QE theory that didn’t work
Quantitative easing relies on the effect of the portfolio balance channel, which stipulates purchasing the long term treasury security by Fed, lowers the total return making it less attractive to investors and making other assets more attractive on a relative basis. As money flows to equity and houses, these assets would be worth more. The asset value provides more collateral for borrowing, and the higher asset value provides a wealth effect that would encourage consumption
Cheap money failed to stimulus growth
However, twenty years of QE did not leave the high exception of the optimists nor resulted in the worst-case scenario of the pessimist. It did one thing, though; it had created the most significant asset bubble in history. The desired inflation never materialized because the companies that tried with cheap Money used the Fed money to buy back stocks to push the prices of their shares higher. Many new unprofitable IPOs were sold at exorbitant prices that are yet to make a profit, such as Uber and Lyft.
Bernake QE didn’t work either
Real GDP growth from 2009 till mid-2018 was less than 2.2% materially below the long term trend.
In 2008, and the world saw the near-destruction of the banking system and the international monetary policy. The CPI dropped to 0.09% in 2008, even lower than 1.8% that prompted Greenspan to embark on four years of monetary easing.
In 2008 Ben Bernake responded similarly, taking the Fed fund rate to 0% in Dec 2008 until the next Fed Janet Yellen raised the rate to 0.25% in Dec 2015.
Four years of QE did not work
Bernake started QE in three rounds purchasing long term security form the bank primary dealers. The purchases were paid for with money from thin air that resulted in Base money supply MO to increase from $820 billion to $4.1 Trillion.
Supporters of QE argued this would result in higher inflation. However, inflation never came as it has little to do with the money supply. Inflation is a psychological phenomenon that needs a catalyst. Inflation never came because people were saving and paying debts.
None of the expected results emerged, core CPE or consumption rate remained below 2% for six years till 2017. The Fed fund rate was still at 2.5% till mid-2018 well below the 3% fund rate. Real GDP growth from 2009 till mid-2018 was less than 2.2% materially below the long term trend.