MELISSA BLOCK, HOST:
Federal Reserve officials, with Janet Yellen at the helm, are steering QE3 into dry dock. QE3 - not a fancy ocean liner, but the Fed's giant bond-buying stimulus program known as Quantitative Easing. And that program has officially come to an end. Confirmation came in a statement today from the Fed. NPR's John Ydstie has been asking economists whether the 6-year, 2.7-trillion-dollar program was a success or failure.
JOHN YDSTIE, BYLINE: Quantitative Easing was a desperate move when the Fed launched it during the dire days of the financial crisis. The housing market was imploding, banks wouldn't lend money for mortgages and investors wouldn't buy mortgages. So the Fed stepped in and did what investors wouldn't. In its first round of QE, the Fed bought $500 billion worth of mortgage-backed securities.
ALLAN MELTZER: It prevented a failure of a financial system, a run on banks, collapse of the payment system.
YDSTIE: That's Allan Meltzer, a Fed scholar and professor at Carnegie Mellon University. That first round of QE was a success, he says. But in his view, the second and third were a mistake. That's partly because the goal broadened for the second and third rounds of QE.
The Fed believed that by pumping money into the financial system through its massive bond-buying, it could lower long-term interest rates, boost lending by banks and in that way, stimulate the shaky economy. Former Fed vice-chairman Alan Blinder says the central bank did succeed in lowering long-term interest rates by 1 to 1-and-a-half percentage points. But he says its QE program failed to ignite lending.
ALAN BLINDER: I'm certainly shocked and I imagine the Fed is shocked that here we are, late in 2014, very far after the trauma of the financial crisis, and banks are still not expanding lending very much.
YDSTIE: To understand why it's shocking, you have to understand how the Fed pumps money into the financial system. Under QE, the Fed bought its trillions of dollars-worth of bonds mostly from banks and paid the banks by depositing the money in their accounts at the Federal Reserve. Banks were then free to lend the money, but Blinder says even as those trillions piled up, banks decided not to lend most of it.
BLINDER: If you talk to bankers, they say there's no demand for loans. If you talk to small business people and people looking for mortgages, they say credit is tight and they can't get loans. To me, that's the deepest mystery of what's going on in the economy right now.
YDSTIE: But Professor Meltzer, who's also a fellow at the conservative American Enterprise Institute, says it's no mystery to him. He says banks didn't lend because the Obama administration created an unfriendly environment for business and investment. He says big fines against Wall Street banks dampened their desire to lend, and he says the massive overhaul of financial regulation after the crisis made it harder to make loans.
MELTZER: The regulations may be useful, desirable, socially necessary, but putting them all on at once is discouraging to business investment.
YDSTIE: Even after the QE bond buying ends this month, the trillions of dollars in reserves will be there for banks to lend. Meltzer fears that at some point, banks will put that money to work and supercharge growth, sparking inflation, or a recession if the Fed pulls the reserves back too quickly. Blinder thinks the Fed has the tools and the skill to manage the situation without serious repercussions. John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.
