Robert Waldmann: Extra Thursday DeLong QE/Risk Smackdown: Morning Comment

…after massive QE tends to suggest that QE just doesn’t work. In 2010 it was possible to argue that massive purchases of long term treasuries would have an effect similar to reductions in the Federal Funds rate. Now not so much.

I do object to your identifying the risk born by the Fed with ‘duration risk’. That is true only of the pointless QE based on purchasing long term treasuries. The Fed also bought agency issued mortgage backed bonds. That is a very different kind of QE (one which I thought would work so my predictions are–as usual–bad).

I don’t see why anyone would think that the Fed bearing duration risk would stimulate fixed capital investment. Long term bonds are risky, because short term rates might go up–either because of inflation and the Fisher effect or because of high demand and FOMC fear of over heating and inflation. Actual physical capital is a hedge against these risks. That is long term bonds are a good hedge against the risk of lower than expected inflation or aggregate demand.

Making a hedge against the risks of NIPA investment more expensive is a very odd way to encourage more NIPA investment.

Risk is not a scalar. Correlations matter and some of them are negative.