A third round of quantitative easing (QE3) announced by the US Federal Reserve on September 13 grabbed the media headlines worldwide.
What Quantitative Easing Is About
The term “quantitative easing” is a recent addition to the economic vocabulary and would sound unfamiliar throughout the XX century. It became commonplace across the US establishment – in the White House, the US Congress, the Federal Reserve – when the financial crisis erupted in 2007-2008.
Explained as simply as possible, the launch of quantitative easing meant that the US took to creating new money out of thin air with absolutely no constraints in sight.
These days, few economy experts in the US mention that reckless money printing used to be regarded as an abuse if not downright criminal offense. Excessive inflow of money into the economy provokes inflation, erodes the macroeconomic balance, discourages productive activity, and has an economically polarizing impact on the society.
In most historical epochs, the emission of money was tightly controlled by governments and the mission rested exclusively with state treasuries or finance ministries. No doubt, bankers dreamed of getting hold of the money-printing press some day, and with their backing, theories proliferated proving that the only way to eliminate various abuses linked to money creation was to leave it to private banks to do the job.
In the US, the Congress eventually passed in December, 1913 the Federal Reserve Act, which established the Federal Reserve System with a structure dominated by numerous privately owned banks.
The Federal Reserve pursued more or less reasonable policies in the gold standard era, when the amount of money was automatically capped by the cumulative size of the private bank’s holdings of gold, but money-printing completely spun out of control with the demise of the Bretton Woods system in the 1970ies.
Private banks constantly pushed for accelerated emission, and the total dollar mass swelled steadily over the past 40 years, flooding the world markets. The above should make it clear how the invention known as quantitative easing fits into the durable trend – the euphemism is supposed to help bankers cover up the mischief.
It grew into an economic axiom over the past couple of centuries that fiscal authorities should run economies mainly by leveraging the federal funds rate, thus adjusting the costs of borrowings as necessary.
The problem is that, with the printing of money totally out of control, the masses of currencies – dollars, euros, rubles, etc. – are already expressed in astronomic figures, and it happens routinely that the interest rates drop below 1%.
The US Federal Reserve maintained the federal funds rate within the 0-0.25% bracket during latest downturn, and in Japan the index has been zero for a decade.
The economies being oversupplied with money, the funds do not work to boost economic output or to improve the people’s living standards. The federal funds rate seems to be a totally defunct mechanism and the financial market as described in textbooks is not a reality any more.
The situation in no way resembles the classic capitalism or the state capitalism that came into being following World War II. Rather, what we witness is the creation of a completely regulated system creating and distributing money at its own discretion and disguising the activity as quantitative easing.
The Federal Reserve’s Quantitative Easings
The quantitative easing which took off on September 13 is the third on record. Its key ideologist Ben Bernanke, a successor to the legendary Alan Greenspan, is nicknamed Helicopter Ben for frequently citing the statement about the “helicopter drop” of money to fight deflation.
Under Bernanke, the dropping campaign began in 2008 with QE1, the first quantitative easing. The stated objective in the case was to overcome the financial crisis which started raging in 2007 and peaked in the fall of 2008 when the Lehman Brothers fabulously crumbled. At the early phase, money was drained from the US budget – the bailouts total reached $1.2 trillion, but the crisis persisted.
At that point, the Federal Reserve joined in. The first round of quantitative easing continued till March, 2010, with the 12 Federal Reserve banks (the biggest one in the system is sited in New York) massively purchasing mortgage-backed securities including the debt obligations of America’s two public, government-sponsored enterprises Fannie Mae and Freddie Mac.
Banks used the money churned out by the Federal Reserve to offload troubled assets, signs of recovery indeed appeared by the spring of 2010, and QE1 was terminated after estimatedly pumping out $1.7 trillion.
The positive effect, however, proved short-living, prompting the Federal Reserve to undertake QE2 in the fall of 2011. The second round of quantitative easing – the absorption of $600b in long-term US Treasury bonds – lasted till mid-2011 but, again, failed to kick the economy back into action for long.
With the outcome in mind, the US fiscal authorities seemed to decide in favor of moderation and any plans for a third round of quantitative easing were put on hold. Supposedly, that was due to the US Congress’s frowning on the Federal Reserve over a series of scandals as the institution drew suspicions of off-balance sheet financing, withheld information about bailout recipients, etc.
In fact, a number of Congressmen called for disbanding the Federal Reserve or at least clipping its financial authority, and suggested drastic measures like tough audit if not nationalization. This was the phase of the crisis when the Occupy Wall Street movement popped up.
A fairly logical hypothesis is that QE3 was rolled out only as late as this fall to reinforce President Obama’s re-election bid.
By the end of last August, Bernanke indicated that, finally, QE3 was on the horizon. It was officially inaugurated on September 13 by the Federal Open Market Committee (FOMC), a body within the Federal Reserve System, with no deadline set and the agenda centered around fostering employment across the US economy.
The objective, it must be noted, is listed among others in the law on the Federal Reserve but somehow has been consigned to oblivion for a century. In 2008, 8% of the US working-age population were reported jobless, and the QE3 plan is to inject up to $40b into the US economy monthly until the unemployment level apparently goes down.
In other words, QE3 may continue indefinitely, and, by the way, the financial infusions will have a form of purchases of mortgage-backed securities as in the framework of QE1.
Anticipated Results of QE3
The impression is that QE3 evokes little optimism in the US. The truth is not deeply hidden that the round of quantitative easing is only an extra narcotic doze meant to temporarily relieve the pains caused by the agony of the US economy.
It does make sense to count on a short-term positive effect – tentatively, an improvement holding out for 3-6 months – that would generate a better background for the Democrats in the run-up to the presidential poll.
In any case, the arguments produced by politically motivated commentators may not be taken at face value.
First, the macroeconomic benefits of QE3 will dwindle in no time. Secondly, the US is to implement a sweeping fiscal reform in 2013, spending reductions and tax hikes being parts of the package, which means that employment will be seriously undercut. Thirdly, there is hardly any realism in pledges that the US will benefit and the nation will benefit – as always, some surely will, but others will lose. Fourthly, the world is watching the US scene, and other countries will not tolerate that the US economy is revitalized at their expense.
Days ahead of the official start of QE3, the European Central Bank passed debt-buying decisions of comparable proportions which can be read as Europe’s own quantitative easing. Watchers actually say that the European Central Bank increasingly mimics the Federal Reserve style and lightheartedly prints new money.
The British and Japanese central banks unveiled their de facto quantitative easing plans over the past two months. A few days after QE3 went online, the Bank of Japan said it would add 10 trillion yens (slightly under $130b) to the total of its financial interventions which, therefore, will jump to 80 trillion yens.
While Europe cites its urgent internal problems as the cause behind the turn to a brand of quantitative easing, Japan is open that the purpose of the liquidity injection is to prevent the appreciation of the yen vs. the US dollar.
Skeptics visibly prevail among the US experts discussing QE3. Congressman Ron Paul, a vocal critic of QE3, wrote: “We are weakening the dollar. We are trying to liquidate our debt through inflation. The consequence of what the Fed is doing is a lot more than just CPI (Consumer Price Index). It has to do with malinvestment and people doing the wrong things at the wrong time.
Believe me, there is plenty of that. The one thing that Bernanke has not achieved and it frustrates him, I can tell— is he gets no economic growth. He doesn’t do anything with the unemployment numbers. I think the country should have panicked over what the Fed is saying that we have lost control and the only thing we have left is massively creating new money out of thin air, which has not worked before, and is not going to work this time” («Ron Paul: “Country Should Panic Over Fed’s Decision”» // Inforwars.com, Sept 14, 2012).
Moreover, Ron Paul urges the US to altogether get rid of the Federal Reserve which he deems an unconstitutional institution. Egan-Jones, a rating agency, says: “The FED’s QE3 will stoke the stock market and commodity prices, but in our opinion will hurt the US economy and, by extension, credit quality.
Issuing additional currency and depressing interest rates via the purchasing of MBS does little to raise the real GDP of the US, but does reduce the value of the dollar (because of the increase in money supply), and in turn increase the cost of commodities (see the recent rise in the prices of energy, gold, and other commodities).
The increased cost of commodities will pressure profitability of businesses, and increase the costs of consumers thereby reducing consumer purchasing power. Hence, in our opinion QE3 will be detrimental to credit quality for the US….” (Michael Aneiro. Egan-Jones Welcomes QE3 By Cutting U.S. Credit Rating // Barron`s, September 14, 2012).
Believe it or not but occasionally even Bernanke sounds like a skeptic. Chances are he was simply afraid to look stupid, but what he said was: “I want to be clear — While I think we can make a meaningful and significant contribution to reducing this problem, we can’t solve it. We don’t have tools that are strong enough to solve the unemployment problem” (Michael Snyder. 10 Shocking Quotes About What QE3 Is Going To Do To America // Activist Post, September 15, 2012). Given that, one is left wondering why the QE3 program had to be adopted if its objective – unemployment reduction – is a priori out of reach.
Why Quantitative Easing Programs Had to be Adopted
Rest assured, the Federal Reserve is not sowing money uniformly all over the US economy. Freshly created, it lands in major US banks burdened with tons of mortgage-backed securities. The financial market giants happily swap toxic assets for cash which – contrary to the claims made by the economists on the banks’ payroll – does not trickle down to the wider economy to revive demand, spur investments, or pop up jobs.
The banks have deeply entrenched habits which they have no intention of giving up – the money is being relayed to the financial and commodities markets which promise maximal yields, with next to nothing spilled elsewhere. The accompanying expansion of the job market will not even offset the natural growth of the workforce.
QE3 thus serves to redistribute the public wealth in a manner that benefits the rich, mostly in the financial sector. All others in the US will be confronted with the imminent inflation and see their living standards plummet.
“Quantitative easing – a fancy term for the Federal Reserve buying securities from predefined financial institutions, such as their investments in federal debt or mortgages – is fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy.
It is a primary driver of income inequality formed by crony capitalism. And it is hurting prospects for economic growth down the road by promoting malinvestments in the economy”, wrote economist Anthony Randazzo (Anthony Randazzo. How Quantitative Easing Helps the Rich and Soaks the Rest of Us… // Reason.com, September 13, 2012).
US billionaire Donald Trump bluntly said about QE3 in a CNBC interview: “People like me will benefit from this” (Robert Frank. Does Quantitative Easing Mainly Help the Rich? // CNBC, 14 Sep 2012). “The Fed is just propping up the banks”, argues independent watcher John Williams. (Hyperinflation is Virtually Assured – John Williams. By Greg Hunter’s // USAWatchdog.com, 12 September 2012).
The list of the recipients to whom the Federal Reserve dishes out money and the amounts in question arouse a lot of curiosity among the US policy-makers and general population, but the information is being carefully kept under wraps. New York City mayor Michael Bloomberg submitted to the Federal Reserve an inquiry concerning the lucky banks but it was turned down.
Bloomberg made another attempt to find out – in court, with a reference to the US Freedom of Information Act – but the Federal Reserve stayed immune, the justification being that the scope of the legislation is limited to US government agencies, the Federal Reserve not being one of them.
Bloomberg, US congressmen, and others should realize, based on the case, who is the boss in the US, and the favorites of destiny will continue to rip the benefits of QE3 incognito. Likely, those are a cohort of recognizable “too big to fall” Wall Street banks. Anyhow, the third round of the global-scale scam is set in motion…