By Lynn Stuart Parramore, Senior Editor at the Institute for New Economic Thinking and a contributing editor at Alternet. Cross posted from Alternet
When it comes to what goes on in the marble corridors of the Federal Reserve, Americans tend to be suspicious. For different reasons, both the right and the left have challenged Fed policies aimed at bolstering the economy in the wake of the Great Recession. In two papers for the Institute of New Economic Thinking’s Working Group on the Political Economy of Distribution, “Have Large Scale Asset Purchases Increased Bank Profits?” and the forthcoming “The Impact of ‘Quantitative Easing’ on Expected Profits: Explaining the Rise and Fall of the Fed’s QE Policy,” economist Gerald Epstein and his colleague Juan Antonio Montecino sought to find out who in the economy tends to benefit from the Fed’s actions. They conclude that Wall Street and wealthy Americans are the big winners from policies like quantitative easing, while the rest see little improvement in their economic lives. End result? Inequality is getting worse.
Lynn Parramore: Complaining about the Fed is something of a national pastime. What is it about this institution that attracts so much criticism?
Gerald Epstein: People in America get really angry at the Federal Reserve and at the “money system” in general during economic crises. The Fed draws hostility because of its power, its insulation from democratic accountability, its lack of transparency, and because of its historical and structural connections to finance. It has a lot of power in the economy because it has a big impact on the supply and cost of credit, that is, interest rates. It also plays a key role in supervising banks and historically has seemed to take it easy on the banks when it shouldn’t have, such as in the lead up to the financial crisis. Bankers themselves govern the Fed to some extent, and then there’s the classic revolving door where Fed officials come from and then go back to the financial sector. Fed officials tend to believe that the institution should have a large measure of independence from democratic control, even though in law it is under the ostensible control of Congress.
So critics, often for good reason, are concerned that the Fed is wielding its vast powers in the interests of the banks and not in the interests of the people. After the financial crisis, Americans have perceived that the banks have been bailed out, but a significant proportion of the population is still in serious economic trouble.
LP: Many libertarians want to audit the Fed or just plain end it, while conservatives like Rick Perry label the Fed’s actions treasonous. On the other side of the political spectrum, members of the Occupy Movement and progressives like Bernie Sanders and Elizabeth Warren challenge the Fed’s ties to Wall Street. How do people with such vastly different ideologies end up distrusting the Fed?
GE: On the surface, it may look like the right wing and progressive criticism of the Fed is similar, but there are key differences. Many of those on the right distrust the Fed and want to eliminate its power in the belief that the private economy, including the private banks, will be much more efficient, productive and even democratic if they are left to themselves: in other words, the criticism of the Fed really reflects a desire to cripple the government in the service of increasing the power and authority of the market.
The perspective of most progressive critics is quite different: they don’t want to destroy the power of the Fed to regulate the macroeconomy and finance. They want to regain control over it so that it better serves the interests of the whole population.
So the right wants to destroy the power of the Fed to increase the power of finance; and the progressives want to reorient the Fed so that it will stop protecting the interests of finance and protect the interests of the broader population instead.
LP: In the past several years, the Fed has been experimenting with a program of quantitative easing (QE) to pump money into the economy. Why did the Fed do it and how does it work? Who exactly does it work for?
GE: Quantitative Easing is an overly mysterious term. The actual term used by the Fed is a program of large-scale asset purchases (LSAP) which is even clunkier, but more accurate. In the aftermath of the financial crisis of 2007-2008, the Fed used its power to create money and bought over $3 trillion of financial assets of various kinds in order to raise the price of those assets and lower interests, and to provide more liquidity and credit to the economy. This was supposed to make it easier for people and business to get access to cash to spend.
The question of why the Fed did this is the subject of our papers. There were actually multiple reasons for the program and it is difficult to sort out their relative importance in the Fed’s thinking.
At first, the Fed wanted to keep the large banks from going bankrupt. Officials believed, of course, that if banks went under, the entire economy would be dragged down with them. But they were also interested in helping out the banks on their own terms. In our “Bank Profits” paper we discussed the close ties between the Fed and the banks, and that is significant here. Our research shows that these initial purchases of assets by the Fed in 2009-2010 did increase bank profits, especially the large players. So the Fed’s policy of QE succeeded in helping these financial institutions make more money.
LP: What about later? Did the Fed’s actions continue to be a boon to the banks?
GE: As time moved on and the economy failed to rebound, Fed officials became concerned about the need to continue large-scale asset purchases (quantitative easing) to improve a broader swath of the U.S. economy. They wanted to increase credit and liquidity to restore profitability in the broader economy as a goal in and of itself. But they also hoped that this would lead to more investment and job creation.
In our companion paper “The Impact of QE on Expected Profits,” Juan Montecino and I look at three rounds of quantitative easing from 2009 till when it ended in 2014. We show that investors expected QE to benefit financial, construction and auto firms in the first two rounds of QE, but by the third round, only certain financial sectors were expected to benefit, and only to a modest extent. We argue that this lack of effectiveness in promoting corporate profits eroded the political support for QE and that contributed to the Fed’s decision to end it.
LP: A lot of people have argued that the Fed’s policies have helped the broader economy overall. Paul Krugman suggested this in a recent New York Times op-ed. Do you agree?
GE: There have been many studies of this issue. The impact of QE on generating more lending by Wall Street to Main Street and in generating more employment and increasing overall investment in the economy is quite modest. QE probably limited the initial collapse of the economy, and likely had a very small positive impact on economic growth, but its broader impact on jobs and growth in the economy seems not very big.
LP: Krugman didn’t say much about how low rates affect the price of assets like stocks. Should we be concerned about asset prices going up?
GE: The evidence is quite clear that QE has increased certain asset prices in the economy. These include the assets the Fed bought directly, such as mortgage backed securities and long term government securities. There is also evidence that QE contributed to an increase in corporate bond prices. But what most people see is the big run-up in equity (stock market) prices in the last several years. Interestingly, it has been much harder to show that QE has caused the big rise in the stock market. A major part of the problem is that there are many possible factors that could have led to the stock market boom and it is hard to isolate the impact of QE.
But there is no doubt that the Fed’s large-scale asset purchases have caused major increases in a number of asset prices in the economy. This is especially true of mortgage backed securities and corporate bonds, and quite possibly of equities as well. For those people and institutions holding those things, the run up in prices has been a wealth bonanza.
LP: How have the Fed’s actions impacted economic inequality in the U.S.?
Our papers suggest that initially, QE contributed to a pretty significant increase in inequality. It raised asset prices, which are owned primarily by the wealthy, while having relatively small if any positive impacts on bank lending, employment, wages or economic growth, so ordinary people haven’t had much help. By the third round of QE in 2012-2014, the effects had likely muted quite a bit. There were probably not big impacts on asset prices from QE and the positive effects on employment growth might have strengthened somewhat.
But in the big picture, I think the evidence points to the conclusion that QE and other aspects of Fed policy increased inequality pretty significantly. This is reinforced if you take into account all the other non-standard measures the Fed used to bail out the banks early on in the crisis.
LP: Lately we hear a lot of worry about what will happen if the Fed raises interest rates. How might the average person feel it if this happens?
GE: Here’s the interesting thing: the fact that QE and lowering interest rates almost to zero has worsened inequality, does not mean that raising interest rates will help reduce inequality. Economists have long known — and recent work by IMF economists supports this — that increases in interest rates normally worsen inequality, at least partly by reducing employment and wage growth.
So raising interest rates might lead to some initial reductions in wealth by lowering asset prices, but it could also take a bite out of your paycheck and dampen your prospects of finding a job. It’s a bit of damned if you do and damned if you don’t.
LP: What kind of Fed policies would help close the inequality gap in the U.S.?
The Fed needs to adopt new tools, on its own and perhaps in cooperation with the other parts of the U.S. government, to improve the economy from the bottom up. This includes increasing facilities for debt forgiveness for under-water mortgages and excessive student loans; increased credit facilities for small businesses and cooperatives; helping to underwrite mechanisms for creating affordable housing in cities; and more restrictive enforcement of financial regulatory rules to help rein in excessive banker risk and pay.
But the Fed cannot reduce inequality on its own; far from it. This requires a concerted effort by the government, broadly speaking, to support a variety of efforts. These include things like raising the federal minimum wage, eliminating unfair restrictions on union organizing, increased fiscal spending on needed infrastructure with a condition that these jobs will be decent paying jobs. Of course, this is just the tip of the iceberg, and far from the question of the role of the Federal Re
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Timid.
Don’t worry boys, your quest for respectability and an honest hearing is doomed, but you haven’t burned your bridges to “the profession” and all will be forgotten (because being right counts for nothing in Economics) while you still get to keep these two big papers on your CV.
“But what most people see is the big run-up in equity (stock market) prices in the last several years. Interestingly, it has been much harder to show that QE has caused the big rise in the stock market. A major part of the problem is that there are many possible factors that could have led to the stock market boom and it is hard to isolate the impact of QE.”
LOL
There’s a couple of easy fixes. If you’re a publicly traded company and you’ve laid off employees or not given raises, you can’t buy back your stock, simple as that. 90% of SP500 profits going to stock buybacks does nothing for inequality.
90% of SP500 profits going to stock buybacks does nothing for inequality.
I disagree. It increases inequality.
Yes, I think this post is good as far as it goes but it doesn’t go far enough. I agree with what they say: “Our research shows that these initial purchases of assets by the Fed in 2009-2010 did increase bank profits, especially the large players. So the Fed’s policy of QE succeeded in helping these financial institutions make more money.”
The follow-up questions should be: then why aren’t these profits and excessive executive compensation fed back into the public purse?
Also the Fed seemed to use the stock market as a measure of its success. It would be better for the general economy if they measured their success by the number of living wage jobs created.
I think the post’s recommendations are on target: “These include things like raising the federal minimum wage, eliminating unfair restrictions on union organizing, increased fiscal spending on needed infrastructure with a condition that these jobs will be decent paying jobs.”
But this would also take a Congress that is interested in the general economy.
The follow-up questions should be: then why aren’t these profits and excessive executive compensation fed back into the public purse?
A Monetary Super Highway from the Marriners S. Eccles Building to the public would be great…directly and immediately.
Also the Fed seemed to use the stock market as a measure of its success. It would be better for the general economy if they measured their success by the number of living wage jobs created
Unemployment kills people.
,
Employment kills people too – visible ones because acceptable rates of worker deaths, and invisible ones.
“The follow-up questions should be: then why aren’t these profits and excessive executive compensation fed back into the public purse?”
They are. Executives with higher income will pay higher taxes…ditto for corporations. Isn’t it great that we can now pay for infrastructure (although wasn’t it the federal and state gas tax that was supposed to fund that?)
“I think the post’s recommendations are on target: “These include things like raising the federal minimum wage”,
Sure, it may marginally narrow income inequality for those who keep their jobs, but (according to the CBO) it will also increase unemployment.
“eliminating unfair restrictions on union organizing”
How about being specific and tell us about some of these restrictions.
Wait, executives and corporations pay taxes? Or did you mean bribes?
Executives with higher incomes pay the same maximum tax rate (or less, depending on how clever their accountants and lawyers are) as managers making $150,000 a year. In fact, if they get most of their income from capital gains and carried interest, they pay less of their income in taxes than the man or woman earing $125,000 of more a year in straight salary.
As per your logic, why not reduce everyone’s income to zero so that then everyone can be employed! I mean, why not reduce us all to poverty wages, or even starvation wages, if by doing so the capitalists will hire more of us to live in poverty or starve while they pocket the earnings from our productive work?
As for unions, how about bargaining in good faith and not threatening to ship our jobs off to Bangladesh sweatshops if Americans dare to unionize?
There is now a higher progressive rate of 39.5% for incomes over $400k. But even if it where a flat tax, more compensation would mean more of a tax to the federal government. As far as cap gains, that also took a jump for the higher brackets from 15% to 20%. I believe that this will hurt the economy. Why? It can be summed up in one word….risk. If I am going to throw $100k into a start up, there is a good chance I could lose it all. If investors are being punished for taking such risks by having gains taxed away, eventually they are not going to bother, and there will be less Apple Computer companies and less jobs.
“As per your logic, why not reduce everyone’s income to zero so that then everyone can be employed! “
Wages are just another price which is affected by supply and demand. Let the market set those levels. In North Dakota the demand for labor (skilled and unskilled) is so high that McDonald workers are starting at $15/hr.
“As for unions, how about bargaining in good faith and not threatening to ship our jobs off to Bangladesh sweatshops if Americans dare to unionize?”
The reason is simple. Domestic companies are now dealing with a global economy. This means they now have a bigger market, but it also means that their competition is not coming from a company in a state next door. They have to compete with foreign countries in a low wage environment. Ergo, if they have a labor intensive manufacturing process, they had best move their manufacturing offshore…..or they die.
That’s one way of looking at it but it treats labor purely as a commodity. This isn’t necessary. Society can choose to give human labor respect and dignity. This can be part of an equalizing process if we start from the standpoint that people deserve a living wage.
—
FDRs 2nd Bill of Rights included
The right to a useful and remunerative job in the industries or shops or farms or mines of the Nation;
The right to earn enough to provide adequate food and clothing and recreation;
The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad;
The right to adequate medical care and the opportunity to achieve and enjoy good health;
The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment;
The right to a good education.
———–
I think Karl Polanyi had a good understanding of the problem:
‘“To take labor out of the market means a transformation as radical as was the establishment of a competitive labor market. but the basic wage itself, are determined outside the market.’’
This implies a big change in thinking if countries opt to put their citizens first above the market.
Well if you want to defy the laws of economics…good luck. As far as FDR is concerned, the Wagner Act which forced union wages up 24%, while non-union workers were basically cast to the wolves, ended up prolonging the Great Depression. If wages were allowed to seek their own level, many more would have been hired, and the economy would have gained a foothold on recovery. As far as his “2nd Bill of Rights”, I’ll stick with just the first….Protecting speech, property, freedom of worship, and gun ownership is enough for me. Anything more than that and we start chipping away at individual liberties.
Your using a lot of sophistry and sophmoric PR Libertarian talking points. Sometimes going for broke and doubling down with this sort of SOP your peddling ends up doing the opposite of what your intentions are: People might just give-up all respect for the extreme, failed version of the market and look for alternatives.
Not to mention that Social Security contributions remain capped as income rises.
Geithner convinced Barack that the stock market is the only true measure of success, even if it is a massive bubble.
The flawed unemployment numbers and inflation index are also false measuring sticks the Fed uses.
I persist (in the face of much evidence to the contrary) in viewing the Fed as a clutch of blind ideologues, rather than evil. However, moves like Bernanke’s to Citadel make me waver.
I don’t think the FED is truly evil – I think they just can’t figure out that finance exist to serve society and not that society exists to serve finance. Since 1980 a tremendous amount of growth has occurred in finance – and correlation isn’t causation, but on the other hand, if you do have correlation causation is a possibility. And the FED has aided and abetted ever more finance, without seeing the problems
http://www.nytimes.com/2012/10/28/business/the-perils-of-feeding-a-bloated-financial-industry.html?_r=0
and
http://www.federalreserve.gov/newsevents/speech/bernanke20060612a.htm
Barnanke: “Other market risks are those inherent in trading and dealer activities. The management of such risks has also advanced significantly, in large part as a result of the growth and development of over-the-counter derivatives markets.”
Really, the worst think the FED does is not just fess up and say, “Our effect on the economy is extremely minimal. All we can actually do is keep bad banks from going belly up. We really don’t have any insight into financial risks. We have a bad economy because congress makes bad policies”
But perhaps the whole point of the FED is to be a big McGuffin – just a big distraction. That way no one considers that the great “profit and loss” system of capitalism uses government to keep the richest and most imprudent, and probably most criminal, (despite irrefutable evidence that all these bankers knew nothing about risk), rich.
“The worst thing they do is not fess up”, um, no. They knew an octopus institution with monopoly money creation power would be a hideous beast at the core of our society, that’s why they named it “Federal”. And they have little or no “Reserves”, they have a printing press. Truth is we have replaced central banks, prudent institutions designed to inject liquidity at high rates to solvent banks in times of stress, with highly-leveraged and secretive hedge funds. Bank of Japan is on track to own 100% of Japanese equity ETFs by 2017; the Swiss National Bank may be the largest single buyer of equities in the world; ECB is set to hoover up all bond issuance from private capitalists and put it on their Wizard of Oz balance sheet. These are grotesque departures from their stated missions and from the charters under which they operate by law. And don’t tell me “oh but Obomba gets to choose their leaders”. He has to choose from a list submitted by…The Fed.
End these evil institutions now – try capitalism for a change. And don’t tell me “but oh there were financial crises before they existed”. Yes, there were; and they ended. We are now 7 years into a $4 *trillion* giveaway program for unrepentant gambling banksters, the economy sucks all over the world, and the IMF is yelling warnings about just how fragile things are. End the Fed.
I would like to suggest that targeting the FED as the enemy is a distraction, designed to take attention away from the real enemy. The real problem is the power to create money is in the hands of private banks, and the ownership of these banks is concentrated in the hands of a very few. Imagine what would happen to our economy if a few unscrupulous and ambitious people were given the license to print as much money as they want, legally. It takes a while to realize all the implications. For clear thinking on the implications, and the needed change, see: The Iceland Plan for Monetary Reform. For more discussion of the idea that the I-NET is a strategic ploy, designed to limit dissent and dissatisfaction to domains which will not disturb existing power configurations, see the RWER blog post I-Net: A Trojan Horse? There are many subsequents posts on the same theme, search for I-NET.
Thanks for that!
“In Iceland, the data (Fig 5.1) indicates that most new money created
by banks was lent to borrowers that invest; in existing assets, in
existing real estate or for speculation in financial assets while a minor
share was lent into the real economy; to fund new business, invest in
new technology, create new jobs, and build new housing or
infrastructure.”
Just like modern economics can’t wrap its mind around the fact that GDP as a measure doesn’t distinguish between increased spending due to more prisons versus more colleges, the idea that all this “borrowing” is worthwhile “investment” versus speculation needs to be addressed…
I like the idea that discourse would be improved if the “savings equals investment” proposition were restated as “savings equals borrowing”. A person who buys poker chips at the casino with a credit card engages in borrowing, but that person is not engaging in investment when thereafter making an ante at the Texas hold ’em table.
“LP: A lot of people have argued that the Fed’s policies have helped the broader economy overall. Paul Krugman suggested this in a recent New York Times op-ed. Do you agree?
GE: There have been many studies of this issue. The impact of QE on generating more lending by Wall Street to Main Street and in generating more employment and increasing overall investment in the economy is quite modest. QE probably limited the initial collapse of the economy, and likely had a very small positive impact on economic growth, but its broader impact on jobs and growth in the economy seems not very big.”
According to this question and answer would QE be a step toward nationalizing our banking system? I know this was a big disagreement between Jamie Dimon and Paul Krugman. Duff McDonald’s book, Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase briefly discusses their disagreement. I was surprised, if I recall correctly, it was the only time Paul Krugman was mentioned re policies the two men disagree about.
We’ve had some re-naming of what happened in 2008-2009.
Great Depression 2 -> Great Recession -> Great Financial Crisis.
If we took it one step further and called it the Great Credit Crunch, then we’d have a clearer description of what really happened. The Fed are fancy Rotor Rooter Men, QE is like Drano, Drano fixes illiquid banks*, but if banks are insolvent**, the Rotor Rooter Men keep the Drano flowing. Trickle down Drano initially lets the real economy start functioning again, and after the shock of all the layoffs and psych trauma on biz and consumer decision making, the natural biz cycle may eventually cure what ails us.
But I’d hate to call that a “policy tool”.
* Short term problem
** Long term problem
Thanks. I had to laugh at the analogy and thought of Robert Gordon’s research (plumbing) posted a while back by Paul Krugman.
http://krugman.blogs.nytimes.com/2012/08/28/is-economic-growth-going-down-the-drain/
Bingo. QE is intended to relieve illiquidity, but the problem was not illiquidity but insolvency. If you’re insolvent, money can pile up at the bank all day, but you’ll never get a penny of it.
Good article. But the idea that quantitative easing is is “mysterious” itself risks mystification because it skirts the ideological effort involved. QE is currently the axial mystification of our political economy. That large scale asset purchases had to occur puts the lie to the ideology of an all-encompassing market rationality that does not require extra-market support. The genial diffuseness of the term reflects a last gasp effort to resuscitate the rising tide principle, whereby everyone eventually benefits. It blocks insight into how the flow of eased quantities of credit first pool into lakes that serve, Lourdes-like, to heal and restore the animal spirits of crippled financial entities and the bullshit neo-classical theory that will let them roam free once more. The paper’s authors should move beyond what appear to be their more or less technical/policy intentions to address, to pound on, the theoretical implications of QE.
Whether by cognitive capture (clutching at ideologies) or malintent, the Fed is clearly a creature of Wall Street bankers and venal political elites. By all available evidence its primary function is to siphon wealth from the poor to the rich and by any measure it’s doing a magnificent job of that. Whatever internal rationalizations and ruminations Fedpeople engage in to justify this is a matter for them and their psychiatrists to deal with, not for those on the outside who are sharpening the guillotines and waiting for the right moment.
I believe we need to take our destiny into our own hands, especially about economics and monetary policy.
I prefer a revolving quasi board of people from all walks of life to fund .gov at NO Interest, transparent to all on the net.
Regarding a political direction, this article I came across yesterday from 1999 seems to be prescient.
http://www.theatlantic.com/magazine/archive/1999/08/a-politics-for-generation-x/306666/?single_page=true#disqus_thread
Fiscal prudence, economic populism, social investment, campaign reform, shared sacrifice, and environmental conservation—this constellation of beliefs transcends the existing left-right spectrum.
The bourgeois left-right spectrum is nowhere near left of any honest center, except for the color of the bikeshed. Stop manufacturing consent and especially leave your Protestant “shared sacrifice” pathology out of it.
We all await to receive from On High how much “deception” is acceptable.
“After the financial crisis, Americans have perceived that the banks have been bailed out, but a significant proportion of the population is still in serious economic trouble.”
Corrected: “After the financial crisis, the banks have been bailed out, but a significant proportion of the population is still in serious economic trouble.”
Great point.
I would add, not just still in serious economic trouble, but in fact, worse, both in absolute terms and relative to the rich, as far as wealth inequality is concerned.
One unbelievable aspect to the large scale asset purchases was the use of the same ratings agencies that caused the great recession to rate the assets being purchased. Why has no one had their NRSRO status revoked?
Didn’t the Fed have the power to pump money directly into the real economy, even to individuals and households, until the Dodd-Frank bill banned such activity? Not that the Fed ever used this power.
Also, in the discussion, Epstein says there has been some small benefit to the real economy from the Fed’s QE. But we should keep in mind always that these benefits come to ordinary people when they’re flat on their backs, loaded with debt and in a horrifically degraded economic state by comparison with what we had 50 years ago.
In fact, anytime we hear talk about middle class wages “leveling off” or some minor improvement in the economy, it may sound as if we’ve reached some kind of plateau, as if things aren’t getting better for working households as the rich reap all the rewards. The real situation — again, measured over the past 50 years — is a great deal worse than that. We’ve gone from a state in which a single average income could easily support a middle-class life and a nice house for a family of four to a state in which a single income can barely afford a studio apartment. Ordinary people can no longer afford health care, dental care, an average new car, a vacation, or retirement and can never pull themselves out of the grip of enormous debts. All these things were commonly affordable 50 years ago, but no more.
And note that this isn’t the case everywhere. Many industrialized countries haven’t let their working populations sink into such poverty and bondage. Our much degraded state is a result of deliberate policy decisions.
Dodd Frank has done nothing to restrict what the Fed can do with its monetary operations. And the benefits to individuals were likely so small as to not make a difference.
Steve Keen has said in a number of venues that Dodd-Frank eliminated Section 13.3 of the Federal Reserve Act, which allowed the Fed to offer direct help to the public rather than banks. As noted, I don’t believe the Fed ever used this power. But is Keen wrong?
Looking at section 13 of the FRA and section 1101 of Dodd-Frank, I don’t see any significant change in Federal Reserve powers. The language changes from authorizing emergency loans for “individual, partnership, or corporation” to “participant in any program or facility with broad-based eligibility”.
My reading is this expands Fed discretion on lending decisions.
Any individual is not the same as a “participant in any program or facility”. An individual seems less restrictive than someone who must be a participant in some program or facility.
“Eligibility” is also a red flag for something that can be used as a loophole to deny access. Whether to deny access to a program or facility, or to deny access to a participant in said program or facility, is not clear–but either way it seems more restrictive.
I am only going from your quotations, but doesn’t a specific listing of the word “individual” leave open the possibility of that said “individual”,might be an actual person? With the new language change to “participant” open the interpretation up to meaning ONLY some entity that qualifies to be elevated in some way as to meet “participant” status. Which, I guess could be specified elsewhere, and could specifically exclude any person who can’t by nature of fact be as “broad based” as some legal entitity, be it a business,corporation,working group of some kind,etc.
and considering everything about laws and definitions really comes down to who has the power to determine just what the written text may in fact mean to them. The essence of disagreement is usually mostly about not really agreeing to common usages of language.
As an aside, there was a foreign affairs article last year, that had (using their data), illuminated the option chosen by using the QE route. the contrast to the money created by the fed for the operation, could have gone out to every person in the united states( or maybe every tax payer?. so be it 100 million people or 300 million people; give or take.my memory is fuzzy)in the form of a check for $56,000.
Now just the rough justice of the implications of that.
The economy would be doing just fine. Their biggest concern would be inflation. But considering the last eight years, wouldn’t that be a nice thing to have to worry about.
Thanks to everyone for all the responses.
The $56,000 check to every taxpayer sounds about right. I had heard $40,000, but either way, it’s a substantial amount.
Yes, think what that would’ve done for the real economy. The Fed’s policies, backed by Paul Krugman and those of a similar cast of mind, are in my opinion just a liberal/progressive form of trickle-down economics. Except — as with the Reaganesque form — nothing much is trickling down.
It’s inflation that’s raising the stock market and housing prices imho. Bail out the banks by making worth less assets worth more through the invisible tax on the people called inflation. It’s all an illusion. Real inflation since 2008 is about 34%. That is the price of an ounce of gold then compared to an ounce of gold now. AND I believe that price is being manipulated. 134% of a homes real value covers the crash in value. When the market isn’t free, no one should be arguing it is.
Or arguing from the point of view that it is. The Fed needs another mandate, that besides increasing employment, it must insure that wages keep up with whatever jobs are created. Creating millions of service related jobs is creating jobs with minimal effort.
it must insure that wages keep up with “inflation” for whatever jobs are created. I never could type as fast as I think, lol
The title to this post wasn’t served by the interview. It was a bit too vacuous. Stating the obvious stuff. It didn’t touch on anything meaningful. Like markets only work when they can be productive for society and nothing can be socially productive these days because technology is too efficient; because we can’t all trade our way into a surplus at once; because extreme competition; because monopolies; because productivity. Huh? Productive markets don’t function because of productivity? Capitalism doesn’t work because of capitalism? The Fed knows all these things. The message is just unspoken – the old economic engine exploded and the only thing left is central banks. So is it better to have QE and zirp, or is it better to have a dead flat economy that cannot be resurrected. What we must create is an entirely new economy. The Federal Reserve isn’t destroying anybody’s economic future. It’s just keeping everything glued together while we look for something that works.
At first, the Fed wanted to keep the large banks from going bankrupt. Officials believed, of course, that if banks went under, the entire economy would be dragged down with them
If street hotdog vendors go under, we will be ok.
If barbers go under, we will ok.
If truck drivers go under, we will ok.
If gardeners go under, we will ok.
If farmers go under, we will ok.
If auto workers go under, we will ok.
If police officers go under, we will ok.
If grocers go under, we will ok.
But not banks.
Because exceptional.
Because special.
Because we set it up that way – New money into the economy does not get to the people directly and immediately.
After reading the piece carefully I see nothing to convince me that the FED is “destroying” my “economic future”. To provide an objective and balanced assessment requires a thoughtful assessment of what would have happened without QE. Further, it should have been emphasized that in a liquidity trap monetary policy is impotent in stimulating economic growth…and with Congress refusing to use fiscal stimulus…for purely ideological reasons…the FED was forced to experiment with unconventional remedies. I hope the two papers are more objective than this interview.
If there had been no QE the bad banks would have gone under and the less corrupt banks would have risen to take their place. I seriously doubt the economy would have been adversely impacted for more than a few days. Everything you need to know about QE is obvious now. QE was only done to rescue the crooks.
Agree, and if the failure of large corrupt institutions could imperil the US economy, wouldn’t steps have been taken to prevent this from happening again the future, i.e., breaking up the banks? Instead they are even larger.
Treasury interest rates are a guarantee profit. And buying treasuries means even more profit. And improved stock prices and more inequality. Then, right about now, raise the interest rates. And when the economy stutters and stock prices fall, buy treasuries again. Rinse and repeat cycle. So the question: why not leave interest rates at zero or close to it?
On another issue for me only I suppose. Why is the fed not part of the treasury? That vaunted independence falls apart when you see the cronyism with these guys and the lack of any ability for an administration to control.it.
One other thing I would ask. How (or maybe why! )Is the fed able to spend money without congressional approval? I heard the fed spent $16 trillion as a result of the crash. The only approval I ever heard was TARP and that was a pittance compared to the $16t. This is a creature of congress and maybe it should be a creature of the executive.
As much as bankers controlling the money supply has turned out badly, the thought of Congress having control is no less terrifying.
That @ 16 trillion dollars the fed magically pulled out of it’s bottom, didn’t really get “spent”, from what I understand. Supporters of the fed like to emphasize that it was only “put on the books” to over a hundred corporations, banks, and other large behemoth institutions ;American and foreign., Bolstering their solvency. It never made it to the “money supply”, thereby there wasn’t the possible inflation caused by such an enormous influx to the monetary system.
What a load of crap, huh?
Now If I were a bank , or an insurance company or really any other large aggregation of business anything, the federal reserve fairy coming along and sprinkling the fairy dust that added all those zeros to my asset logs, would translate(without any actual accounting connection) in my insolvent business going on indefinitely paying me exorbitant pay packages and my legions of jr. scumbags manipulating every market they can get their greedy fingers up,keystroke by keystroke
The reality is, the federal reserve ought to be part of the treasury. The bill HR 2990 in the 112th congress, The “NEED ACT”, Proposed exactly this. The plan which was originally called the “Chicago plan” was a 1939 plan created by @ 400 economists , to take the privately controlled federal reserve bank, and dissolve it back into the treasury.That plan was in response to the depression, another bust cycle caused by fed actions/policies.
This latest incarnation of the Chicago plan. ” the National Emergency Employment Defense act”, was written to take the roll of the federal reserve and set if back in the control of the treasury, and use the ensuing money saved by debt free creation of money, into programs that could re-build and re-invest in America. Be it a single payer healthcare system, of maybe free college education, or maybe water projects, energy, infrastructure, etc. the needs are there. And this is a way to pay for them, in a sane way. At least the mechanisms for money creation could be “set” say by limiting growth to population or other metric to insure adequate money supply.
I agree. I wish they would drop some reserves on some local business books. But we are not big shots and we need an act of congress first.
Yes, this is the thing that needs to be explained. We know the fed is crazy, that’s a given. The thing that needs to be explained is the ongoing (and on and on and on) participation of the political class, when there is no apparent good that can come of it.
And active participation, at that.
A spectrum of international currency issues that are affected by QE policy is often overlooked in the justifiable focus on domestic economic and markets effects. Commodity-producing nations that at least partially peg their currencies to the U.S. dollar have been affected by QE programs IMO. Further, the petrodollar and U.S. dollar reserve currency status do not come without costs to U.S. constituencies.
China’s efforts to make the Yuan a member of the IMF’s SDR currency group in May will be interesting.
Are we surprised? A largely unaccountable (i.e. not democratically elected) group of technocrats that effectively determine capital distribution and access whose friends are also Ivy educated (or similar) individuals who represent the “top tier” of society. Also, WRT public/private status, their own description provides a great deal of abstraction and hand-waving (see for yourself: http://www.federalreserve.gov/faqs/about_14986.htm). Sounds like a system that provides a great deal of room for corruption. No oversight from the executive and legislative, but their responsibilities can be “altered” (whatever the hell that means) by statute (an exercise of which congress never participates). Monetarism is just another tool for power without sound democratic politics and accountability. Stating that their power is “independent within the government” rather than fully external, to assuage our fear of private interests influencing the national economy, does not do much to make me feel better. Their position is even more precarious when considering national defense. Should we feel better WRT foreign policy when Ashton Carter tells us the Pentagon is “within and subject to the government”? Seems like the US military does whatever the hell it wants because who knows better? Similar could be said for economic policy. The less popular representation in the policy the more corrupt. It is inevitable.
My understanding is Elizabeth Warren, likely to become Hillary’s running mate in my opinion, is opposed to a true audit of the Fed.
That’s a great read. I think what is most important to understand about the Fed is that they report to government leaders. The Fed is simply doing what the political class want them to do.
This sentence I would suggest encapsulates the different non-rightist thoughts quite well. Some people want to increase (or at least protect) the power of the Fed. Other people think the Fed shouldn’t be in the business of regulating the macroeconomy and finance in the first place.
I strongly advocate the latter. An entirely separate government agency should be responsible for regulating the banks.
I want to touch on the “solution” to increase affordable housing in cities. Here in Michigan, where we are still in the middle of a depression (because everyone tries to ignore and forget about us). We have tons of affordable city housing. 2 blocks from the state Capitol there are tons of run down ghetto homes that are cheap that just need some TLC. But here is what the local/state govt is doing. They are building million dollar condos 2 blocks the opposite waythat are being given to wealthy city donors and other wealth extracting persons. These condos are attempts by the govt to attract wealthy persons to downtown to “invest” (I.e. Spend their money goods and services). One mile south of these “temples to the wealthy” what was once an economic machine where 30k workers (in 1980) produced millions of automobiles, now empty acres of concrete sit, employing less than 3,000 persons (most of them tier 2 workers. No benefits, etc.). My point is that these condos are just lipstick on a pig. All wealthy persons live in the suburbs (white flight, and an auto state will have citizens who also live in their cars;commuting). The only jobs downtown are state govt and service sector. Like I began, within a 3 block radius of the downtown, gun shots are common, poverty is rampant, and if you do have any money, your primary objective is to move away from the decay.
This is just Lansing, a city of 100k ppl. Detroit is obviously much worse. And my point is that by building another sports stadium, a casino, or million dollar condos will not save these communities. All the white folks come from the suburbs for a day and they know that even though the surroundings are a disaster, they get to return back home to the safety of their wealthy white communities. Therefore they do not have to care whether there are abandoned buildings across the street from the brand new stadium (of course, bought and paid for by taxpayers). When they close their eyes to goto sleep, they know their economic privilege does not have to worry about the thousands of people living on the streets, at war with each other for the small scraps left from the rich.
I blame everyone for letting this happen. We let what was once the manufacturing Capitol of the world die and didn’t even have the decency to bury it. It’s rotting corpse is right there in front of our faces everyday. It’s like Detroit is wealthy grandmother. We put grandma in a cheap nursing home. Then when grandma dies, we pick her bones for every last bit of wealth and then dump her carcass at the morgue. “Shes not our problem anymore”. We don’t even bury her because that costs money. We burn her up and put her on the mantle so we can worship what she left us, not what she meant to us as a person.
As for our governor. He’s a Scott walker clone, who is bought and paid for by Grand Rapids. And the fine ppl from GR (the van Andels, the princes, Devos’), can brag all day about how their city is a success because they did things the right way (no unions, no minorities, conservative Christians).
Thank you so much for this invaluable, boots-on-the-ground perspective. Your words carry great weight. Many of us grieve for what has happened to the good folk of Detroit.
That is a sad tale and it is all unnecessary. Our federal government has the ability to rectify this. But our government is more interested in saving banks from bankruptcy than in helping people.
This article dignifies this bunch of arch criminals instead of properly condemning them. There’s nothing mysterious about the Fed — it’s the PR wing of the most villainous criminal conspiracy in the history of the USA, which coordinates with the government wing, the academic wing, the controlled mass media wing, and the international equivalent of the Fed, the Bank of International Settlements. It’s all about making the rich richer while maintaining the appearance of propriety and “economic theory.”