The Fed’s Quantitative Easing Policy: What’s In It For You?

by on September 26, 2012 · 9 comments

in Business, Editor's Picks, Government, Politics

Ben Bernanke, Federal Reserve Chairman, has been in the business of printing money. His program is euphemistically called “Quantitative Easing (QE).” In September 2012 Bernanke announced QE3 in which the Fed would purchase $40 billion of mortgage backed securities per month indefinitely.

There had been QE1 and QE2 previously, which were one time injections of capital into the nations’ money supply. All theses QEs have resulted in one thing: interest rates have been brought down to practically zero. This may be great for people wanting to buy a car or a house, but for savers, like senior citizens, they have been robbed from gaining any interest on their savings accounts.

They might as well have put their money in their mattresses. However, the interest that the nation pays on its national debt has certainly been minimized and this has given the US budget deficit, already enormous, a little break.

The purpose of the Federal Reserve is to pursue full employment and stable prices. In practice the only thing the Fed can do to promote full employment is to lower interest rates in the hopes that people will borrow and spend more money. It can promote stable prices by raising interest rates in order to put a damper on inflation.

However, inflation is not the present problem. Employment is. QE injects money into the economy at the top in the hopes that it will trickle down to the average person in terms of consumer loans. The general idea of QE is that the Fed buys up financial assets, injects capital into the big banks and lowers interest rates.

This should get the economy moving again by encouraging people to borrow money. Only it has not worked out that way. Instead the money injected at the top of the economy, just like the Bush tax breaks for the rich, has resulted in making more money available for speculation.

At the street level the average person has been reluctant to go into even more debt by taking out more loans. This is why Bernanke has been practically begging the Congress to implement a fiscal policy to complement the Fed’s monetary policy. A fiscal policy would mean that the Federal government would have to borrow money or go into more debt and then spend that money into the economy in terms of such projects as infrastructure development.

A fiscal policy such as this would result in the injection of capital at a lower level than the Big Banks as construction workers would be hired lowering unemployment and presumably increasing GDP. They then might be more willing to take out a car loan, for example. Since the private sector isn’t hiring to any great extent, it remains for the government to act as employer of last resort.

The only problem is that conservative politicians are deadset against any expansion of government or any increase in government debt, in short, any stimulus. That leaves the situation in a stalemate with Ben Bernanke vainly trying to increase employment by giving money to people who don’t need it. This is the policy that Republicans also want to pursue through the tax code: reduce taxes on the rich in the hopes that they will create jobs.

The problem is that neither of these policies – tax breaks for the rich or printing money and giving it to the rich – has worked. Both of these policies inject money into the top of the economy, into the hands of the wealthiest people. Both of these policies are debt based: fiscal policy increases the US national debt by having the government issue more Treasury bonds while getting people to borrow more money to increase GDP increases consumer debt.

Ellen Brown critiques the whole idea of a debt based economy in her path breaking book, Web of Debt. She suggests that, instead of the US central bank, the Federal Reserve, being privately owned, Congress itself should own the nation’s central bank i.e. the central bank should be publicly owned. All the money that Ben Bernanke prints is fiat money. That is it’s not backed by gold or anything else. A dollar is worth a dollar just because the government says it is.

So instead of Ben Bernanke’s “helicopter money” (another name for quantitative easing which is just dropping money out of the sky), the government itself could issue the fiat money. That way no interest would be involved! The money would just be spent into the economy. When the government issues bonds that are bought up by the Federal Reserve (quantitative easing), it has to pay interest.

If the government, instead of the Federal Reserve, issues the fiat money, it doesn’t. Because the government and the Federal Reserve have to go through the big Wall Street banks, the banks profit and the people go into debt. If the American people owned the nation’s central bank, Wall Street profits and citizens’ debts could be eliminated or at least drastically reduced.

The American government has in the past issued its own fiat money. Abraham Lincoln issued fiat money, Greenbacks, that were used to win the Civil War, build the transcontinental railroad and provide the Land Grant colleges. Greenbacks were fiat money, totally. They weren’t backed by gold.

In the process he saved the nation an estimated $4 billion in interest. Other countries’ central banks are owned by their governments, for instance, Japan and China. Even the European Central Bank is publicly owned. Publicly owned central banks can increase the money supply without incurring ever more debt.

As Ellen Brown states on p. 384 of “Web of Debt,”:

Debt-free government-created money was the financial system that got the country through the American Revolution and the Civil War; the system endorsed by Franklin, Jefferson and Lincoln; the system that Henry Clay, Henry Carey and the American Nationalists called the “American system.” The government could simply acknowledge that it was pumping money into the economy.

It could explain that the economy needs the government’s money to prevent a dollar collapse, and that the cheapest and most honest way to do it is by creating the money directly and then spending it on projects that “promote the general welfare.” Laundering the money through non-producing middlemen is giving the people’s Constitutionally-ordained money-creating power away.

To summarize, the Fed’s quantitative easing only enriches the big banks like Goldman Sachs and JP Morgan Chase who use the money to speculate. It does little for the average person including savers who are not able to get any return on their savings. Government money could have been used to bail out under water mortgagees; instead it was used to bail out Wall Street.

A central bank that created fiat money and then spent it into the economy to do infrastructure rebuilding and improvement would do more to increase employment and raise GDP than the schemes that the Federal Reserve Bank and the Congress are now capable of because it would inject money at the bottom of the economy and not the top. Currently, both US fiscal policy and US monetary policy are flops.

 

avatar

John Lawrence

John Lawrence graduated from Georgia Tech, Stanford and University of California at San Diego. While at UCSD, he was one of the original writer/workers on the San Diego Free Press in the late 1960s. He founded the San Diego Jazz Society in 1984 which had grants from the San Diego Commission for Arts and Culture and presented both local and nationally known jazz artists. His website is Social Choice and Beyond which exemplifies his interest in Economic Democracy. His book is East West Synthesis. He also blogs at Will Blog For Food. He can be reached at j.c.lawrence@cox.net.
avatar
avatar Anna Daniels September 26, 2012 at 11:11 am

The irony is that the low interest rates aren’t good news for people who want to buy a car or a house because the banks still aren’t lending.

avatar John Lawrence September 26, 2012 at 3:21 pm

Well, they will lend to rich people. They are the ones (investors) who are buying up the foreclosed houses, and many of them are foreigners. They are taking the money that is piling up due to the US trade deficit and, instead of buying Treasuries, they are investing directly in US real estate. Many of the real estate deals (I think about 1/3) are all cash deals which tells you what kind of people are buying up foreclosed properties at fire sale prices. It sure isn’t the middle class. Those properties will then become rentals to the former middle class..

avatar Anna Daniels September 26, 2012 at 4:14 pm

You are absolutely right about what is happening to foreclosed homes, which have hit the poorest communities in San Diego the hardest. Am I wrong to see another real estate bubble forming?

avatar Jamie Edmonds September 26, 2012 at 4:35 pm

Or we could collectively just dump this endemically corrupt monetary system entirely. It is a cruel system that pits mankind against itself using debt-based money and competition for limited resources to divide us and breed envy and resentment. It has outlived its usefulness in this modern age of technological advancement which, if properly applied, could create abundance for all. Today we can see the spirals getting ever tighter as the current monetary debt-based system circles the drain. Soon the natural course of technological unemployment will eventually finish it off anyway. Just ask the next generation coming out of our schools and universities–they know this all too well. They are burdened with debt-slavery and see no hope of ever attaining a small part of their parents’ generation’s “prosperity”. They will join the ranks of the growing homeless and soon the hoards of hungry, and angry unemployed with no purchasing power to keep up the cycle of continuous consumption will take to the streets just to have their basic needs met. The whole Occupy phenomenon is but an appetizer to the bitter meal that surely awaits us if we don’t start taking a hard look at this new reality we find ourselves in today. The Zeitgeist Movement advocates a far better solution: transition to a resource based economy.

avatar John Lawrence September 27, 2012 at 7:25 pm

What you describe is already happening in Spain and Greece. It will eventually happen here unless the job situation improves which it probably won’t without government involvement in the job creation process.

As you say, there has been enough technological progress that the knowledge of how to produce enough material goods to meet everyone’s needs is readily available. The contradiction between that and the production for profit model that represents the present world standard, the “spread”, if you will, should eventually lead to the awareness that a better way for production and distribution, which is not debt based, is surely possible.

avatar Frank Thomas September 29, 2012 at 1:50 pm

John,

Why aren’t more states migrating seriously to North Dakota’s state-owned bank model which operates in the manner Ellen Brown recommends on a national level, i.e., public ownership of the nation’s central bank? If this idea is so difficult to consider seriously at a state level due to the usual self-interest political gridlock imprisoning novel ideas and discourse today, how can we ever come together to agree to the mammoth structural financial change your article addresses so clearly?

We Americans have a hard enough time changing anything fundamentally structurally unsound and/or obsolete in our social, economic, poltiical systems in the interests of ALL citizens … rational changes covering a Bought Political System serving special interests; a sharply focused national Green Energy Policy competing with CO2 polluting fossil fuels; an affordable, quality Public Option Health Care Policy; a financially strong but sane 3.5/4.0% of GDP affordable, effective Defense Spending Policy; an aggressive Pre-College Quality-Improvement Education Policy; a Balanced Budget Strategy of austerity, economic stimulation by investing in infrastructure/education, reduction of long-term debt, cutbacks in government entitlement spending, and sensible tax increases; a Trade Policy that requires China to purchase as much from us as we purchase from China to reduce astronomical net trade deficits now rising back to the $60 billion a month level; an aggressive Financial Regulation Policy and Debt-Deficit rules to control sustainable borrowing by government, households, the banking/hedge fund sector, etc.

I doubt any revolutionary reforms such as government ownership of central banks or responsible reforms in other policy areas noted above will occur centrally top down. Real change seems destined to evolve from the bottom-up community/regional/state levels in decisive, measured steps. One such step, for example, is the COOPERATIVE movement — comprising all sizes and shapes of the Mondragon Cooperative business concept– which puts workers and managers on a democratic playing field where all share equitably in a firm´s successes and failures … where wage/salary gaps between management and workers are reasonable … where workers share in company decision-making.

We don´t spend enough time on the alternatives of How and What to do to achieve short-term relief and stimulus to reduce unemployment and long-term structural reforms to improve our nation´s productivity and financial solidity. Ideological polarization prevents any merger of the best ideas/brains to bring everyone forward. In an age of rapidly declining natural resources, we remain obsessed with the paradigm that growth is and end in itself (and Romney´s 47% of the public or 145,000,000 million Americans are characterized as hopeless losers to his wealthy donors) … rather than being obsessed first on how to expand sustainable job opportunities as widely as possible, which has always been a fundamental aim of the Mondragon Cooperative movement.

The Republican party believes we are in a prolonged social-economic mess because taxes are too high for all (including corporations) and regulatory burdens are an obstruction to growth. The Democratic party contrasts this with the 1990s when taxes were high, bank regulations were not strict (even under Clinton), and growth was admirable compared to exactly the opposite in the 2000s when taxes were reduced for the rich and deregulation was wildly increased for the financial sector.

Such diametrically opposed, inflexible concepts of what kind of country we want leave little room for the serious, bipartisan consideration so critically needed of structural reforms, for example, the financial reforms advocated by Ellen Brown and yourself. This requires an objective, open transparent political goverance not based on myths, misinformation and lies. It requires civil exchange of a range of ideas grounded in facts, rational and intuitive reasoning where the intent is to serve the nation´s common good.

For example, concerning the growth effects of tax cuts, the non-partisan Congressional Research Service just came out with a report that GDP growth, business investment, and a number of other economic indicators were all stronger during the 1990s, after taxes were raised on the rich, than during the supply-side administrations of Presidents George W. Bush and Reagan. Of course, the `Trickle-Down´ theory has long been proven a farce.

But, here are Messieurs Romney and Ryan promoting the same failed policy myths for growth that almost got us into another catastrophic depression and widened the gap between the top 5% and all the rest of us.

avatar John Lawrence September 29, 2012 at 4:18 pm

Frank,

Readers can read more about Mondragon here: “From Neo-Liberalism to Economic Democracy: An Alternative Road for Europe”.

Economic Democracy combined with cooperative enterprises combined with publicly owned banks (as opposed to a Fed which is privately owned by the big banks it supposedly regulates) would go a long way towards alleviating the current dysfunctional political/economic/banking system.

The Federal Reserve Bank of New York which supposedly regulates Wall Street has on its Board none other than Jamie Dimon, CEO of JP Morgan Chase. So the regulator and the regulated are one and the same. Is it any wonder that Wall Street got bailed out and the people got sold out?

avatar Frank Thomas September 30, 2012 at 7:13 am

John,

Thanks much for that reference to: “From Neo-Liberalism (Far RightConservatism) to Economic Democracy: An Alternative Road for Europe” by Nyegosh Dube, where he pleas for more public and private cooperative options to compete with large global corporations and banks.

Actually, the mature EU countries are already well-balanced “social-economic” democracies. For example, government policies in the Netherlands, (recently cited as the 5th best competitive country in the world ahead of Germany and the US) focus on the greater well-being of the common folk as well as on the talented and entrepreneurial. Mr. Nyegosh’s thought-provoking article is very relevant to the U.S.’s broken down social-economic situation.

You would think the entire premise of a self-ruling democracy is that it has a “we-ness,” a sense of community that transends self-interest … some degree of reasonable rationality in critical times like now. Times when financial and corporate powers have long taken command of our economic democracy, squeezing out the last vestiges of middle-working class wealth — jobs, wages, health, social security benefits — while sucking up $trillions of general taxpayer funds to bail out failing banks and giving tax gifts to hugely profitable oil firms. On the other hand, a job loss is due to one’s own failure, or lack of smarts or lack of work ethic … while corporations cut jobs and export jobs to get their stock price up and small firms must beg for bank loans.

As Romney reaffirms repeatedly in so many words, “Job losses are definitely not society’s fault.” Welcome to the world of elitist meritocracy first and equal opportunity for all last.

avatar Frank Thomas September 30, 2012 at 7:21 am

John:

Correction 3rd paragraph next to last sentence: … while sucking up $trillions of general taxpayer funds to bail out failing banks and hugely profitable oil firms are receiving tax reduction gifts.

Comments on this entry are closed.

Older Article:

Newer Article: