From Unconventional Economist, who has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs. Cross posted from MacroBusiness, originally published at The Conversation.
When financial markets stood on the verge of collapse in the summer of 2008, two of the world’s most important central banks, the US Federal Reserve and the Bank of England, began considering unorthodox policy measures. They turned to Quantitative Easing, or QE: injecting money into the economy by purchasing assets from the private sector, in the hope of boosting spending and staving off the threat of deflation. These were desperate measures for desperate times.
With signs of a fragile economic recovery gathering enough momentum to reassure policymakers in the US, the policy was expected to be wound down. But in a move that caught commentators off guard, the Fed instead committed to continue with its existing level of asset purchases. For the foreseeable future, at least, QE is here to stay. What began as a short-term crisis measure has now become a key component of Anglo-American growth strategies. It’s important, then, to take stock of QE and the central role it has played within the Anglo-American response to the financial crisis.
The way the Fed led the policy response to the financial crisis is important in two ways. First, it reflects the extent to which the Anglo-American economies have become financialised: credit-debt relations are pervasive throughout all facets of contemporary economic activity and there has been a deepening, extension and deregulation of financial markets commensurate with this development. In that context, with the increased competitiveness, scale and global integration of financial markets intensifying the risk of financial instability, the crisis management capacities of central banks have become increasingly important.
Second, central bank leadership of the policy response also reflects a key feature of neoliberal political economy in practice. Despite all the rhetoric of free markets, competition and deregulation that has been the mainstay of neoliberalism, there is a central contradiction at its heart: neoliberalism has been extremely reliant upon the active interventions of central banks within supposedly “free” markets.
The crisis has been warehoused on the expanding balance sheets of central banks, demonstrating just how much scope for policy manoeuvre there is when governing elites want it. Government debt and private assets, including toxic mortgage-backed securities, have been indefinitely transferred onto central bank accounts. This strategy highlights the role of arbitrary accounting processes, shaped by state institutions, at the heart of supposedly “free market” economies.
Given this room for manoeuvre, there is no doubt that a much more expansionary fiscal policy and a progressive taxation system could have been implemented in response to the crisis, but that response is foreclosed by the ideological confines of the prevailing neoliberal orthodoxy. Instead, we have monetary expansion and fiscal austerity.
Incubated within the crisis conditions of the 1970s, the neoliberal revolution in the West was birthed during the 1980s with the landmark electoral victories of Margaret Thatcher and Ronald Reagan. The early years of their tenure were marked by proactive central bank policies, fighting inflation through high interest rate regimes that were justified with monetarist dogma. Those policies had mixed results, but, crucially, they signified the strong emphasis upon monetary policy within the new paradigm, which now prioritised price stability, rather than the traditional post-war commitment to full employment.
By 2008, the challenge faced was markedly different. Now it was deflation and a shortage of liquidity, not inflation, which threatened the functioning of financial markets. Yet, in common with the inflationary crisis of the early 1980s, monetary policy has again been emphasised as the proactive component of the policy response. The common element in both crises is this combination of monetary activism, through extreme tightening (in the 1980s) or loosening (from 2008) of the credit flow, plus of course fiscal austerity.
What have the effects of this combination been? In the 1980s, the high interest rate regimes aggravated unemployment, boosted bank profits and accelerated the growth of income inequality. When the Anglo-American economies did return to growth they were markedly different than they had been before.
In the present period, we’ve witnessed a similar form of wealth redistribution. Recent estimates by Berkeley professor Emmanuel Saez, an influential scholar of income inequality, suggest that 95% of wealth gains since 2009 have accrued to the top 1% of the US income distribution pattern. In Britain the experience has been very similar, with the Bank of England’s own report in 2012 suggesting that QE had benefited Britain’s richest 5% the most.
These two major crises – the first inflationary and the second deflationary – have been the defining moments of the neoliberal period within the Anglo-American sphere and it’s remarkable that they have led to a similar pattern of policy response.
They have also both produced “regressively redistributive recoveries”: by this I mean that where and when growth has returned the benefits have been highly skewed towards the upper percentiles of wealth holders. That was the case in the 1980s, when the acceleration of income inequality really got underway. And it has been the case, once again, in the wake of the 2008 crisis.
Today’s “recovery” has largely been confined to rising stock prices and asset values. Meanwhile, average incomes have continued to stagnate or decline and income inequality has intensified. Quantitative easing has been central to this regressively redistributive recovery, boosting balance sheets and stock market values without providing a commensurate recovery throughout the economy as a whole. These measures have disproportionately benefited those who already own financial assets on a large scale.
Quantitative easing is thus exposed. It’s not merely a technical remedy to a malfunctioning financial system, but rather a deeply political policy programme. There are winners and losers just as with any economic policy that affects the overall distribution of wealth and resources within society. The conventional fixation with GDP obscures these dimensions of the recovery and ignores key questions about the distribution of wealth within society.
As the statistics about the uneven benefits of economic activity since the final crisis show, it’s important to remember that recessionary periods are not simply dead-spaces: even while the pie may be shrinking, the slices held by different groups within society can expand and contract in a very uneven manner with serious social consequences. There is no small irony in the fact that the banks, whose indiscretions lay at the heart of the original financial crisis, have been the major winners during the recession.
If we keep on following these same neoliberal policy paths we will only end up with ever more deeply divided and highly unequal societies. These are not firm foundations for healthy democracies.
Article by Jeremy Green, Research Fellow, Sheffield Political Economy Research Institute (SPERI) at University of Sheffield
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Yes. Precisely. One might almost suspect that was the intention. Almost.
I suspect it’s even worse than the author describes. Sure the rich get richer when stock prices go up, but the dark side is how this twists the psyche of CEOs. A lot of the excess QE liquidity found it’s way into stocks, pumping up stock prices. CEOs are now under intense pressure to keep profits increasing to catch up with stock prices. So they are less willing to hire and do capital investment (revenue growth has been weak). There has also been a historical inverse relationship between PE ratios and quality accounting. Then they do stock buybacks with cash to pump up earnings per share.
They have long ago refi’d all their corp bonds to lower interest rates, so nothing more to get there.
Our entire banking system is regressive because the rich are more so-called creditworthy than the poor!
But expecting Progressives to realize that basic injustice is like expecting the blind to see – you’ll become Christians first!
And there’s no excuse since shares in Equity is an ethical form of private money creation that requires no usury and no government privileges … which justly shares wealth and power rather than unjustly concentrates them.
“Our entire banking system is regressive because the rich are more so-called creditworthy than the poor!”
Hmm. “Worthy” as humans, or “worthy” as sites for reliable rental extraction? (Could be both, in the same way that charity donations are higher as a percentage of income among the poor than the rich — I don’t think that’s a factoid.)
My question is, when are we going to quit calling it “free market ideology” and start calling it “looting and stealing”? One gives a cover of non-personal enrichment and actions free of conflicts of interest, the other shows the actual motivation and results.
Second, central bank leadership of the policy response also reflects a key feature of neoliberal political economy in practice. Despite all the rhetoric of free markets, competition and deregulation that has been the mainstay of neoliberalism, there is a central contradiction at its heart: neoliberalism has been extremely reliant upon the active interventions of central banks within supposedly “free” markets.
Free markets are like God: you hear a lot about them, but no one has ever seen them. Government is always behind free markets and not only in the role of maintaining order and enforcing contracts. Government is the biggest purchaser in the economy, the biggest researcher (who invented the internet, after all), the biggest educator, and so on. It is also the biggest organizer of economic relations. The Trans-Pacific Partnership, the Trans-Atlantic Trade and Investment Partnership, and all the other free trade agreements were pushed and enabled by government. Our foreign policy is based on control of fossil fuels throughout the world. When one talks of energy markets, one is silent about the ships, the planes, and marines that secure these markets for our economy. But the government is there, always, and to complain about government interfering in the free market is as uninformed as the senior who objected to government interfering with her Medicare. So, those who object to the regulation of markets in the name of freedom are really objecting, in the financial markets of today, to interference with the freedom to steal.
Great comment! It pretty much covers all the bases.
Those free markets are kind of like Erewhon: They are nowhere.
Free markets have never existed, not since Adam Smith created them out of whole cloth over 200 years ago.
“neoliberalism has been extremely reliant upon the active interventions of central banks within supposedly “free” markets.”
I like the idea of the neo-liberal thought collective:
I’m not sure there is rigorous intellectual consistency to be found in the work of this collective, but surely what you point out is an outcome of their hegemonic quest. (Consistency would be at the level of practice not theory, much as Beard and I come to similar or at least amicable policy outcomes reasoning from opposed premises.)
At least the Christian God, however much a conventional construction, comes with divine attributes and covenant of virtue.
We would be so lucky if the so-called “free market” could even approximate a mutually inclusive analogy with the Christian God!
Because it has the form of a market, which is important to maintaining its legitimacy. (“Pay no attention to the man behind the curtain….”).
Not “free market” but “rigged market,” “fixed market,” “fake market,” “planned market”… None of them really sing, do the? I like “planned market” because it’s a dig at the Austrians…. “gamed market.”
I sense that our big capitalists – corporations, the military; and various corporations that benefit from the “system” have all bonded together like blood brothers so ashamed of themselves that they will never admit it. The bonds of embarrassment are very strong. I’m sure that is the wellspring of all rationalization.
Embarrassment? That would require a conscience and the ability to feel shame. I don’t think so…
When the following central tenet of neoliberalism has been definitively debunked: that the wealthiest people have a proven record as the best wealth creators so that in order to increase GDP the State must make every effort to transfer as much wealth as possible to the wealthiest.
The holding of this tenet as a self-evident truth by the most powerful State mandarins is behind the fact that both in conditions of inflation and deflation the Fed manages to increase wealth concentration at the top.
In the view of the State mandarins, under the influence of neoliberalism, any crisis in the system is to be solved by making more of the wealth created by a population available to the wealthiest.
I wish this article contained a bit more evidence. Professor Green makes a few assertions about QE in the context of a broader critique of the many failures of neoliberalism, but the connection between the two is left vague and no evidence is marshaled to support those asserted connections as far as I can tell. I’m not saying he’s wrong, but I also can’t quite follow the argument.
I do think this is an important point:
Second, central bank leadership of the policy response also reflects a key feature of neoliberal political economy in practice. Despite all the rhetoric of free markets, competition and deregulation that has been the mainstay of neoliberalism, there is a central contradiction at its heart: neoliberalism has been extremely reliant upon the active interventions of central banks within supposedly “free” markets.
The way I would put it is that part of the political shift to neoliberal economics depended on the embrace of Milton Friedman’s enabling theories that taught that (i) pretty much everything macroeconomically important is a “monetary phenomenon”, (ii) central banks control monetary phenomena , and thus (iii) all of the government that is needed to manage our economy and maintain prosperity can be exercised through the central bank.
The two premises were quickly refuted by history, but interestingly, the people attracted to this trend in thought just continue to manufacture new premises to support the conclusion (iii). (The current story is that the Fed manages everything important by actually or potentially controlling everybody’s confidence levels and expectations in areas from the price level to the level of employment and the overall level of growth.) This conclusion has proven endlessly and magnetically attractive to neoliberal policy elites, because it is the core policy element in the kit of ideological defense mechanisms designed to keep politicians, governments and democratically-minded citizens out of the economy, where they would threaten existing property claims, business-as-usual exploitation, and established ownership and wealth hierarchies.
As long as economists can continue to convince people that there is a man with an all-powerful economic knob who is controlling everything inside a single building, they can succeed in defending neoliberalism against democratic engagement and renewed economic activism by the political branches of government. Note that the ideological defense mechanism has been successful both in the case where the target audience consists of the Fed fanboys (Yglesias, Avent, Duy, Soltas, etc.) and in the case when it consists of the harsh critics like Paul and the zero hedgies. In both cases, the message that comes across is “Ben Bernanke runs everything – there is no reason to pay attention to the political sphere.” Fed obsessions of either kind promotes social stagnation and disempowerment.
I wondered about dating the inflection point to the 1980s (Reagan and Thatcher). I’ve been amassing a series of charts under the heading of “Where It All Went Wrong,” and over and over again, the curves change in the mid-70s. Perhaps some sort of “higher level” decision was taken at that point, with Reagan and Thatcher coming along to ratify it electorally. This is all amateur and informal speculation; a professional might have a different and more rigorous view.
“On or about December 1975 human character changed,” as Virginia Woolf did not write….
“Perhaps some sort of “higher level” decision was taken at that point”
Well duh!
Your models lead back to the same time frame for one very important reason Lambert. As you well know it was the beginning of the end of the American hegemoney. With Executive Order 11615 Nixon effectively put the nail in the coffin for any sense of fiscal prudence in the U.S.
There’s a reason for our continuing boom and bust cycles and the increasingly comical behavior in Congress, and the reason is obvious. Our leaders, in their characteristic fashion of “We know what’s best” pride and hubris have taken it upon themselves to utilize the opportunities availed to them to keep the party going for as long as they can in that quest for growing GDP, enriching themselves at every step along the way.
The increasing income and wealth inequality are not an accident. They are the foundation of the current monetary system. The results were predictable if you take a step back and look at the situation from a much broader perspective with consideration of other times and cultures.
This will not end well, because it never does. For now, it’s an all-out defense of a corrupt status quo.
http://goldswitzerland.com/we-are-seeing-an-all-out-defense-of-the-status-quo-jesse/
Agreed.
The 70s correspond to when the US became a net importer of resources and energy; when it started to need the reserve currency status to maintain its way of life. And to maintain this reserve currency status, it needs to maintain military might.
When countries become net importers, they depend on money printing and exploiting emerging countries to maintain their way of life.
Most of the middle class in the US wants its SS and world peace. Two major contradictions. As long as it does not understand the big picture, it will be disappointed.
You really believe that the reason America’s oligarchs have declared permanent war is so they can pay Social Security benefits?
I must say, your opinion of these guys is infinitely higher than mine.
I don’t believe that’s what he’s saying at all. The “war” you are referencing is simply the evolution of the increasing level of force and deception needed to maintain the status quo, as we’ve witnessed by the continued dismantling of the rule of law and the social contract.
Welcome to the Hunger Games!
That’s not what Moneta is saying?
Then what does this mean from his comment below:
Moneta seems to believe three things:
None of these is true. As austerity has ground down on American workers, it has ground down even harder on workers in emerging markets. This is not America vs. the world. It is the Transnational Capitalist Class vs. the poor and working people of the world.
1) The US imperialists conduct empire for the benefit of the poor and working people of the United States
No I don’t. I believe the middle class is a product of the post WW2 economy where the US came out as the global leader and the middle class grew DESPITE capitalist ideals.
2) The US’s imperialists are nationalist, as opposed to being just merely greedy, and operate to maximize the national interst instead of their own self-interest, and
The imperialists are not nationalist. They are greedy just like most of the rest of the US population which wants to continue consuming at the expense of the ROW.
3) If the poor and working people of the US consume less, the poor and working people of the emerging countries will consume more
I don’t agree with that either. I just have trouble seeing perpetual good fortune for a nation that has exploited the ROW. And I’m not pointing my finger at the US only, I include all developed countries.
Lambert Strether: The NYC bailout was in December 1975.
One currently popular theory is that it is around that time that the conservative counterattack to defend the free enterprise system mobilized, instigated by the Powell Memo’s call to arms. According to Greenpeace:
Registered corporate PACs grew from 89 (out of a total 608) in 1974 to 1,262 by 1980 (out of a total 2,551). In 2008, there were 1,578 corporate committees out of a total 4,292 registered PACs. Corporate PACs have consistently outnumbered other registered PACs since the mid-seventies.
Yes, that’s my thinking too. but I’m wary of it. I’d like the mechanisms of transmission laid out, though, from Powell Memo -> to CoC lobbying (e.g., PACs) -> institutional effects -> policy change, because it’s not clear to me that the Powell Memo is cause or coincidence, and until we get the whole chain (and not as conspiracies of individuals, but systemically) I don’t think we can see that. Perhaps this work has already been done, and I don’t know about it, though. I guess I’m saying I want to single case study with all those elements chained together that I can generalize from and turn into a polemic (heck, I’m a blogger…).
And what’s really disconcerting Dan, is that this call to arms mustered up an enormous legion of half-wits who were manipulated for at least a decade before they began to wake up. When Mr. Green says in 1975 or so we should have had an expansionary fiscal policy and a progressive tax, he fails to mention that we had not yet “won” the “cold war.” (aka the capitalist war) And when you say we have always had and still have “a man with an all powerful economic knob” running our business, I spit my coffee. Keep in mind that in 1954 (Catherine Graham’s autobiography) we (Washington DC) held the “bankruptcy ball” to celebrate the fact that we could foist any monetary system we wanted to foist on the entire world. And we did. A kluge of nonsense. This didn’t start in the 70s. It started immediately after WW2.
If you want the downbeat for the neoliberal regime, look to the Banker’s Coup in NYC in 1975, which represented the first sustined and successful attack against the New Deal and Great Society: 15,000 teachers laid off, hospitals and firehouses closed, cops laid off and tuition imposed at the City University. The first real victory of the Austerians.
The next tune would be Proposition 13 in California in 1978, which began the hollowing out of the public sector there.
“the downbeat for the neoliberal regime” — Effing brilliant.
And the musical metaphor is so fun, because it could include scores, improvisation, ensembles…. Fake books… All the flexibility to ground narratives historically as opposed to brittle CT.
Thanks for the compliment, Lambert.
Alas, this score seems destined to end not just with entropic noise, but with the instruments themselves being smashed.
That worked for The Who!
+10
True, but can you say with confidence that “We won’t be fooled again?”
I blame Nixon for everything. haha.
And the Cold War. I think the idea of fighting the Cold War by setting up an economic block was the thing that gave globalists (call ’em neoliberals) traction again.
But after going off the international gold standard and the buck becoming a true western fiat reserve currency, the USG gained a lot of flexibility. We enabled the ability to run trade deficits seemingly with no consequence. Some bumps along the way – the Arabs didn’t care much for it and we got the Arab Oil Embargo. But then they saw the light when they realized they could get both military protection and also buy US phyical assets with their fiat dollars.
Then Carter came along with his globalist sentiments. (Trilateralist connections *)
One idea of how to influence people and gain friends in the western world, and build an economic block against commie nukes and commie infiltration, was to open US consumer markets to our friends. Japan said hello with the Japanese Invasion – a “weak” yen translated to $5 Jap labor vs US $15 union labor. US corporations followed Nixon on the long road to China – but first traveling to the South, then NAFTA, then SE Asia, and finally China, and India.
The other way of cementing ties with our friends was helping with oil exploration and of course international banking too so everyone could borrow fiat dollars to play the game. The US “consumer” needed to be able to play the game too – the US market was now offered up as a great big Pinata full of prizes for our foreign friends to win – so we needed banking de-regulation to enable lots of US consumer borrowing so they felt like winners too.
The other happy effect was now that we spent all these dollars on imports, foreign dollar holders needed something to buy with them. If it wasn’t US exports, then Treasury bonds would do. So we also enabled the chronic fiscal deficit and ever increasing national debt.
‘Course I just made all that up, and you read it here first. haha.
*The Trilaterists sort of merged with the CFR (Council on Foreign Relations) and Pete Peterson had the helm there for a while after leaving the Nixon Admin and being a private equity guy.
good summary Craazy#2
The Japanese didn’t just compete with lower labor costs/prices, but with better-quality goods, from cars to cameras and electronics. American industry had grown complacent long before U.S. markets were opened to imports.
You’re right. People forget that Carter deregulated the airlines. Or that Clinton allowed media to be more consolidated. So it wasn’t just The Gipper and Mags. It started before both of them came onto the scene.
that was about when Led Zepplin turned everybody into stoners.
The pot back then wasn’t so harsh it totally fried you, so you could get a buzz and still more or less function, but it did make things harder if you had to concentrate.
the pot got harder and so did the life. after a while, it was easier just to stay stoned all the time.
the Asians weren’t big stoners, from what I gather. They’re very industrious and hard working, which makes them amenable to being worked to death. It’s hard to compete with an industrious Asian when you’re stoned, but then, all you need is a stoned woman and a cabin in the woods and who cares? That’s the problem now. The woods.
If the Asians figured out how to live stoned in the woods it would be game over.
the more I think about this the more sense it makes.
why don’t all the Asians say fuhhk you white man, we’re not gonna make your sh9t anymore, we’re gonna lay around and chill out. make your own iphones and plastic crap, round eye.
I heard that once, they make fun of white people by making their eyes round with their fingers and going “oooh ohhh ooooh”.
I heard that from a dude who worked in project finance for a Japanese company. It cracked me up hilariously. I couldn’t care less since I’m so un-PC it wouldn’t even register as an insult. I thought it was hilarious, worthy of Chris Rock or Eddie Murphy back in the Day.
why do they make all our crap? why don’t they just say f8ck you round eye, go get stoned and puke for all we care. that’s what I’d do. I wouldn’t make their crap. I’d rather lay around and die from an overdose of something.
the economists would call this “utility preference function maximization” and it would graph in 5 dimensions using differential equations on a 5th degree polynomial. After they did that, they’d be so lost nothing else they did would either help or do any more damage. You just have to let them sit there with their computer until they get it out of their system. After that, hopefully they’ll be up for a few beers.
Gee, I dunno crazy. True, Japanese music sucks and that probably contributed much to the Japanese Miracle, but after graduating college 10 Years After Whole Lotta Luv, they just about wiped out my first cap equipment company employer in my first 3 years in the working world. So I jumped ship, knowing by that time that my company wasn’t doing any investment in anything, let alone product quality, with 15% Volker interest rates and the Jap banks were handing out free money to Jap corporations, then buying their stock.
To be on the safe side, I went to work for a Swiss company, thinking that Yodeling would be a similar advantage. Didn’t ask the right interview question and a year later they were ready to bite the dust. Then I found out the rest of Europe had the same problem. Sure, Britain was toast, but they have crappy music in Germany too, were making great cars and cameras, and Germans were getting nailed almost as bad.
So I’m not so sure the music theory is the complete picture.
But at least they blew up in 1990. Wonder what coulda gone wrong?
Sorry that I don’t have any more wisdom to pontificate further.
over and over again, the curves change in the mid-70s. Perhaps some sort of “higher level” decision was taken at that point, with Reagan and Thatcher coming along to ratify it electorally. This is all amateur and informal speculation; a professional might have a different and more rigorous view.
It’s an interesting and important question. Just when and how was the decision to abandon full employment, growth, increasing general welfare taken? When did the elites decide – we’ve had prosperity for 30 years. Ugh. Let’s smack the lesser people down NOW.
Mitchell & Muyksen’s Full Employment Abandoned is a place to start. Mitchell’s student Victor Quirk’s research – exposed in various papers and guest billyblogs is highly relevant. Mitchell was himself surprised by the animus Quirk documented those 1%ers expressing back then toward the 99%ers they lived off of, and the clear, blunt way they expressed their decision to ‘Let’s have lots of unemployment and stagnation now.’
I have been particularly interested in who saw it coming. Who made correct predictions of the onset of the Great Moderation = Great Stagnation? Very few. Two who saw it very early – in 1971 or 72 and said in nearly the same words IIRC that “the decision for stagnation has been made” were the Kaleckian economist Josef Steindl and the philosopher Herbert Marcuse.
Wow!
That research done by Victor Quirk is amazing!
Thanks for the heads up.
Here’s a teaser:
http://bilbo.economicoutlook.net/blog/?p=13140
I remember the 70s, the complaints about the world going to hell were all about how much cab drivers and plumbers charged, how slow the waiters were, and how they couldn’t get respect from counter staff in stores. The general message was “the scum aren’t working hard enough, and they’re getting too much pay.”
I remember how happy they were when the 80s came round, the unemployment shot up, and people got more scared of losing their jobs.
No. We only need fiscal intervention to any large extent in order to counter the effects of the inherently corrupt and unstable government-backed credit cartel WHICH YOU SUPPORT!
Otherwise, we’d have ethical, stable forms of private money creation that do not require extensive government privileges and massive government spending to ameliorate the damage the current money system causes.
It becomes quite clear that the term neoliberal means “policy I don’t like.”
Clear to whom? Did whoever it was clear to give a reason for their moment of clarity?
“But in a move that caught commentators off guard, the Fed instead committed to continue with its existing level of asset purchases.”
Hahahahahahaa… this is a joke, right? Did anyone honestly expect them to “Latest Made-Up Fed Term” – uh, sorry, “Taper”?
Fool me… can’t fool me again?
I would put it a lot more strongly. Bernanke belongs in prison, along with the majority of senior officials from a thoroughly corrupted Fed, Admin, Congress and Wall Street. It’s been evident for years now. While I welcome confirmation via the studies cited, the outcome could not have been different given the mechanism – essentially free money piped into the banks still run by the worst characters on the planet, rather than aimed directly at real production. I suppose I ought to feel good for being vindicated afer plunking so many keys for so long, attacking QE and its huge distortions – from the working stiff’s gas bill to global financial fissures – but the damage is done. Bernanke has utterly blown it and neither he, nor Yellen, nor “who cares” can do anything about it except stop, go on TV and tell the world it’s up to the Executive and Congress to address the calamity of the GFC, not the frigging private Central Bank at the heart of it.
Nothing, not one thing, has been done to offset a decade of runaway stupidity, and nothing will get done until this Axis of Assholes is broken – and the first step is to stop engaging these people as if they were honest men and women honestly “debating” the merits.
Mini-rant aside, I would point out that the early ’80’s wasn’t just about inflation – the Third World debt crisis blew US banks’ solvency apart every bit as badly as what we just witnessed, the difference being the far greater relative power and percentage of the global economy the US possessed at that time vis a vis the rest of the world. High interest rates didn’t just quash inflation, as money poured into the States from around the world, emerging markets but a gleam in the eye of the neoliberal globalists.
QE also pumps money out of the banking sector.
Unless the Fed overpays for the assets!
Which comes back once it’s been run through a series of refining-for-speculation money transumution processes, the final product then plunked down on oil, food, the housing “recovery”, or whatever leveraged scam wins the day, because, after all, what are friends for if not to help one suck in record profits year after year. And should a piece of the operation have to take a bit of a hit in order that others make out like, well, bandits, so be it.
It is very difficult to believe QE was ever intended as a ‘cure’ for the general economy given the already known Japanese experience – we had long talked of their zombie banks before Leyman. It is much more likely QE came about because the powers that be knew the investment banks were up to their necks in debt and rent-seeking corruption. It’s not credible those proposing QE didn’t know the likely Cantillon effect.
I’m for the ‘amateur approach’ – mostly because I don’t believe the economic levers approach Dan outlines as the problem. Lambert seems about right to me, though I suspect a longer historic control fraud. The big switch in this process was the change from very high manufacturing profits to financialisation and of subsidies from the former to the latter.
I played a bit of professional sport and we clearly don’t want to saddle ourselves with the handicap of trying to compete as amateurs against professionals, or end up as 9/11 conspiracy theorists working so far from the real data and science as to be cranks. The key seems to be that our professionals now work almost solely in their own interests and we lack any control of the game itself.
Many pension plans were loaded with the defaulting securities. Without the bailouts and any QE, pension plans would have collapsed already.
QE that might not be regressive is discussed at length here –
http://s.bsd.net/nefoundation/default/page/-/publications/QE_Report_Final_WEB.pdf
This seems to be a useful 72 page paper from the NEF (New Economics Foundation)
from 4.4 Distributional impacts of QE
“”QE has important distributional effects. It supports asset prices, including equities (shares) and house prices and thus helps people who hold such assets – mainly richer and older parts of the population.
At a time when fiscal policy is disproportionately affecting the poorer sections of society as the Government cuts benefits and public services, this hugh boost to the wealthiest segment of population via monetry policy raises serious concerns; we suggest it calls into question the validity of the distinction between ‘redistributive’ fiscal policy and ‘neutral’ monetary policy.””
I’m sure Michael Hudson would agree with this:
5.2 Direct lending for real economy investment
“”UK banks prefer making loans that are secured against existing property or to other financial institutions rather than making loans that support productive activity. This does not appear to represent an efficient market allocation of capital unless we believe that favouring asset bubble over productive investment is efficient.””
So essentially they seem to be saying: Go ahead and get rid of the toxic debt by putting it on central bank balance sheets and letting it net out but then learn by your mistake. Don’t let the banks do this again.
7. Conclusions
“”Enabling banks to lend more will not be effective in stimulating investment, production, and employment if the lion’s share of new credit goes into mortgages and lending to the financial sector.
We recommend the second option as providing a more direct and controllable channel to ensure that QE results in non-inflationary expansion of investment and employment. By structuring the provision of funding through the purchase of bonds in intermediaries, the current mechanism of QE remains essentially the same with the difference being the type of financial security being purchased. It also has the benefit of developing capital markets for investment in these sectors and leading potentially to ‘crowding-in’ private sector investors.””
This seems to be in the right direction as it would get the govt more involved in financing productive employment generating activity such as infrastructure and small businesses.
Financialization occurs when an economy is fully developed and has accumulated enough wealth that needs to be redistributed into fluid systems.
The best way to alleviate the income inequality and to tax excess capital created through stock prices and capital appreciation, is by incentivizing long term investments. This can occur by infrastructure development (large scale) or tax benefits associated with taking illiquid equity risk.
And a tax disincentive or two wouldn’t hurt, either. Tobin Tax, anyone?
I’ve come to believe that the policy gridlock that prevents a fiscal approach to demand creation is ‘a feature not a bug’, i.e., it gives the DLC/Wall Street Dems an ‘out’, they can blame the Republicans and the Fed is ‘forced’ to rely on QE, whose affect on asset prices is tilted in favor of liquid assets held by the 0.1%.
Both sides can say it was the “independent Fed” that did it and have the option of denouncing it or holding their nose and saying the Fed had no choice…
Nothing to see here, just more looting…
The article leaves out one very important player who eschewed from Quantitative Easing: the European Central Bank.
If it had implemented such policies, we likely wouldn’t have witnessed the sovereign debt crisis in the European periphery. With the ECB buying trillions of debt – Fed, BoE or BoJ style – it’s hard to see how yields on periphery debt would have jumped to two digits or close.
Perhaps a case of QE (like love) not happening where it was needed the most.
The problem is that you are wrong about the ECB:
http://www.google.com/imgres?imgurl=http://www.acting-man.com/blog/media/2011/12/ECB-balance-sheet1.jpg&imgrefurl=http://www.acting-man.com/?p%3D12777&h=376&w=600&sz=28&tbnid=isdp5iWdm2xc0M:&tbnh=75&tbnw=120&zoom=1&usg=__sN_fe1Hom08dhT0s5IGDc_NFfRc=&docid=l8KZaprVwnlXBM&sa=X&ei=0vVGUoX9GoP68QSCxIG4Dw&ved=0CC4Q9QEwAQ
No, not wrong at all.
The ECB does not engage in open market operations. It makes advances to commercial banks, a very different thing. Those advances are behind the expansion of the ECB’s balance sheet shown on the charts.
In August of 2012 the ECB promised – merely promised – to engage in so-called Outright Monetary Transactions to support periphery public debt, subject to the continuation of austerity.
This promise caused yields to fall massively. One can imagine what would have happened if actions, instead of mere conditional promises, had taken place.
But the ECB never bought significant amounts of government debt on the secondary markets. Had it done so since the beginning of the financial crisis – Fed or BoJ style – the sovereign debt problems of the eurozone periphery need not have happened.
There has been a growing concentration of wealth in the US where you have the rich, the poor and a shrinking middle class. But there is great injustice in the world where the US has been exploiting emerging countries to maintain its lifestyle. The poor and the middle class will have to be exceptional to be able to keep on consuming what emerging markets produce without paying them back. To keep this game going, you will need the backing of the elite and a strong military.
The other scenario is to bring back production and jobs and stop exploiting emerging markets. But this would not happen overnight. This would create huge global dislocations… emerging markets are not ready to pick up the baton. They were not built up to consume, they were built up to produce cheaper stuff for us. But such a transition would not be without pain. It would probably take a decade of pain where you are building up but not producing. A sacrifice that the 50+ are not willing to take.
When someone makes a mess, someone has to clean it up. And cleanups are harder than making the mess. Entropy at work. Every few decades, there is a sacrificed generation and we are due.
Those small countries are saying that very thing at the UN in the ongoing opening “debate”.
Link = http://news.xinhuanet.com/english/africa/2013-09/29/c_132759440.htm
Emerging markets a reeling… the middle east in there too.
It’s interesting to see leaders/dictators which were protected for decades suddenly fall like flies when there seems to be wheeling and dealing with the Chinese….
A thought on QE:
In the midst of a credit crisis you don’t start sending cheques to everyone and his uncle…
Step 1 is to pick up what is defaulting.
Step 2 is to form committees and analyze where you could inject money.
Step 3 is funding these projects.
These 3 steps would logically take 10+ years. We are in year 5 and probably in the early innings of step 2.
With capitalism, history has shown that, in practice, the wealth tends to rise to the top 10-15%.
So it’s hard to understand why the US is so attached to a capitalist ideal when most want decent health care and a guaranteed pension without working for 20-30 years of their life.
If everyone gets a guaranteed pension and healthcare, that means that everyone owns a share in the capital. So wouldn’t that type of capitalism where everyone owns a share of the capital fall into a very strong form of socialism?
All the more reason to kick this surveillance state into high gear. Security spending done in the name of terrorism sounds good, but the real reason is to guard against domestic disturbance as the income inequality continues to play itself out. That’s why the personal date dump is total and not selective. Everyone is a suspect because the masses may a bone to pick with the one percent someday. Soon being detained will be a common occurrence. Only now, they know everything about you. Standing up for your rights will only make matters worse since you don’t have any. Remember, you gave them up for security. The Elite appreciate your total cooperation and support.
I love how Federal deficits of anything less than $1 trillion per year are now considered “fiscal austerity”.
At present, the U.S. and its satellites are ‘printing’ funny money and giving it to rich people. It is not ‘real’ money because it does not represent labor or any other form of value. Apparently they will continue until some catastrophe ensues.
We can speculate as to the nature of that catastrophe.
If most of the funny money consists of credit, speculation, and bookkeeping tricks, it will vanish when people stop believing in it, causing radical deflation. This is what occurred between 2006 and 2008.
If the funny money is transformed into instruments which continue to have some kind of existence even when they are no longer believed in (currency, debts) then we will observe radical inflation when the rich begin to allow it to pass to the lower orders, the working class.
Paradoxically, both of these breakdowns could occur at once.
We will probably find out in the next few years.
What you say about inflation might be true if we were already at full employment/economic capacity. But in fact we’re nowhere close. Plenty of room for additional spending by the “lower orders”, at least until if/when things like global warming and peak oil start limiting actual economic activity.
You are conflicting the money base inflation that Anarcissie is referring with the the “other measures” of inflation like the CPI, etc.
I can see and hear the US dollar bubble inflating from my back porch….ever since 2008.
Its resiliency may be tested in the next few weeks.
Lambert, you are so close to having your eyes opened, but you just keep missing the key question- Why is is possible to make money so easily in the financial assets markets, and why is it so easy for that sector to transfer the effects of any errors onto the economy that produces goods and services? Yes, the central banks are involved, but their power arises from a singular ability. All you are advocating in your solutions is to turn that power over to another centralized entity that will just abuse it in the same way to the detriment of the goods producing economy.
Pure rocket science: QE is regressive and the free market is a myth! Stop the presses!
Exactly. The real beginning of the neoliberal ascendancy was not the Volcker Fed response to inflation but the abandonment by Nixon of his own policy of wage and price controls.
The next question is why did he abandon them?
Maybe the nation subconsciously realized that protectionist policies meant a lower standard of living was coming and nobody was willing to accept it.
Why accept it if you can push off the day of reckoning for another 40 years and convince yourself that thechnology will save the day by then?
We live in a kleptocracy. Of course, QE is a political program of the elites whose purpose is to effect the transfer of wealth to the rich. Monetary policy is a much more effective vehicle for these transfers than fiscal policy which invariably leaks wealth, sometimes a lot of wealth, into the middle classes and poor.
Jeremy Green gets so much right in his exposition, except for his final statement:
“If we keep on following these same neoliberal policy paths we will only end up with ever more deeply divided and highly unequal societies. These are not firm foundations for healthy democracies.”
Of course, they are not. They are the foundations of kleptocracy. We have moved beyond the point of healthy democracies, even unhealthy democracies, sometime ago. “We” are not following these “neoliberal policy paths”, also know as class war. They are being thrust upon us by the rich and elites. They control the political apparatus and government and have foreclosed democratic change through them. What is left to us, and what they can not take away (although they are trying), is the democracy of the street, that is revolution. They have indoctrinated us to hate and fear it, but it is the only door to change we have left. What we should be discussing is not if we should have a revolution, but what kind of a revolution we wish to have, and then get down to the actual doing of it.
Yeah, who’s “we”, Qui-No-Sabe? It’s irksome when analysts point out the obvious while conspicuously avoiding the blatantly obvious. Of course QE is regressive; of course the market is rigged; of course this fosters “deeply divided and highly unequal societies”; of course these are not “firm foundations for healthy democracies”. Do we really need a scholarly study to reach these conclusions? That should be obvious to everyone … well, everyone but economists, whose unmerited salaries and perks depend on willful ignorance.
What’s chafing about this post is the unstated premise that any of this is unintended, that the liars, thieves and murderers who rule us and who devised this policy, aided and abetted by Obama, are really well meaning, that inequality is not the implicit goal, and that if we just point this out again and again, they will change course.
Anyone who believes that will also believe in the great hope-and-change peddler. They will also believe that the current budget crisis is not staged, that it really is what the media says it is: those dastardly Republicans are at it again, trying to obstruct ObamneyCare (like they don’t want the same FIRE bailouts). They’ll believe that the dramatic fiscal cliffhanger is not at all a theatrical setup for the Grand Betrayal, cutting the safety net, inflicting austerity, and imposing global fascism on humanity. Surely our elite are not capable of such treachery are they?
The thing is that the population is essentially split in 3.
Those who are power hungry, those who have no power and no means to get any and the vast majority that wants nothing to do with all of it and has given free reins to the elite. It just wants to go about its daily life and consume without having to fight.
The vast majority does not really follow finance and politics because it is too busy living its life or looking for the American dream. The power hungry elite love this mindset and thrive on it.
And now the majority is starting to get angry because the power hungry are not playing nice.
Jeremy, interesting article. However, it’s “competitive markets” that are required, not “free markets.” Please read, Free Markets are Fraudulent Markets: How the Financial Elite Con Us into Wanting the Wrong Thing. http://www.economicpopulist.org/content/free-markets-are-fraudulent-markets-5360
The financial crisis created a brief opening for systemic change. If nothing had been done by the government (a la 1929), the world wouldn’t have come to an end. Why? The PTB (“they”) wouldn’t let it happen because it would seriously affect their world. They chose to direct their minions to front run the bailout and it succeeded. For a moment, there was palpable popular resistance. Had it been even stronger or longer-lasting, they would’ve had to show their hands and that would’ve led to a real education and awakening of the masses. Even then I don’t think a new order would be forthcoming, but we’d presently be in a much better bargaining position. A “revolution” is not around the corner. People can endure slavery, serfdom, what-have-you for decades if not centuries. The tools of control employed by the power elite are more effective today than they were 5 years ago. When the next crisis arises, let’s hope we’ll let “them” bail out the sinking ship. They will. They have more to lose and we have everything to gain.
I believe the book “Never Let A Serious Crisis Go To Waste”, by Phillip Mirowski, provides an extensive and I believe credible explanation for when things ‘changed’, and how the ‘change’ was crafted. This book starts from an examination of an answer to the question, “How did Neoliberalism survive the financial meltdown?”
I’m still finishing the last chapter and will probably need to read the book again to get a fuller grasp of its content, so please forgive whatever miscomprehensions I present here and forgive my presumption in giving summary to my present understanding. Mirowski would claim that the ‘change’ started right after World War II with the beginnings of the Neoliberal Thought Collective (NTC) at the first meetings of the Mont Perlerin Society initiated by Hayek. The NTC, as Mirowki details, is a complex movement whose reach, power, and monetary backing goes far beyond my more limited notions of a conspiracy. The NTC has effectively taken over the economics profession, and not just at Chicago. Neoliberal thought is difficult to contend with given it’s ‘Russian doll’ structure. The inner circle of the Mount Perlerin Society contains the innermost ‘doll’, the real face of neoliberal thought and intent. That intent is to make the ‘Market’ the final arbiter of all human activity, and only through the ‘Market’ and its ability to discover the most efficient solution to all problems. The outer dolls wrap around this notion of the Delphic Market and as they move further from the center they move further from the clearest statement of this deification of the Market. In our present day, virtually all big name economists at first tier universities adhere to neoliberalism to extents varying as their distance from the center of the Russian doll. Mirowski demonstrates this in a lengthy review and discussion of all the proposals for what’s wrong with economics and how to fix the problem, as provided from their writings and statements following the financial collapse. He effectively dismantles the arguments and nostrums from the full list of usual suspects to show them as variations little deviating from a central theme encapsulating neoliberal economic thought.
Mirowski also describes how the Russian doll of neoliberal thought creates confusion and misdirection in the general understanding of what’s wrong and how best to fix it. He suggests this is another play from the agnotology rule book that’s been so effective in dealing with the regulation of cigarettes, addressing global warming, and now in dealing with the real origins of the financial meltdown crafted and promoted through applicaion of neoliberal thought, exploited through that same vehicle. He also explains how that agnotology has protected the NTC from meaningful change.
That’s the best book report I can do off the top of my head from a book I’ve found very difficult to understand and make no claim of reaching any depth in understanding. However, I do see truth in Mirowski’s analysis regardless of the seemingly outlandish conclusions he reaches. I had long ago noticed a disturbing change in our Universities and in the handling of scientific and scholarly research with Reagan’s introduction of research contracts and the coincident early stages of the corporate capture of research which is consistent with Mirowski’s narrative. I felt something was very wrong, but Mirowski describes the nature and extent of the full beast now reaching it’s glory in our age.
On further reflection, it struck me that the Neoliberal Thought Collective has an outline similar to that of the early church (not the Christians hiding from the Romans) when it began crafting its political structures and canonical doctrine.
Mirowski sounds like a must read. Few economists seem able or willing to tackle the new reality.
http://www.amazon.com/gp/aw/d/1781680795/ref=mp_s_a_1_1?qid=1380426815&sr=8-1&pi=AC_SX110_SY165_QL70
Another comment that is brimming with information that is invaluable to understanding what is going on.
Thanks so much for the heads up.
I found the material in this book very stimulating. Be warned however, for what it’s worth, I’m having a difficult time reading this book. The sentence structures are more complex than I’m accustomed to and the vocabulary — not jargon — is beyond my knowledge of words. Part of the motivation for a second read will be to pick up, and hopefully learn, the new words I found on almost every page. I would never consider playing scrabble with this guy.
It’s also worth note that Mirowski makes many very favorable comments in his book regarding our own Yves Smith.
This is an excellent article by Jeremy Green about Quantitative Easing used as a stimulus in this post 2008 crash. I have argued that QE is not a Keynesian policy for stimulus. During the 1930’s depression Keynes viewed the policies of manipulating the interest rate as an ineffective tool. However, Conservatives and their economic guru, Milton Friedman later sold monetary policy as less intrusive than Keynesian fiscal policy. John K. Galbraith describes the rise of monetary policy during the 1970’s as unfortunate. He writes, “Money: Whence It Came, Where It Went” the following early history of monetarism.
[quote]The final flaw was this revival, during these years, of faith in monetary policy. In light of the history of this instrument it was as surprising as it was damaging…
Nevertheless, offstage faith in monetary policy was growing. Partly this was the result of the fading memory of earlier failures. Partly it was the normal human hope that salvation might somehow be found in magic, sorcery or witchcraft as these are revealed to experts. Partly it reflected the unsinkable prestige of central bankers in general and the Federal Reserve System in particular, something to which readers of this history will no longer react with surprise. In the small world of economics the failures of monetary policy, though fully conceded, continued to be a reflection not of fundamental fault but of interesting aberration. The text-books and teaching still told in refined detail of how movement in the rediscount rate and the purchase and sale of bonds, notes and bills could increase or decrease the supply of money, thus encourage or restrain the economy. Discussion of movements in the money supply became especially fashionable, although subject somewhat inconsistently to growing doubts…as to what should be included in the monetary aggregates. And best of all was the fee dome of monetary policy from interference from any of the inconveniences of public process. Monetary policy “…enjoys a degree of flexibility which fiscal policy does not enjoy: The decisions of the Board of Governors are not subject to the time-consuming procedures which characterized congressional action or to the time lapse which may occur between the enacting and the applying of fiscal policy.” Footnote 13 (Campbell R. McConnell, Economics, 4th ed. (New York:McGraw-Hill Book Co., 1969, p. 332.)
But much of the revival was owing to the effective evangelism of the most diligent student of monetary policy and history during these years, Professor Milton Friedman. As a devout and principled conservative, Professor Friedman saw monetary policy as the key to the conservative faith. It required no direct intervention by the state in the market. It elided the direct management of expenditures and taxation, not to mention the large budget, which was implicit in the forgiving the errors of the Federal Reserve or minimize role of government—for returning to the wonderfully simpler world of the past. Professor Friedman did not forgive the errors of the Federal Reserve or minimize their importance. On the contrary, he emphasized them, and thus he took no responsibility for past misfortune or non-fortune…Professor Friedman’s case was not casually advanced; it was supported by massive evidence which, as necessary, was arranged to serve the author’s purpose. (Substantial changes in the velocity of money use had especially to be explained away. There was also the serious and unresolved problem just mentioned of what was to be counted as money.) In the years to come, Professor Friedman’s breathtakingly simple solution would not, in fact, be tried. But it would powerfully support the hope that all problems could be solved by the magic of monetary management. Alas. (Money: Whence It Came, Where It Went, by John Kenneth Galbraith, 1975, Bantam Press, p. 338-342.) [/quote]
With the election of Reagan in the 1980s Freidman’s simple solution was tried resulting in great pain for the middle-class and extreme income inequality.
With this early history of monetary magic in mind, read “The Regressive Politics of QE,” written some 38 years after Galbraith’s criticism, about how monetarism has failed to stimulate aggregate demand directing the income flow to the 1% elite. Also note how this conservative monetarist policy of QE was enacted without the inconvenience of democratic processes—this is called euphemistically “flexibility.”
Another comment which is most informative and helpful.
You guys are knocking ’em out of the ball park today.
Here is an eye-opening article of how the same scam of QE and Neoliberal policies are being applied to the Japanese economy. The effects are very much the same on the Japanese economy as on the American economy. Most Japanese are clueless to what is being done to them because they are accustomed to the government’s postwar policies much like Americans who took for granted New Deal reforms like Glass-Stegal and social safety net programs. Notice how the Japanese QE money giveaway to the Japanese banks ellipses the fiscal stimulus which is much more effective for increase aggregate demand, but is only a one shot deal while QE will continue indefinitely. The entire piece is a very good descriptions of QE effects and how it’s sold to the public in both America and Japan.
The Abenomics Flimflam
Neoliberalism, Japanese-Style
by MIKE WHITNEY
http://www.counterpunch.org/2013/09/30/more-on-the-abenomics-flimflam/