has become a three-stage bond-buying program intended to provide more of the same by forcing long-term rates lower. The Fed's purchases amount to printing money. But very little has found its way into homeowners' pockets. A big reason is a gummed-up mortgage system, with underwater borrowers unable to refinance and banks cautious with new loans.
Despite very low long-term Treasury yields, the average effective interest rate on the $10-trillion of mortgage debt outstanding is still stuck above 5 per cent. Using the run-rate in the last quarter of 2008 as a baseline, U.S. mortgage borrowers have saved a cumulative $300-billion or so in interest payments since then, according to Bureau of Economic Analysis data.
That's not chump change, but it's less than 15 per cent of the Fed's QE outlays to date. Of course, Mr. Bernanke and his colleagues have also fuelled gains in stock and bond markets. These dwarf the Fed's bond-buying and should make homeowner-investors – not to mention businesses – feel better. Yet higher retirement-fund balances don't directly add to people's spending power, especially with the painful losses of 2008 still fresh. And with companies already sitting on $1.7-trillion in liquid assets, it's hard to see how lower debt costs will encourage more hiring.
If it really wants to reach Main Street pocketbooks, the Fed may need to come up with something completely different. One idea was set out last month by Anatole Kaletsky, a Reuters journalist and economist. Instead of printing money to buy bonds, the Fed could print money to give to citizens. The suggestion is not as crazy as it might seem. If Mr. Bernanke's many radical actions since 2008 don't deliver results, maybe eventually he'll be willing to try one more.