Plenty of economists, investors and others have been wondering what will happen to financial markets and the real economy as monetary stimulus in the form of Quantitative Easing is wound down by central banks from the US to the Eurozone in the face of stronger growth.
I will be writing more about it next week, considering the perspectives of critic Richard Koo among others, but here is Michael Hudson from, as ever, his iconoclastic and insightful ‘dictionary’ J is for Junk Economics (p.189-91):
“Quantitative Easing: Central bank support for bank credit creation to drive down interest rates and re-inflate real estate and stock market prices. In the wake of the 2008 crash the Federal Reserve and the European Central Bank (ECB) promoted new bank lending and arbitrage speculation as an alternative to writing down debts. The hope was that new bank lending would re-inflate the bubble. The ECB’s QE (“as much as it takes,” said its president, Mario Draghi) lent money and purchased bonds to bail out banks and bondholders for their bad loans and investments. But it did not create money to revive businesses or indebted homeowners or consumers. Focusing only on subsidizing bank balance sheets, its aim was to save the financial sector and the One Percent behind it, not the economy. So QE had little effect in coping with the underlying problem, which was debt deflation. In fact, Eurozone governments imposed austerity, sacrificing national economies by giving priority to creditor claims.
In the United States, the Federal Reserve accepted mortgages and other bank loans at full face value as reserve deposits, enabling banks to meet their capital ratios and create new electronic credit. But the $4.2 trillion US Federal Reserve creation of bank reserves did not increase commodity prices or wages as the Quantity Theory of Money implied it would. Banks engaged mainly in speculation. They bought foreign bonds and currencies, and lent to hedge funds and for corporate share buybacks, mergers and acquisitions. None of this financed new investment. The US and European economies remained debt-wracked and suffering deepening debt deflation.
Without QE the banks would have had to sell their loans in “the market” at falling prices, at rising interest rates – further lowering the price of collateral-backed bank loans, forcing yet further sell-offs. So in the name of saving “the market”, the Fed and ECB overruled it in the aftermath of the 2008 junk mortgage crash.
Apart from banks, other sectors of the financial markets suffered along with the rest of the economy – above all pension funds and insurance companies. Money managers urged an end to the Federal Reserve’s QE policy to hold down interest rates. One argument was that higher interest rates are necessary to support workers in their role as consumers as well as pension plan savers. It was almost as if labor obtains its spending money mainly from bonds and stocks. “In the first place,” a fund manager opined in a Wall Street Journal op-ed, “the Fed’s policy of zero or near-zero interest rates means negligible returns on savings. Consumers thus have less to spend and those nearing retirement need to save more.”
This depicts workers/consumers as rentiers, not debtors. The trick is to get indebted voters to think of themselves as savers, benefiting from higher interest rates rather than suffering as debtors. “In human terms, the Fed’s policy means emergency room nurses in Texas work longer hours to make up for low yields on CDs, dairy farmers in Iowa forgo equipment purchases to save more for retirement, charities for the homeless in Manhattan reduce services as foundations cut grants, and local governments from Albany to Sacramento close libraries to fund pension fund deficits.”
The higher retirement savings required by nurses, farmers and charities – for whom widows and orphans are stand-ins – are a result of how the economy has been financialized. Debt service and compulsory savings are owed by these nurses on their home mortgages and education debts, by farmers on their equipment and mortgage debt, and by local governments on their borrowings. Higher interest rates make these charges heavier. What is needed to alleviate their financial squeeze is debt relief, along with a shift of Social Security and pensions, health care and education back to the public sector, to be financed out of progressive taxes on rentier income and wealth as well as public money creation.
QE thus was a policy to save only the banks and bondholders, not the economy at large. The effect since 2008 has been to sharply increase the power of the One Percent over the rest of the economy. In the United States, 95% of the population has seen its real income and net worth decline during 2008-2016, despite the soaring stock and bond markets. And while real estate hedge funds such as Blackstone have made a killing by buying up foreclosed properties, home ownership rates have fallen back from 69% to 63.5%. The decline has been especially sharp for blacks, who were the major victims of junk mortgage loans, and for individuals under 35 years old, who cannot afford to buy homes as long as they remain saddled with student debts and other obligations in the face of a falling-wage economy. The “easing” in Quantitative Easing has thus been only for the top of the economic pyramid.”