Stimulus Tops $3.4 Trillion, But Where’s the Growth?

Published May 1, 2014

Since August 2007 when the financial crisis began, the Federal Reserve has expanded its balance sheet by more than $3.4 trillion — purchasing mortgage-backed securities and U.S. treasuries.

The idea was and is to counteract the credit contraction that pulverized the global economy.

But where’s the growth? As recently as March 19, 2014, the Fed was projecting anywhere from 2.8 to 3 percent growth in real Gross Domestic Product (GDP) for the year. Its December projection for 2013 was 2.8 to 3.2 percent growth.

Then the numbers for the quarter came in: 0.1 percent growth annualized for the first quarter.

They must have a really foggy crystal ball over there at the Fed. But what is clear is that since the financial crisis, the Fed has been basing its policies on overly rosy economic assumptions of a rapid recovery — that has never transpired.

Wrong, Wrong, Wrong

Once again, growth is coming in below government expectations. This is nothing new.

In January 2008, the Fed saw no recession or financial crisis on the horizon. It projected between 1.3 to 2.0 percent real growth in 2008, and between 2.1 to 2.7 percent growth in 2009.

Instead, the economy contracted by -0.3 and -2.8 percent in 2008 and 2009, respectively.

By October 2008, as markets were crashing, the bank changed its tune. The economy was slowing down considerably, but likely would not shrink. 2008 would see between 0.0 to 0.3 percent growth, and 2009 between -0.2 to 1.1 percent. Wrong again.

In January 2009, in the midst of severe financial distress, the Fed finally thought a recession would happen, but would be mild, projecting a contraction between -1.3 to -0.5 percent that year. Still way off. Again, in 2009, it went down -2.8 percent.

Similarly, the Fed’s track record in projecting a recovery has been way off. That year, the Fed projected a V-shaped recovery after 2009. The economy would grow between 2.5 and 3.3 percent in 2010, and between 3.8 and 5.0 percent in 2011.

By January 2010, the Fed had changed its expectations slightly for 2010 — by raising them. Then, they said the economy would grow between 2.8 and 3.5 percent in 2010, although they lowered their expectations for 2011 to between 3.4 and 4.5 percent.

Instead the economy only grew by 2.5 percent in 2010, and by 1.8 percent in 2011. Wrong again.

Even as late as June 2011, the Fed was projecting between 2.7 and 2.9 percent growth for 2011. Way off. Again, the economy only grew by 1.8 percent in 2011.

In January 2012, the Fed said the economy would grow between 2.2 and 2.7 percent — just barely meeting its forecast that time when it came in at 2.2 percent for the year. Like the broken clock, it finally got one right.

In March 2013, the Fed predicted the economy for that year would be 2.3 to 2.8 percent. Wrong again. It only came in at 1.9 percent.

A Keynesian might consider all of the above and suggest that means that the Fed’s current posture — $55 billion a month of securities purchases — has not been aggressive enough.

Unused Money

But anyone with common sense can look at the stimulus and say it has made almost no difference whatsoever. Excess reserves held by financial institutions have shot up from $1.78 billion in 2007 to $2.7 trillion today. Almost 80 percent of the Fed’s “stimulus” has been sitting in a vault, padding banks against losses stemming from the crisis.

In the meantime, unemployment remains too high, young people are not entering the labor force at the rate they once did, wages are flat while prices keep increasing, and the economy both on the individual and institutional levels, still has way too much debt at almost $59 trillion nationwide.

Deeper Bottom, Faster Recovery?

Maybe if we had just done nothing to begin with, and let financial institutions all over the world take the losses they justly deserved in the crisis, the initial contraction might have been much steeper — but the market would have found its bottom. And we’d be back to robust growth already.

Instead, we did the bailouts and now the Fed sees no escape from the stimulus trap it has created as it still tries to hold back the inevitable. There is no growth because we’re trying to grow off a mountain of debt that can never possibly be paid back. Is anyone listening?