Thursday, November 4, 2010

Quantitative Easing, or, The Rich Get Richer

Here’s my favorite take on the elections.

The Federal Reserve and its head, Ben Bernanke, have recently announced their latest initiative, called “quantitative easing.” Aside from the fact that this sounds somewhat pornographic, it apparently means that a central bank creates money ex nihilo, i.e. out of nothing (sometimes called printing money, though these days it’s not so crude; the Fed just magically adds billions to its account), and then uses the funds to purchase financial assets (including government bonds, mortgage-backed securities, and corporate bonds) from regular banks and financial institutions. The Fed, this time, is apparently going to create some $600,000,000,000 (that’s billions), a sum, according to Chrystia Freeland of Reuters, “nearly as big as the TARP. It’s nearly as big as the first stimulus was.”

Now why, you might ask, would the Fed be doing this now. Well apparently, the Fed and most economists really think it’s imperative that the economy get another boost to prevent it from going into a second tailspin. And since the Fed is pretty sure, especially now that the “people” have spoken and swept out Democrats and swept in Republicans (giving the latter control of the House) that there is going to be even worse gridlock in Congress and the White House than before, they have to act. In short, there’s not a snowball’s chance in hell that this Congress will pass another stimulus, so the unelected Fed has to do it.

Here's where it gets interesting. The “people,” according to pundits and pollsters, have decided that Obama and the Democrats have spent too much money keeping the country out of depression; the stimulus, in particular, has been rejected as the product of “big spending Democrats.” It’s time to cut back on spending, is the alleged popular message, to get money back to the people. And how to do that: why by putting back into power the Republicans—the very party that crashed the economy in the first place. NO MORE STIMULUS, is the message. And yet, economists agree a stimulus is needed, and so the Fed rides to the rescue. The irony of all this? Listen to Chrystia Freeland:

I think the problem is, when the Fed acts as it does, printing more money, it’s a rich-get-richer phenomenon. This is going to be great for the banks. It’s going to be great for people whose personal finances are strong enough that they can re-mortgage—refinance their mortgages. But it’s not so great for the people who are in trouble. And that’s one reason why it might not have as powerful an impact as the Fed would like.

Now isn’t that sweet? The poor working-class slobs in the Midwest and South (the Tea Partiers) who voted the Republicans into office presumably believed they were voting to help themselves. But by voting for gridlock, they are doing exactly the opposite! They are forcing the Fed to push a stimulus through the back door. And that stimulus, quantitative easing, is going to help the very people—the bankers and financial pirates—voters are supposedly pissed off at. Banks are infused with tons of money, presumably to induce them to lend to small businesses and households to increase buying. But the banks don’t really have to do that (and all indications are that they don’t want to). Rather, they’ll invest in foreign assets where they can make more profit (have people still not caught on that financial institutions and corporations couldn’t give less of a damn about the USA?). And because there’s a whole lot more money in circulation, it’s going to increase inflation. All of which will help make people like us even poorer. We’ll be poorer, too, because the Fed’s stimulus doesn’t create jobs directly, as another stimulus from Congress presumably would.

Is our democracy not a wondrous thing? It allows damned fools, like the ones who enjoyed victory on Tuesday, the freedom to vote against themselves! While the financiers laugh all the way the bank.

There are other, perhaps more serious global downsides to this latest move of the Fed. But frankly I’m not sure I understand how it all works well enough to explain it. To get some ideas, check out Professor Michael Hudson, “U.S. Quantitative Easing is Fracturing the Global Economy,” at Meantime, and remembering that “quantitative easing” didn’t work for Japan in the 1990s, enjoy the irony. It may provide the only laughs we get for a while.

Lawrence DiStasi

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