The decision is in: Unlimited quantitative easing. That was the announcement from the Federal Open Market Committee this afternoon, launching a third round of purchases of securities in a bid to boost the economy and reduce unemployment. This time, Federal Reserve Chairman Ben Bernanke and crew are pledging to buy $40 billion per month until the economy improves. The Fed's policy committee also extended its zero-interest rate policy until “at least mid-2015.” If QE3 lasts that long, the Feds will be printing at least another $800 billion to buy mortgage-backed securities.
It won’t be a surprise to read conservatives lambasting this as unconventional monetary policy meant to help re-elect President Obama. And inflation hawks have already started screeching. But the loudest cry of “for shame” should be coming from the Occupy Wall Street movement.
Quantitative easing—a fancy term for the Federal Reserve buying securities from predefined financial institutions, such as their investments in federal debt or mortgages—is fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy. It is a primary driver of income inequality formed by crony capitalism. And it is hurting prospects for economic growth down the road by promoting malinvestments in the economy.
How is the Federal Reserve contributing to regressive redistribution, income inequality, and manipulated markets? Let’s flesh this out a bit.
Last month, Bernanke said that quantitative easing had contributed to the rebound in stock prices over the past few years, and suggested this was a positive outcome. “This effect is potentially important, because stock values affect both consumption and investment decisions,” he argued, apparently under the belief that the Fed has a third mandate to support rising stock prices.
This is ironically a trickle down monetary policy theory, where rising stock prices mean more wealth and more consumption that trickles down the economic ladder. One problem with this idea is that there is a gigantic mountain of household debt—about $12 trillion worth—that is diverting away any trickle down. An even worse assumption is that the stock market really reflects what is going on in the real economy.
Where the Occupy movement should really be teed off is when you consider that most equity shares in America are owned by the wealthiest 10 percent. That is not inherently a problem—wealthier individuals with more disposable income will have more ability take ownership stakes in companies than those in lower income brackets. And it is not a call for class warfare. However, it does mean that when the Fed engages in quantitative easing it is providing a benefit to a very narrow segment of society at the expense of others (either through future inflation or through the cost of raising taxes to pay for increased federal debts). That is the definition of crony capitalism.
At the same time, all Americans have seen the prices of basic goods increase over the past few years in large part due to rising commodities prices. The whole idea of QE is to drive investors out of lower risk investments like mortgage backed securities and government debt and get them to put that money in “more productive” use—lend it, build skyscrapers, invest in technology, etc. Since there is little confidence about the future of the economy, many investors have crowded into the stock market with their money, and still others have invested in commodities.
The problem is that investing in commodities can push up prices on things like gas, meat (because of feed corn prices), bread (because of wheat prices), and even orange juice. There certainly have been other contributors to commodities prices going up, but if the Fed has boosted stocks, they've boosted commodities too. So not only are the cronies gaining from quantitative easing, there is a negative wealth effect too.
The cronyism doesn’t end there. In a Dallas Fed paper released in August, OPEC chief economist William White points out that easy monetary policy favors “senior management of banks in particular.” And even Bernanke himself suggested (as if it was a good thing) that quantitative easing purchases “have been found to be associated with significant declines in the yields on both corporate bonds and MBS.” Translation: the Federal Reserve has made it artificially cheaper for corporations to borrow money and has pushed up the prices of houses (benefiting homeowners but hurting homebuyers).
Correct me if I’m wrong, but I thought cheap loans allowing businesses to leverage up and juiced housing prices were key parts of what got us into this mess?
All of this might be acceptable to some if quantitative easing was helping the American economy recover. The reality is that quantitative easing has made it cheaper for the government to borrow, has artificially propped up the housing market (making it take longer to recover), and has dramatically manipulated the distribution of capital in financial markets. And the economy has not been in recovery.
The plans announced today will exacerbate pre-existing malinvestment and income inequality. What is this continuous round of purchases going to do? It won’t get banks lending any more than they already are. And even if it did, households and small business still have a lot of debt that will keep them in a deleveraging state for a while. It won’t help the housing market bottom out, clear away toxic debt, and end the wave of foreclosures that need to process. It is not going to push up incomes, create new jobs, or change the technological revolution that is altering the face of employment in America.
To put it simply: More quantitative easing is not going to move the dial much on the growth meter.
Taken together, the crony capitalism and negative wealth effects of quantitative easing should clearly give pause. The fact that QE promotes activities that led to the housing bubble should have stopped its progression as an idea a long time ago, especially since these problems are greater than any gain that would come from this now perpetual pace of money creation.
If there is a time to head down to Zuccotti Park and raise some cardboard in opposition to the continuation of such a devastatingly failed policy, it is now.
This commentary first appeared at Reason.com on September 13, 2012.