Quantitatitve Easing Is Not “Liberal” Economics

The Fed has just announced its fourth round of “quantitative easing”.

While the mainstream financial press pretends that quantitative easing is a “liberal” economic policy, nothing could be further from the truth.

As we’ve repeatedly explained, quantitative easing is a bailout for the super-rich, at the expense of the little guy.  It increases inequality and fails to stimulate the economy. (And it destroys the savings of retirees.)

Indeed, Fed boss Ben Bernanke knew 24 years ago that quantitative easing doesn’t help.

Forbes’ Lawrence Hunter explains:

The Federal Reserve … operates its own financial Laundromat for troubled, in some cases criminal banks.  The Fed’s loan laundry and downscale resale consignment shop first takes in the wash by purchasing non-performing, and therefore largely worthless financial assets (loans and loan-backed securities) to remove them from the books of private banks. (Another variant is for the Fed to swap the banks’ bad paper at face value for federal debt instruments, which replaces the banks’ non-performing assets having little, if any, resale value, with safe, interest-paying and highly marketable assets.).  The Fed then launders the loans by reselling them back to the same group of banks at a fraction (10 percent or less) of the face-value price it paid the banks for them. Once the banks repurchase the spiffed up dirty loan laundry, it not only has turned a nifty 90-percent-or-more profit on the turn around, it also has a new asset it can put back into the stream of financial commerce at a price reflective of its true value.

The Fed is a perfect vehicle to transform bad assets into good.  It is weakly overseen without an independent audit and thus is able to intermediate the transformation of bad, illiquid assets into money (and near money) and then back again into valuable financial assets, all done secretly and anonymously.  Unlike the polite, don’t-ask-don’t-tell fiction of private hedge-fund money laundering, however, the Fed says outright, “Don’t ask, because we aren’t telling,” even when asked again and again.

Immediately after the 2008 financial meltdown, the Fed laundered more than $2 trillion in worthless assets held on the balance sheets of private banks. According to a watered-down 2011 audit of the Fed by the Government Accountability Office (GAO), there have been $16 trillion in Fed bailouts to banks and corporations around the world since the financial meltdown in 2008. Since that report, Bloomberg has reported on an additional $9 trillion in secret, off-balance-sheet Fed transactions that the central bank refuses to discuss. Now, Ben Bernanke is ginning up assembly-line washing machines at the Fed with QE∞ to spin an opened-ended, $40-billion-monthly cleansing campaign to purchase worthless mortgage backed securities from banks at face value, which could run to an additional $1.3 trillion loan laundering accompanied by downscale resales.

Indeed, the Fed:

Hunter continues:

QE∞ is no mere financial Laundromat; it is a full-service loan laundry and downscale resale facility that not only cleans the banks’ balance sheets but also sterilizes the entire operation to prevent it from producing immediate price inflation.  It illustrates the way the Fed’s loan laundry and downscale resale facility works:

After the Fed buys (at face value) and resells (at pennies on the dollar) the bad mortgage-backed securities with newly minted electronic digits that it places into the banks’ Federal Reserve accounts, it then sterilizes the entire operation to prevent the new money from transmitting the dread inflation virus.  The Fed does so by, in effect, quarantining inside the banking system the new toxic money used to launder the dirty loans.  [I’ve explained the mechanism for the Fed’s action before.] To affect this quarantine, the Fed wields both a carrot and a stick to keep this newly minted digital money from seeping out into the economy through new loans and igniting inflation: It pays the bank interest on its Fed reserves as long as the bank keeps the funds on deposit at the Fed (the carrot); and it tightens reserve requirements by raising the amount of money the bank must keep on deposit at the Federal Reserve (the stick).

There are much better ways to stimulate the economy, but the Fed is only interested in maintaining the status quo for its owners. And see this.

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.

10 Responses to “Quantitative Easing Benefits the Elite … And Hurts the American Economy”

  1. ilsm says:

    Sixty years ago US soldiers were getting this line from brainwashers in North Korean POW compounds.

    The ‘commies’ were right!!

  2. wcvarones says:

    Indeed.

    The Fed creates wealth and income disparity.

    Why do so-called “progressives” not oppose the Dirty Fed?

  3. Greg0658 says:

    1st:
    entitlements and budgets
    whats an entitlement

    medicare?
    social security?
    a global force for good MIC?
    NASA?
    civilian air travel?
    legalizing global paper pushing?

    without a balanced budget deficits increase and ENTITLEMENTS become skewed in mindset

    “dazed and confused for so long its not true”

    ~~

    2nd:
    imo – this is right and wrong .. currency is required – REQUIRED .. hense it is the corporate stocks currency to be blamed for the jive .. corporate stocks are creating the feudalism and mis-aligned forces of human nature

    other forms of currency like silver, gold, corn, oil : without the paper stock certificate – are nothing but inputs into a product

    product development without free money (speculate – with bankruptcy write-off /or reward) would slow down development & population growth

    the FIre Sector is to blame

    ~~

    now if we wish to discuss fire’g the FED for UST coin – umm – still think’g that thru ..
    http://www.thedailybeast.com/articles/2012/12/11/how-a-platinum-coin-could-solve-the-debt-ceiling-problem.html

  4. howardoark says:

    Hmmmmm – let’s see, so the Fed is taking a 90% loss on $13 trillion in bailouts which calculates to $11.7 trillion in losses (funny I seem to remember the Fed pays the Treasury every year and you’d think I’d remember Tim having to write a check for $11.7 trillion to cover the Fed’s losses). But at least that explains why Bernanke’s bonus is so small.

  5. Mark A. Sadowski says:

    “Indeed, Fed boss Ben Bernanke knew 24 years ago that quantitative easing doesn’t help.”

    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?

    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’s Blog.

  6. Mark A. Sadowski says:

    “According to a watered-down 2011 audit of the Fed by the Government Accountability Office (GAO), there have been $16 trillion in Fed bailouts to banks and corporations around the world since the financial meltdown in 2008.”

    I’m sorry but I have to impose some reality on this comment.

    The $16 trillion figure comes from page 131 of the GAO audit of the Fed:

    http://www.gao.gov/new.items/d11696.pdf

    The actual figure is $16.115 trillion through July 26, 2010.

    Notice that TARP is included in there because TARP was a Treasury program. The amount distributed under TARP was $431 billion and the subsidy amount is estimated to be $32 billion (page 2):

    http://www.cbo.gov/sites/default/files/cbofiles/attachments/03-28-2012TARP.pdf

    Now to see how silly the $16 trillion dollar figure is lets focus on the largest component, the $8.951 trillion lent out under the Primary Dealer Credit Facility (PDCF). Those were overnight loans made over the period from March 17, 2008 through February 1, 2010. Thus the average amount of loans under the program on any given night was $13.1 billion.

    The peak amount of loans under PDCF was $130 billion (fourth page of the GAO audit) and occured in early October 2008. In fact nearly a third of all the loans (by amount) were made in October 2008. An Excel file containing details about the loans can be downloaded from here:

    http://www.federalreserve.gov/newsevents/reform_pdcf.htm

    The peak spread between the Libor rate:

    http://research.stlouisfed.org/fred2/data/USD3MTD156N.txt

    and the rate paid on a PDCF loan was 3.07% on October 10, 2008 when the PDCF rate was 1.75% and the Libor rate was 4.82%. Thus the value of the subsidy under PDCF was less that 3.07% of the average daily amount of $13.1 billion over 1.88 years or $756 million.

    Why is the subsidy on $8.951 trillion in loans so small? Because it’s a flow and not a stock.

    The peak stock amount under the emergency lending programs was $1,067 billion on December 18th, 2008:

    http://www.federalreserve.gov/releases/h41/20081218/

    A graph of the stock amounts is depicted on page 137 of the GAO Audit. The program with the largest stock amount was the Term Auction Facility (TAF) which peaked at $493 billion in early March 2009. At the time the interest rate paid on a TAF loan was 0.8%:

    http://publicintelligence.net/term-auction-facility/

    when the Libor rate was about 1.3%. The average amount of loans on any given day during the life of the program was $142 billion:

    http://research.stlouisfed.org/fred2/series/WTERAUC

    Thus the subsidy under TAF might have been about 0.5% (the spread) of $142 billion over 3.35 years or $2.38 billion.

    And in fact if one totals up the estimated subsidies for the $16.115 trillion loaned under the emergency lending programs it comes to about $4 billion.

  7. Mark A. Sadowski says:

    “Notice that TARP is included in there because TARP was a Treasury program.”

    should read

    “Notice that TARP isn’t included in there because TARP was a Treasury program.”

  8. Mark A. Sadowski says:

    “As we’ve repeatedly explained, quantitative easing is a bailout for the super-rich, at the expense of the little guy. It increases inequality and fails to stimulate the economy. (And it destroys the savings of retirees.)”

    Richard 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.”

    http://www.cnbc.com/id/47242605

    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.

  9. Couldn’t agree with you more. We went as far as to consider it a regressive tax – http://www.seasoninvestments.com/insights/the-ultimate-regressive-tax/

  10. justaluckyfool says:

    “There are much better ways to stimulate the economy, but the Fed is only interested in maintaining the status quo for its owners”

    If in fact this (QE) were used “to stimulate the economy”, it would well be one of the best known ways to stimulate the economy. Also if it were used for the common bettering of the people rather than for the benefit of “private for profit banks” (PFPB), Ben Bernanke should receive the Noble Prize for Economic.
    As Fed chair he has proven that QE can be used to “print” unlimited amounts of currency and at the same time have quality and quantity control. Completely taking away the danger of uncontrolled inflation thereby; leaving the only danger “moral hazard” needing to be addressed and perhaps that could be done with full ,immediate, open disclosure.

    Ben Bernanke should receive the Noble Prize in Economics.
    Ben Bernanke has proven MMT.
    A Monetary Sovereignty can not run out of money for purchases of assets.
    Solid proof; QE 4-for as long as needed and in whatever amounts desired!!
    BUT justaluckyfool asks
    .” WHY NOT do it for the people ?
    Stop doing it solely to benefit the “Private For Profit Banks” (PFPB).
    Justa example: Purchase all residential real estate loans and modify them at 2% for 36 years. This would allow for stabilization of the housing and construction sectors, increase jobs and the bettering of all citizens. And at the same time raise revenue, lower taxes, and fund “for the general welfare. A simple solution; if $100 trillion is needed ,what happens ? all that it does is take away from the PFPB a revenue of $5.5 trillion a year and turns into into Income for the US Treasury.
    But , who is man enough to “free the servitude of the people” as it is the right of the people as stated in the 13th amendment.
    “Section 1. Neither slavery nor involuntary servitude, … shall exist within the United States, or any place subject to their jurisdiction.”
    May Ben Bernanke see this moment in history, and surely President Obama could place himself next to Lincoln in history. As Lincoln freed the slaves, Obama can free all the people from servitude.
    “… (A)fter due examination and analysis,you find to be kind, conducive to the good, the benefit,the welfare of all beings – that doctrine believe and cling to,and take it as your guide.”- Buddha[Gautama Siddharta] (563 – 483 BC),
    “Justaluckyfool”