Why US Monetary Policy Has Not Been Working

After the onset of the Great Recession in 2008 the Federal Reserve engaged in very expansionary monetary policy, which resulted in near zero interest rates on short-term securities. This policy, together with record fiscal deficits, failed to restore full employment as historic experiences would have predicted it should. Explanations for this phenomenon are presented and evaluated in this paper: inadequate fiscal deficits; time consuming deleveraging of balance sheets; collapse of the inter-bank market; policies of banks creating specific debt to equity ratios as mandated by the Dodd Frank Act and Basel Rules; and lack of risk-adjusted profitable investment opportunities and general policy uncertainty leading to bank borrowing. The latter has been caused by the cost and uncertainty created by record levels of regulation, anti-business rhetoric of the Obama administration and the public's concern about the uncertain effects of future inflation and large fiscal deficits. The best explanations are argued to be deleveraging policies and the shortage of profitable investments due to regulation and public concerns over inflation, deficits, higher taxes and the criminal and civil prosecution of business