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35 » VISIT US ONLINE @ DSNEWS.COM ST. LOUIS FED CASTS DOUBT ON EFFECTIVENESS OF QE AND ZERO INTEREST RATE POLICY In a recently released white paper analyzing actions taken by the Federal Reserve in the im- mediate aftermath of the 2008 financial crisis, St. Louis Fed VP Stephen D. Williamson questions a few of the central bank's policies and the effect they have had on the economy. In a section of the white paper titled "Un- conventional Monetary Policy After the Great Recession," Williamson covers three areas that he says comprised a program of "unconventional policy" by the Fed starting in 2009: the zero interest-rate policy (ZIRP); quantitative easing, or large-scale asset purchases; and forward guid- ance. Even though the Fed's ZIRP is nothing new, since the interest rate on reserves during the Great Depression was zero, Williamson points out that it is unprecedented in post-1951 United States. He contends that the ZIRP period con- stitutes a "liquidity trap" in which reserves and Treasury bills are "essentially equal assets." Wil- liamson said that the zero interest rates enacted by the Fed in 2008 and are still in place have not had their intended effect on inflation. Instead, he said, "the relevant long-run determinant of inflation, in a nominal-interest-rate-targeting monetary regime, is the level of the nominal interest rate. Indeed, mainstream monetary theory and the experience of Japan for the last 20 years tells us that extended periods of ZIRP lead to low inflation, or even deflation." It is possible, Williamson said, for the Fed to become permanently trapped in ZIRP because of the Taylor rule that dictates how much the Fed should raise rates in response to other eco- nomic conditions. "If the playbook for the Fed's forward guid- ance in the post-Great Recession period was supposed to have come from received macro- economic theory, then it seems clear that the FOMC was not following instructions correctly." "With the nominal interest rate at zero for a long period of time, inflation is low, and the cen- tral banker reasons that maintaining ZIRP will eventually increase the inflation rate," William- son wrote. "But this never happens and, as long as the central banker adheres to a sufficiently ag- gressive Taylor rule, ZIRP will continue forever, and the central bank will fall short of its inflation target indefinitely." QE, which consisted of purchases of long- maturity Treasury securities and mortgage- backed securities, has served to increase the Fed's balance sheet by more than four-fold since before the crisis and substantially increase the average maturity of the Fed's assets, according to Wil- liamson. But while the Fed's rationale for QE was articulated by then-chairman Ben Bernanke in 2012, Williamson said that the theory behind QE is "not well-developed." "Further there is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed inflation and real economic activity," Williamson wrote. "Indeed, casual evidence suggests that QE has been ineffective in increasing inflation. For example, in spite of massive central bank asset purchases in the U.S., the Fed is currently falling short of its 2 percent inflation target." Forward guidance was an attempt on the part of the Fed to provide more explicit information on policy statements instead of letting the central bank's actions speak for themselves, according to Williamson. Like the ZIRP, however, William- son says the Fed's forward guidance may have had the opposite effect of what was intended. "If the playbook for the Fed's forward guid- ance in the post-Great Recession period was supposed to have come from received macro- economic theory, then it seems clear that the FOMC was not following instructions cor- rectly," Williamson wrote. "'Extended period' is far too vague to have any meaning for market participants; monetary policy rules should be specified as contingent plans rather than actions to take place at calendar dates; 'thresholds' are meaningless if nothing happens in response to crossing a threshold. us, the Fed's forward guidance experiments after the Great Recession would seem to have done more to sow confusion than to clarify the Fed's policy rule." U.S. SEN. BROWN CALLS FOR ACTION AGAINST 'ZOMBIE DEBTS' ON CREDIT REPORTS U.S. Senator Sherrod Brown (D-Ohio), Ranking Member on the Senate Banking Committee, has called federal regulators to action against so-called "zombie debts," which are debts that remain on a consumer's credit report even though they are no longer owed. Often these zombie debts are sold to banks or other debt collectors who harass consumers attempting to collect a debt that has already been settled. Brown recently joined David Rothstein, a credit counselor with Neighborhood Housing Services of Greater Cleveland, and Gabriel Rice, a consumer from Cleveland whose credit report contained zombie debts, at Neighborhood Housing Services to discuss how these debt and credit issues are impacting family finances. According to an announcement on Brown's website, the credit report of one in every five Americans contains an error. e devastation of the 2008 financial crisis resulted in the elimination of $13 trillion in household wealth and caused about five million Americans to lose their homes, according to Brown. Many Americans are still having difficulty obtaining mortgage loans due to the adverse impact of the crisis on their credit scores even seven years after the crisis. In mid-July, Brown proposed a bill known as the Consumer Reporting Fairness Act, which would require banks or creditors to notify credit reporting agencies when a bankruptcy extinguishes a consumer's debt. e bill also would allow consumers to take legal action against creditors that fail to report a discharged debt that the consumer no longer owes. Brown introduced the bill in response to the number of Ohioans affected by the recent JPMorgan Chase settlement. JPMorgan agreed in July to pay $136 million to settle claims that the bank sold inaccurate credit card debt to debt collectors. "Credit history is critical to home buying and asset building," Rothstein said. "Far too many families come to us with dings on their credit that are not real or were taken care of years ago. Without this bill, families are inadvertently being denied access to homeownership." In early August, Brown wrote a letter to Federal Reserve Chair Janet Yellen, Comptroller of the Currency omas Curry, Federal Deposit Insurance Corporation Chairman Martin Gruenberg, and National Credit Union Administration Chairman Debbie Matz urging the regulators to strengthen oversight of debt sale arrangements, which includes information that financial institutions send to debt buyers and consumers and how that information is verified for accuracy. Brown also asked the regulators to consider whether or not financial institutions are prohibited from selling zombie debt to debt collectors. "Every consumer should have an accurate credit score, and no consumer should be haunted by debts they don't owe," Brown said.

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