Woodford on QE

Interesting interview by David Andolfatto of Michael Woodford. Woodford is skeptical of QE.

Andolfatto

You talk about Fed purchases of risky assets. I mean, do you have in mind some loose connection of the Fed’s purchase of the mortgage-backed securities, the agency debt?

Woodford

I think that the main argument that’s been made for the desirability of the Fed asset purchases relies upon the idea that certain types of risk are going to be taken onto the Fed’s balance sheet, and the claim that taking those types of risk out of the portfolios that people in the private sector have to hold is going to make a difference for the pricing of risk in the economy. And so the whole idea that you’re concentrating certain kinds of risks on the balance sheet of the central bank, I think, is entirely the theory behind what’s going on. It’s not just an accidental effect.

And so then you have to ask: What do you think that does? And I think it’s a mistake to say, well, the central bank just takes the risk away. It doesn’t take it away. It can affect who is, in fact, going to bear the risk, because essentially it means that a public institution is taking on the risk, and that means that taxpayers as a group are going to have no choice about bearing that kind of risk. And the question is whether you think that concentrating the risks in that way is facilitating an allocation of risk that was, in fact, desirable and that the markets would have been achieving themselves through voluntary trades if financial constraints hadn’t been impeding it, or whether you’re bringing about an allocation of risk that people would have liked to trade away from if financial constraints weren’t keeping them from doing it. And you’re pushing them even further into a corner they don’t want to be in.