The Fed Is Expected to Launch QE3 Next Week … Which Would Help the Rich and Hurt the Little Guy


Many speculate that the Fed will launch QE3 next week.

But independent economics and financial experts say this would hurt – rather than help – the economy.

Dallas Federal Reserve Bank president Richard Fisher said:

I firmly believe that the Federal Reserve has already pressed the limits of monetary policy. So-called QE2, to my way of thinking, was of doubtful efficacy, which is why I did not support it to begin with. But even if you believe the costs of QE2 were worth its purported benefits, you would be hard pressed to now say that still more liquidity, or more fuel, is called for given the more than $1.5 trillion in excess bank reserves and the substantial liquid holdings above the normal working capital needs of corporate businesses.

William F. Ford – former president of the Federal Reserve Bank of Atlanta – notes:

One of the overlooked consequences of the Federal Reserve’s recent rounds of monetary stimulus is the adverse impact those policies have had on the interest income of savers. The prolonged and abnormally low interest-rate structure put in place by the Fed has made life particularly difficult for retirees and others who depend on conservative interest-sensitive investments. But the negative effects do not stop there. They spillover into the overall performance of the economy.

Our estimates show that these negative effects, resulting from the Fed’s two rounds of quantitative easing (QE1 and QE2), are sizable and may help account for the lackluster character of the current recovery.


By lowering interest rates to historically unprecedented levels, the Fed’s policy deprives savers of interest income they normally would have earned on the interest-sensitive assets they hold. Thus, there is an income channel that no one is talking about, and its negative impact can be powerful.


Table 2 below shows our estimates of the possible losses in spending power, output, and employment generated by the Fed’s artificially low interest rates. Even by our most conservative estimate, which only looks at the $9.9 trillion in assets most directly affected by depressed yields on Treasurys, the losses are impressive. The average yield on Treasurys in June 2010 was 2.14 percent compared to an average of 7.07 percent in the previous nine recoveries, a difference of 4.93 percentage points. The projected annual impact of this loss of interest income on just $9.9 trillion of rate-sensitive assets translates into $256 billion of lost consumption, a 1.75 percent loss of GDP, and about 2.4 million fewer jobs. (Our calculations assume that the recipients of interest income face a 25 percent average income tax rate and consume 70 percent of their after-tax income.)

RR20110704 2 The Fed Is Expected to Launch QE3 Next Week ... Which Would Help the Rich and Hurt the Little Guy

Had these jobs not been lost, the unemployment rate would be 7.5 percent, instead of the current 9.1 percent, and this is the minimal effect we estimate.


As the estimate of the total of affected interest-sensitive assets gets bigger, the negative effects of depressed yields becomes even more striking. Using our mid-point estimate of $14.35 trillion of interest-sensitive assets, a 4.93 percentage point reduction in interest rates annually cost the economy $371 billion in spending, 3.5 million jobs, and 2.53 percent of GDP. This is a sizable effect, given that during this time GDP grew by only 2.33 percent and the economy added only 870,000 jobs.

With the additional jobs that might have been created by higher interest income levels, the unemployment rate could fall to 6.8 percent. And output could grow more than twice as fast as it has. The resulting GDP growth rate of 4.86 percent would then be closer to the average second-year growth rate of the past nine recoveries, and the U.S. economy would be well on its way to a vigorous recovery, rather than struggling as it is now.

This midpoint appraisal is our best estimate of the likely effect of the Fed’s policy. It may still be on the low side.

The numbers do not account for any so-called multiplier effects. Additional spending by recipients of interest income creates revenues for businesses, which in turn increases the income of their owners and employees, who themselves spend more. This, in turn, could boost overall spending and employment by more than the gain in interest income alone would suggest.


The housing market has not even begun to recover since the QE initiatives were created. U.S. auto sales and the stock market also remain well below pre-recession levels. And the sharp decline of the U.S. dollar has not created an export boom. But it has put upward pressure on the cost of our food and energy imports.

And tens of millions of U.S. savers, largely the elderly, still are facing strained circumstances created by Fed-driven abnormally low interest rates across the entire Treasury yield curve.

The negative impacts on output and employment caused by quantitative easing through the interest income effects shown here are large. In fact, they may outweigh the expected, but hard-to-document, positive effects of the QE program.

In fact, it has been thoroughly-documented that quantitative easing is great for the wealthy, but terrible for the little guy.

As the Guardian reported last year, quantitative easing increases inequality:

Quantitative easing (QE) … have contributed to social unrest by exacerbating inequality, according to one City economist.

As the Bank of England considers unleashing a fresh round of QE, Dhaval Joshi, of BCA Research, argues the approach of creating electronic money pushes up share prices and profits without feeding through to wages.

“The evidence suggests that QE cash ends up overwhelmingly in profits, thereby exacerbating already extreme income inequality and the consequent social tensions that arise from it,” Joshi says in a new report.

He points out that real wages – adjusted for inflation – have fallen in both the US and UK, where QE has been a key tool for boosting growth. In Germany, meanwhile, where there has been no quantitative easing, real wages have risen.

The Washington Post reported last month:

How might a third round of quantitative easing (QE3) affect the already-wide levels of inequality in the United States? Across the Atlantic, the Bank of England has come in for some criticism this week after it released a new report showing that its own quantitative easing efforts have disproportionately benefited the wealthiest:

The richest 10% of households in Britain have seen the value of their assets increase by up to £322,000 [$510,000] as a result of the Bank of England‘s attempts to use electronic money creation to lift the economy out of its deepest post-war slump. …

The Bank of England calculated that the value of shares and bonds had risen by 26% – or £600bn – as a result of the policy, equivalent to £10,000 for each household in the UK. It added, however, that 40% of the gains went to the richest 5% of households.

It’s not hard to see why this happens. One way the bank’s quantitative easing program works, in theory, by pushing up asset prices in order to support the broader economy. And, according to the Bank of England, the median British household only holds about $2,370 in financial assets. So the direct benefits largely accrue to wealthier households.

What about the United States? Much like in Britain, the distribution of financial assets are also heavily skewed. As you can see on page 26 of this Fed report (pdf), the median American family in the middle income bracket has about $19,900 in financial wealth. By contrast, the median family in the top income bracket has $423,800 in financial wealth. So any move by the Fed to push up asset prices is likely to increase wealth inequality in the short term.

There are other effects, too. As The Wall Street Journal has reported, the Fed’s efforts to bring down interest rates have mainly helped better-off Americans with good credit scores. For instance, it’s exceedingly cheap to get a mortgage right now — for a small number of people. (The folks at Zero Hedge, who are no fan of Bernanke’s stimulus efforts, have compiled a much longer list of links on how the Fed’s quantitative easing program benefits the wealthy.)

Indeed, Bernanke knew in 1988 that quantitative easing doesn’t work.  But keeps caving in to the super-elite, and implementing it anyway.

Category: Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

7 Responses to “Quantitative Easing Helps the Big Wheels and Hurts Everyone Else”

  1. denim says:

    This is just baloney. Here is why. Most money managers should be able to get 7% returns for a client who doesn’t tolerate risk very well. So by putting half their savings in an FDIC insured bank or investment instrument and the other half into the hands of a reputable, licensed money manager, risk is cut in half and the return reduced to 3.5% Which is better than a bank alone.

  2. denim says:

    But for heaven’s sake spread it around to more than just one manager…you never know if you picked a Madoff.

  3. gusgus says:

    What would you have Bernanke do instead?

    Are you claiming that the economy is fine and does not need any further monetary support?

    Perhaps you subscribe to the Cochrane school of thought and believe that the Fed should raise the overnight rate?

    But if you think, as many do, that further easing should be offered, how would you recommend the Fed engage in such easing?

    What would you have Bernanke do?

  4. Mark A. Sadowski says:

    Fisher’s opposition to further easing is rooted his long-held view that lower rates are giving Congress an excuse not to tackle the difficult job of reining in deficits and the national debt.

    “By providing monetary accommodation, we are saying, in essence, ‘Congress, you better eat your vegetables, or we are going to serve you a big plate of monetary cookies,’” Fisher said at a panel on job creation at the Global Conference.

    The Fed’s program of bond purchases is pushing down the price of debt, interfering with a pricing mechanism that would otherwise force Congress to come to terms with its “fiscal misfeasance,” he said.

    “We have children in Congress,” he said. “They need to be disciplined.”

    Richard Fisher is opposed to both fiscal and monetary stimulus because he believes the economy is already at maximum employment.

    William F. Ford’s concerns about the effects of lossed interest income on the economy have to be pitted against the benefits from gained wealth. When the yield on bonds goes down the value of the bonds of course goes up.

    Assuming the average Treasury has a maturity of 7 years the decline in yield from 7% to 2% means that bondholders have gained nearly $3 trillion in bond wealth. Assuming a wealth effect of 5% that would mean $150 billion in increased consumption.

    Also the decline in interest payments means a smaller deficit for the Federal government.

    But more importantly, what is the distribution of interest income? In 2009 according to Piketty and Saez 32.5% of all taxable interest income went to the top 1%. Yes they’re probably mostly old people. *Rich* old people.

    In fact that’s the very reason why the BOE’s report on the distributional impact of large scale asset purchases showed that most of the gains went to the wealthy. It is because they own the lion’s share of the bonds, the very source of the declining interest income William Ford is so worried about.

    However, the BOE report also stated:

    Page 1:
    “Without the Bank’s asset purchases, most people in the United Kingdom would have been worse off. Economic growth would have been lower. Unemployment would have been higher. Many more companies would have gone out of business. This would have had a significant detrimental impact on savers and pensioners along with every other group in our society.”

    Page 5:
    “According to the reported estimates of the peak impact, the £200 billion of QE between March 2009 and January 2010 is likely to have raised the level of real GDP by 1½ to 2% relative to what might otherwise have happened, and increased annual CPI inflation by ¾ to 1½ percentage points. Assuming that the additional £125 billion of purchases made between October 2011 and May 2012 had the same proportionate impact, this would translate into an impact from the £325 billion of completed purchases to date of roughly £500-£800 per person in aggregate.”

    When discussing distributional impacts it’s important to distinguish between the effects on inequality of income and inequality of wealth. Given that previous research has found expansionary monetary policy shocks tend to increase the ratio of labor income to capital income (dividends, interest and rent), and that its effects on the inequality of labor income distribution are generally positive (labor income increases the most for those at the bottom) it’s very likely income inequality was reduced by the BOE’s large scale asset purchases.

    Also, the effects on wealth will change over time. As the economy recovers the asset price channel will weaken, and the effect of expansionary monetary policy will tend to benefit debtors more than savers.

  5. Mark A. Sadowski says:

    Seth B. Carpenter and Selva Demiralp:

    “For example, Bernanke and Blinder (1988) and Kashyap and Stein (1995) note that the bank lending channel is not operative if banks have access to external sources of funding. The appendix illustrates these relationships with a simple model. This paper provides institutional and empirical evidence that the money multiplier and the associated narrow bank lending channel are not relevant for analyzing the United States.”

    Ed Yardley:

    “Did you catch that? Bernanke knew back in 1988 that quantitative easing doesn’t work.”

    As enumerated by Frederic Mishkin there are nine monetary transmission mechanism channels of which the Bank Lending Channel is only one, and one of the least important.

    How does Yardley go from the fact that Bernanke stated that the “narrow” bank lending channel is not relevant to the conclusion that Bernanke knew that QE doesn’t work?

  6. yenwoda says:

    Beats me, Mark. Bernanke and Blinder weren’t even discussing non-conventional monetary easing in their paper – they were arguing that banks should have different policy targets for monetary versus credit shocks. A huge leap by Yardley, uncritically repeated by Washington here.

    In Ford’s analysis, note that he is attempting to estimate only the negative (not the net) effect of QE.
    And the bolded part is his estimate of the negative impact of dropping Treasury yields across the curve by 493 basis points – come on. This is an order of magnitude too high. The entire idea of comparing yields in the current recovery to yields in the 9 previous recoveries averaged together is pretty odd. Obviously yields will be much lower during the recovery if they were much lower before the crisis! Not to mention, yields will be lower in a severe recession, they will be lower in a recession causes by a financial crisis, and they will be lower if the rest of the world is getting hammered just as hard.

  7. Defining Quality says:

    All QE has been and will be undertaken for one CLEAR reality – The CRASH of 2008 rendered Wall Street INSOLVENT!
    There is a huge difference between being Liquidity and Solvency and in 2008 Wall Street became BOTH and wiped out $Trillions in Bank Capital as well as Consumer Deposits – Insured by Government!
    All QE has done in reality is to make Wall Street liquid. TARP and QE prevented total Global collapse.
    It did not make Wall Street Solvent! $Trilllions have been pumped in – $Trillions more will be required! Wall Street MUST be supported at any cost!
    Those $Trillions are for the Directly Benefit the CentaMillionaire$ and Billionaire$ and the US Consumer is paying the BILL, with his job and his home and his 401k and his dignity!
    Capitalism is ABSOLUTELY dependent upon the CONSUMER! For Capitalism to succeed the Consumers interest must be considered above all others! That fact is being ignored by all!
    The HARD truth is that WEALTH – CentaMillionaire$ and Billionaire$ – abused the American Consumer in a myriad of ways!
    If you don’t know when, where, why and how, it is because we are not Allowed by WEALTH to even discuss so we can make it stop. The abuse of and total lack of respect for the importance of the CONSUMER will continue.
    Capitalism is collapsing because GREED abused the MARKET – THE CONSUMER!