Ben Bernanke testified before Congress this week and the conclusion of markets appears to be that Ben's got their back, so party on. Underlying that premise is an assumption for which there is scant evidence, namely that QE is positive for growth. Certainly Ben Bernanke seems to beleive that what he and his cohorts have done with unconventional monetary policy has been positive for the economy. Anything that can be pointed to as a positive is credited to QE while the negatives always seem to be blamed on exogenous forces. 

Economic growth so far this year has been anemic by any measure. First quarter GDP grew at a subdued 1.8 annual rate. The consensus estimate for second quarter growth - not that the consensus is ever right - is less than 1%. This is what we get for a multi-trillion dollar expansoin of the Fed's balance sheet? We can't run a real live counterfactual experiment so there is no way to know what growth would have been absent QE but I think we have to at least start considering the possibility that QE is either wholly ineffective or possibly an impediment to growth rather than the magical growth elixir it is assumed to be. Bernanke and his colleagues have spoken of balancing the positive effects of QE against the negatives but they have always assumed that there were positive effects. What if they're wrong? What if QE is negative for growth and has other negatives as well with regard to financial stability?

I think most people, including Bernanke, would point to several things as "evidence" that QE is working. Exhibit 1 would of course be the housing market which has recovered in construction volumes as well as in the price of existing structures. I think one must ask though what exactly the transmission mechanism is for QE to affect housing. It seems to me that the key variable is interest rates and based on our experience with QE so far, it would seem to be a negative. In every instance of QE so far, starting with the first iteration in 2009, interest rates have risen during the QE episodes and fallen after they were ended. If the Fed's goal was to reduce interest rates to spur borrowing and therefore housing, it would seem they would have been better off doing nothing. This same logic would also apply to the other interest sensitive sectors of the economy such as autos.

The other "evidence" would be the stock market I suppose since it tends to rise during periods of QE and fall during the lulls. While stocks do seem to respond to QE, to cite that as evidence of a strong economy is difficult at best and impossible at worst. The fact is that over relatively short to medium time frames, stock prices are hardly correlated with economic activity at all. I have no problem with those who say that stock and other liquid, tradeable asset prices are directly affected by QE. I - and all the available economic research - have a big problem with saying that will translate into significant economic growth. And the fact is that, as I pointed out above, it hasn't.

There are any number of reasons why QE might be negatively impacting growth, from high oil prices to the diversion of capital to speculative purposes to its effects through exchange rates on other countries with which we trade. I do not claim to know the full extent of the effects of QE but most importantly, neither does Ben Bernanke. That being the case and considering the evidence to date, why does Bernanke persist in pursuing the policy? Is there some other reason for the policy other than the stated one of spurring economic growth? If so. Bernanke sure isn't telling anyone what it is. He seem to genuinely believe that higher stock prices are sufficient reason to continue the policy. I believe Bernanke had it right when he started talking about ending the policy a few months ago. It is time we found out how the economy would function without the psychological support - and the mood of stock market participants does seem to be the only tangible benefit to date - of the Fed's extraordinary policies. I suspect we'd find that even if stocks did worse for a while that the real economy might actually do better. And while stocks aren't correlated with economic growth in the short or medium term, they certainly are over the long run. Some short term stock market pain may be exactly what we need right now. It's time to run the counterfactual.