Here’s an explanation from Dallas Fed President Fisher:
But a not-so-funny thing has happened on the way to the reality forum. While bankers and other sources of credit have slowly but consistently liberalized their lending practices, borrowers have not been especially keen to put cheap and super-abundant credit to use in expanding payrolls to the degree the FOMC desires.
To be sure, we have, as hoped, seen a reinvigorated housing market. Indeed, FOMC records will show that based in the superb work done by two housing-market experts at the Dallas Fed—John Duca and Anthony Murphy, working with John Muellbauer at Oxford—and thanks to our field soundings with housing and housing-related business leaders, the Dallas Fed was way ahead of others at the FOMC table both in warning of the housing market debacle and then recognizing the housing recovery. The fact that the housing-market gears have now begun to mesh is why I believe we are running the risk of overkill by continuing our mortgage-backed securities purchase program at the current pace and would suggest tapering off those purchases.
As to the more broadly impactful Treasury purchases, occurring as they have simultaneously with a loss of confidence in the euro bond markets—I like to say that, relatively speaking, the U.S. economy has been the “best-looking horse in the glue factory”—they have indeed led to a massive bond and stock market rally. For the ninth time in U.S. history, we have experienced a doubling of the market indexes; corporate borrowing rates are at the lowest levels on record, including those for CCC-rated credits that are just north of default.
That’s the good news. Some sharp market operators have done very well. For private-equity firms, for example, hyper-accommodative monetary policy has offered a chance to go back to the glories of payment-in-kind and other financial techniques that enrich financiers but may not create employment. For the largest banks and financial institutions, policy has helped dig them out of the holes in which they found themselves (including the hole of executive compensation). And for the wealthiest investors, even unto the revered Oracle of Omaha, there has been the windfall of super-abundant credit that, after adjusting for tax deductions on interest and a modicum of inflation, is practically free. Ordinary savers and retirees have benefited from the turnaround in the all-important housing sector, but with the remainder of their savings, they have been waylaid on the sidelines of the zero bound. In addition, the 5,500 or so smaller banks that are the backbone of our communities have seen their interest margins squeezed severely. The wealth effect, in other words, has been unbalanced. Main Street does not seem to have been impacted to the same degree as Wall Street.
To be sure, as mentioned, businesses have been able to improve their balance sheets and are enjoying higher stock market valuations of their businesses. However, thus far, businesses have pursued payroll-expanding job creation with less enthusiasm than had been hoped for. Unemployment remains annoyingly high. There are some pockets of exception like Texas, which now operates at employment levels 3.1 percent above its prerecession peak and, over the last decade, has created jobs across the entire income spectrum. Nationwide, meanwhile, job creation has been weak and in the important middle-income quartiles has been shrinking.
Employers large and small, privately owned or publicly traded, will tell you that despite access to cheap and abundant capital, they are hesitant to make long-term commitments, including hiring significant numbers of permanent workers. They cite uncertain growth prospects for the goods and services they sell at home, where consumption is retarded by slow growth in employment and, lately, by the increase in payroll taxes. And abroad, these employers point to the dampened consumption stemming from the economic debacle in Europe and its knock-on effects on China and the export-led emerging economies. They are uncertain about fiscal policy, not knowing what their taxes will be and what will happen to all-important federal spending that directly impacts them or their customers. They are uncertain as to the ultimate effect on their cost structures of the seemingly endless expansion of health care and other mandates and regulations, however meritorious their intention. And, for some, there is a deeply imbedded worry that the Fed’s contortion of the yield curve and cost of money cannot last forever, or, if it lasts too long, will eventually result in financial bubbles and/or uncontrollable inflation, adding another uncertainty to the plethora of uncertain factors that already plague them.
As I walked down memory lane in preparation for this lecture today, I thought of my days at business school in the mid-1970s. Everything we learned in business school was oriented toward operating and growing companies under the assumption of constrained, conservative debt markets and a fundamentals-driven equity market. Today, the opposite obtains: Credit is super-abundant and stock market behavior is conditioned not so much by the fundamental performance of its underlying companies but by increasing doses of monetary Ritalin. Against this backdrop, I am not surprised by the reaction of businesses. Operating in a highly uncertain environment, it is eminently sensible for them to defensively use their newly strengthened balance sheets to buy back shares and pay out dividends or employ them offensively in ways—say, in making acquisitions—that often lead to employee rationalization, not payroll expansion for U.S. workers.
This is how businesses really think; this is the way people really are.
The bottom line is that rather than achieve the intended theoretical effect, I believe the policy of super-abundant money at costs deviating substantially from normal equilibrium levels may ultimately prove to be counterproductive. Or it may restrain the benefits that theory might suggest.
It was interesting to see Mr. Fisher stress and emphasize that much of the help is going to the wrong people – Wall Street not Main Street. Don’t get me wrong, I want Wall Street to do well, but I don’t want it to do well at the expense of Main Street, because that means that we are inflating another asset bubble, and that is not good for anyone.