Friday, March 28, 2014

A "Post Collapse" Quantitative Easing Primer

Let's Go To School
No! No!  Not STILL ANOTHER quantitative easing class!
Yes, sorry, you've only completed the first 11,284 semesters so far.

We have all heard plenty about quantitative easing as the nation's comatose economy stumbles from the wreckage of the Bush W. economic collapse. Perhaps, in fact, many of us think we have already heard quite enough. It would not require a "exasperated dramatic leap" for MeanMesa to reluctantly join that "group already totally stuffed to the point of gastric distress" with the topic, but, gracious visitors, "there are still even more poison snakes" hiding in that wood pile.

If the main danger of implementing the program had somehow ended by this time, delving into the grisly facts would amount to little more than "cursing history while the Visigoths are pounding down the gates."  Unhappily, what we deal with right here, rather than the admittedly insulting accounts of events already accomplished, are the continuing and future prospects of even more, equally severe economic repercussions awaiting us.

Spend a few minutes with MeanMesa to "come up to speed" with a rough explanation of quantitative easing, just what we've done so far and what we can expect with respect to longer term, future consequences.  While this post contains no astonishingly revelatory "breaking news" or even any particularly provocative analysis, MeanMesa has parsed around the GOOGLE to collect some interesting, "feet firmly on the ground" articles which seem to present a "skeletal glimpse" of the issue through points of view respectively in favor or equally opposed.  The selected articles are excerpted here in relatively palatable, easy to digest abbreviated packages. One side, in MeanMesa's view, is well represented by an animated video.

Quantitative Easing
[Read the entire WIKI article here.]

[MeanMesa has highlighted certain terms and statements in the quoted WIKI text which seem to merit close attention.  The foot noting in the original article is suppressed here for ease of reading, but the WIKI version's foot notes offer the reader useful reference material. MeanMesa's notations at the end of highlighted portions of the excerpts refer to specific discrete discussions following the article.  

If you find these excerpts interesting, you are encouraged to read the entire original article.]

Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective [1]. A central bank implements quantitative easing by buying specified amounts of financial assets from commercial banks and other private institutions, thus increasing the monetary base and lowering the yield on those financial assets. This is distinguished from the more usual policy of buying or selling short term government bonds in order to keep interbank interest rates at a specified target value.

Expansionary monetary policy to stimulate the economy typically involves the central bank buying short-term government bonds in order to lower short-term market interest rates. However, when short-term interest rates have reached or are close to reaching zero, this method can no longer work [1]. Quantitative easing may then be used by monetary authorities to further stimulate the economy by purchasing assets of longer maturity than short-term government bonds, and thereby lowering longer-term interest rates further out on the yield curve. Quantitative easing raises the prices of the financial assets bought, which lowers their yield.

Quantitative easing can be used to help ensure that inflation does not fall below target. Risks include the policy being more effective than intended in acting against deflation (leading to higher inflation in the longer term, due to increased money supply), or not being effective enough if banks do not lend out the additional reserves [2]. According to the IMF and various other economists, quantitative easing undertaken since the global financial crisis of 2007–08 has mitigated some of the adverse effects of the crisis.


Quantitative easing is distinguished from standard central banking monetary policies, which usually targets the interbank interest rate. When interest rates have been lowered to nearly zero (because of either deflation or extremely low money demand), when a large number of non-performing or defaulted loans prevent further lending (money supply growth) by member banks, and when the main systemic risk is a recession or depression because banks cannot lend any more money, then central banks need to implement a new set of tactics. These are known as quantitative easing.

The central bank may enact quantitative easing by purchasing a predetermined quantity of bonds or other assets from financial institutions without reference to the interest rate. The goal of this policy is to increase the money supply rather than to decrease the interest rate, which cannot be decreased further [1]. This is often considered a last resort [1] to stimulate the economy.

Quantitative easing, and monetary policy in general, can only be carried out if the central bank controls the currency used. The central banks of countries in the Eurozone, for example, cannot unilaterally expand their money supply and thus cannot employ quantitative easing. They must instead rely on the European Central Bank (ECB) to set monetary policy.

Increase income and wealth inequality

In August 2012, the Bank of England issued a report stating that its quantitative easing policies had benefited mainly the wealthy [3]. For example, the report said that the QE program had boosted the value of stocks and bonds by 26%, or about $970 billion. About 40% of those gains went to the richest 5% of British households.

Dhaval Joshi of BCA Research wrote that "QE cash ends up overwhelmingly in profits, thereby exacerbating already extreme income inequality and the consequent social tensions that arise from it [3]".

Economist Anthony Randazzo of the Reason Foundation wrote that QE "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 [3]".

In May 2013, Federal Reserve Bank of Dallas President Richard Fisher said that cheap money has made rich people richer, but has not done quite as much for working Americans. Most of the financial assets in America are owned by the wealthiest 5% of Americans. According to Fed data, the top 5% own 60% of the nation's individually held financial assets. They own 82% of individually held stocks and over 90% of individually held bonds.

Criticism by BRIC countries

BRIC [BRIC is an acronym for emerging economies in Brazil, Russia, India and China] countries have criticized the QE carried out by the central banks of developed nations. They share the argument that such actions amount to protectionism and competitive devaluation. As net exporters whose currencies are partially pegged to the dollar, they protest that QE causes inflation to rise in their countries and penalizes their industries [4].

Comparison with other instruments

Printing money

Quantitative easing has been nicknamed "printing money [5]" by some members of the media, central bankers, and financial analysts. However, central banks state that the use of the newly created money is different in QE. With QE, the newly created money is used to buy government bonds or other financial assets, whereas the term printing money usually implies that newly created money is used to directly finance government deficits or pay off government debt (also known as monetizing the government debt).

Central banks in most developed nations (e.g., the United Kingdom, the United States, Japan, and the EU) are prohibited from buying government debt directly from the government and must instead buy it from the secondary market [6]. This two-step process, where the government sells bonds to private entities which the central bank then buys, has been called "monetizing the debt" by many analysts. The distinguishing characteristic between QE and monetizing debt is that with QE, the central bank is creating money to stimulate the economy, not to finance government spending [5]. Also, the central bank has the stated intention of reversing the QE when the economy has recovered (by selling the government bonds and other financial assets back into the market). The only effective way to determine whether a central bank has monetized debt is to compare its performance relative to its stated objectives. Many central banks have adopted an inflation target. It is likely that a central bank is monetizing the debt if it continues to buy government debt when inflation is above target, and the government has problems with debt financing.

Ben Bernanke remarked in 2002 that the US government had a technology called the printing press (or, today, its electronic equivalent), so that if rates reached zero and deflation threatened, the government could always act to ensure deflation was prevented [1]. He said, however, that the government would not print money and distribute it "willy nilly" but would rather focus its efforts in certain areas (e.g., buying federal agency debt securities and mortgage-backed securities). According to economist Robert McTeer, former president of the Federal Reserve Bank of Dallas, there is nothing wrong with printing money during a recession, and quantitative easing is different from traditional monetary policy "only in its magnitude and pre-announcement of amount and timing". Stephen Hester, Chief Executive Officer of the RBS Group, said in an interview, "What the Bank of England does in quantitative easing is it prints money to buy government debt, and so what has happened is the government has run a huge deficit over the past three years, but instead of having to find other people to lend it that money, the Bank of England has printed money to pay for the government deficit. If that QE hadn't happened then the government would have needed to find real people to buy its debt. So the Quantitative Easing has enabled governments, this government, to run a big budget deficit without killing the economy because the Bank of England has financed it. Now you can't do that for long because people get wise to it and it causes inflation and so on, but that's what it has done: money has been printed to fund the deficit [7]." 

Richard W. Fisher, president of the Federal Reserve Bank of Dallas, warned in 2010 that a potential risk of QE is "the risk of being perceived as embarking on the slippery slope of debt monetization. We know that once a central bank is perceived as targeting government debt yields at a time of persistent budget deficits, concern about debt monetization quickly arises." Later in the same speech, he stated that the Fed is monetizing the government debt. "The math of this new exercise is readily transparent: The Federal Reserve will buy $110 billion a month in Treasuries, an amount that, annualized, represents the projected deficit of the federal government for next year. For the next eight months, the nation's central bank will be monetizing the federal debt."

A Definition of 'Monetize'

To monetize is to convert an asset into or establish something as money or legal tender. The term monetize has different meanings depending on the context. It can refer to methods utilized to generate profit, while it also can literally mean the conversion of an asset into money. For example, the U.S. Federal Reserve can monetize the nation's debt; this involves the process of purchasing debt (treasuries) which in turn increases the money supply. This essentially turns the debt into money (monetization).

The Rate of US Quantitative Easing 

Following the Bush W. Recession

Accompanying the misperception about how gravely the national economy had been damaged during the Bush W. years was an additional, understandable misperception of the scope and scale of the rehabilitation which would be required to get the thing running again.  For this reason, it is beneficial to review the scope of the Fed and FOPM's response to the crisis.

What follows is an abbreviated "bullet point" account of what's been done.
The US Fed's securities holdings [WIKI: original image]

The histogram track of Fed holdings shown in the chart can be be further illuminated by a review of specific Fed and FOPM events -- the decisions which drove the policy producing the history plotted on the above chart.

Before 2008 Bush W. Recession the Fed held $750 Bn in Treasury notes
2008 QE1 NOV started buying $600 Bn mortgage backed securities
2009 Fed held $1.75 Tn in Treasury notes, bank debt and mortgage securities
2010 JUNE Fed holdings hit $2.1 Tn
2010 AUG maturing notes lowered holdings back to $1.7 Tn in 2011, revised Fed goal $2 Tn
2010 AUG Fed started buying $30 Bn/month in 2 - 10 year notes
2010 QE2 NOV Fed started $600 Bn purchase complete by 2nd qtr 2011
2012 QE3 SEP Fed started buying $40 Bn/month
2012 DEC FOPM initiated purchase from $40 to $85 Bn/month
2013 JUN reduced from $85 Bn/month to $65 Bn/month
2013 SEP Fed decided to hold off on scaling back

QE3 has been humorously called "QE-Infinity" because it is continuing longer than originally cited.

Pay extra attention to the quantities described as "BN's/month."  These are NOT single "QE purchases" for $40 Bn 0r $85 Bn -- they are recurring "MONTHLY" rates of purchases.

A Closer Look at a Few Points in the WIKI Article

[1] ...when standard monetary policy has become ineffective.
[1] ...when short-term interest rates have reached or are close to reaching zero, this method can no longer work.
[1]  The goal of this policy is to increase the money supply rather than to decrease the interest rate, which cannot be decreased further. 
[1]  This is often considered a last resort  
if rates reached zero and deflation threatened, the government could always act to ensure deflation was prevented.

A glaring strategic miscalculation slid into play during the tumultuous months in 2008 encompassing the public revelation of the economic collapse and the Inauguration of the President. Worse, from the cool headed view of hindsight, that miscalculation was not to be defined in political nuance, campaign tactics or even with errors or mistakes in the economic policy implemented almost at once when Obama had taken office.

That mistake, instead, was a failure to adequately impress upon American voters the calamitous gravity of what had been done to the economy. Obscured in the maelstrom of other contemporary Bush W. disasters -- torture, failing wars without purpose, TARP, Supreme Court inflicted outrages on democratic elections and the rest -- the active attention of the electorate predictably migrated to these relatively comforting, more easily comprehensible "bright shiny objects" at the expense of any thoughtfully valid grasp of less glittering but more lethally deadly economic matters.

The glaring fact was that traditional economic recovery techniques were of no value in an economy already taken to such a low level. There was no hidden surplus or accessible leeway remaining which could have made other choices possible. The quantitative easing choice was a desperate one, driven by panic, and made when conditions were so bad that none of the other choices offered even a glimmer of hope. This panic was embarrassingly revealed -- written large -- when then Secretary of the Treasury Paulsen delivered his three page fiat of an $800 Bn TARP to the Congress, and the decision was taken right then to conceal the gut wrenching terror from Americans at any price.

However, "on Main street," the gut wrenching terror was palpable.  It took the form of out-of-control unemployment arriving in waves like a hideous tsunami without any visible ending.

2008 compared to previous recessions [Daily KOS - image source]
The conditions in the "big picture" making quantitative easing necessary may have been too complex for general comprehension among typical Americans, but the unemployment monster was quite comprehensible.  Unfortunately, the quantitative easing program's goals did not directly include relief from the unemployment pain.  Notably, the new Fed chairwoman, Janet Yellen, has now -- finally -- mentioned unemployment as one of her important priorities.

Nonetheless, this lack of "big picture" comprehension of economic gravity among voters has confounded public opinion since then. The behavior of politicians from the same Party which orchestrated this disaster should, reasonably, been one of frightened contrition, but instead, we know that the destructive hubris has grown even more flamboyant.

[2] ...not being effective enough if banks do not lend out the additional reserves.

In the period since 2008 the banks which were deemed "too big to fail" have grown conspicuously larger -- and grotesquely more petulant. As a collective, they have been fairly successful politically in eluding serious efforts to regulate them legislatively.  The now unabashed presence of oligarchic and corporate influence in Congress has further complicated this already deteriorating situation.

The "life or death" recovery confronting the nation has been reduced to cheap politics by an obedient media.  The six years of the Obama Presidency have been consumed by conflicts with the interests controlling an illegitimate Congress -- consumed by battles which should never have been joined.  It should have been unthinkable that a Party with the blood of the economic collapse still on its hands and face would even dare to sabotage efforts to "right the ship."

The "retention" problem among the banks is no more than the inevitable symptom of having an unelected Congress which refuses to control them.  While the national economy staggers forth mired in an unending demand crisis, these banks are pocketing, purloining and obscuring money which might have otherwise helped immensely.  Even amid this largess, the latest Treasury Department "stress tests" for banks' financial integrity have shown six of the largest are still recklessly unstable.

[3] ...quantitative easing policies had benefited mainly the wealthy.
[3] "QE cash ends up overwhelmingly in profits, thereby exacerbating already extreme income inequality and the consequent social tensions that arise from it."
[3] " 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."

Income inequality may have become the "academic moral darling" of conversations between the President and the Pope, but the concept remains laughing stock for the oligarchs currently "calling the shots" in the government they now control.  The fascinating aspect of this is the mortal short sightedness which must be in place before such ambitions can be considered rational ones.

Meaningful legislative mitigation has become a solid "non-starter."  The Congress will not even pass a minimum wage bill which would almost directly increase the wealth of its mercantile owners.  Economy building ideas such as affordable health care, job creation or infrastructure renovation instantly become ideologically toxic when they venture beyond the White House.

The wealth of those subverting the democracy is so great that they can no longer be threatened by anything.  Blocking the recovery at every step is a prospect holding absolutely no hazard for any of them.  They are foolishly convinced that the violent inevitability of a unilateral "wealth correction" will never reach an active stage.

They are hardly "history's victims."  They clearly had never read it.

[4]  QE causes inflation to rise in their countries and penalizes their industries.

This could be easily dispatched as "too theoretical for serious relevance" if the looters who destroyed the United State's economy hadn't also tempted every other economy that would listen to join them in the plunge.  In 2005-2006 the already suspiciously artificial "return on investments" in US real estate securities and other temptations had been boosted to a narcotic frenzy.  Coupled with the idiocy of thoughtless bombast from a "Presidential" Administration intent on stealing everything not bolted down before being ignominiously thrown out of office, the flimsy, high risk "profits" were an irresistible spell cast over the eager eyes of European and Asian bankers.

When 2008 arrived, previously staid and stable financial institutions lined up for their own hair cut.  Unemployment sky rocketed, investment froze and currencies began an inflation cycle which would make the economic policies of the Weimar Republic look exquisitely genius.

We can discuss the domestic inflationary consequences of quantitative easing once we've finished covering a few "high points" in preparation.  The process hasn't been terribly inflationary here -- yet.

US QE was the hardest on nations not autonomously in control of their own currency, but it still did plenty of damage to "non-economic" economies such as the state controlled system in PRC and to plutocratic "wealth states" such as the monarchic Saudis if they were foolish enough to invest in its precursors.

It was a "gift that kept on giving" -- to everyone, even those who had only sipped from the poison cup.  In some cases, remote economies which only walked idly by where it was being drunk by their neighbors.

[5] ..."printing money"
[5] ...the central bank is creating money to stimulate the economy, not to finance government spending.

Misperceptions have price tags.  There were plenty of Americans who thought "swallowing the pill" of a few hundred billion of TARP funds was as bad as it was going to get.  After an admittedly puny stimulus package, this same bunch were solidly convinced that the "worst had finally passed," that the horrible price "had finally been paid in full."  

Further, this misperception extended to other issues.  Many Americans presumed that if the government were to "spend money," they would see material benefits -- benefits such as a new school, better highways, pre-school subsidies and possibly more affordable health care, but this hadn't been the case for decades.  The general standard of living continued to decline, the country continued to literally fall apart, spending increased and the deficits and debt continued to mushroom.

Yes, there is more of something called money put out there in exchange for something of equal value given up voluntarily by individuals or institutions who earned it in exchange for services in the marketplace. The amount of deposit money created matches the amount of government securities taken off the market if banks fail to make use of their new reserves resulting from their new deposits, which has been the case lately.

Heh, heh, "exchange for services in the marketplace?"

The political strategists feared that the recklessly exploited image of "printing and spending money" a quantitative easing program might collect in the public eye would be a game changing "ogre in the closet," but these strategists had jobs, new cars, 401K retirement funds, real estate and Wall Street holdings.  The people on the street held very few of those concerns -- they couldn't afford to hold many.

The misperception also lurched to a halt with the concept of "stimulate the economy."  The exhausted people on the street had become officially unable to sense any particular difference between a "stimulated economy" and an "unstimulated one."  Likewise, a similar phenomenon developed around what became widely known as the "myth of recovery."  The folks on the street could no longer sense any noticeable difference in the conditions of life between a "recovered economy" and an "unrecovered economy."

The oligarchs ordered their corporate media to provide plenty of targets to receive the blame.

[6] ...must instead buy it from the secondary market.

Item six [6] is actually a compendium of the consequences of most of the items preceding it. From the same Forbes quote cited above, we can also direct our attention to the last sentence.

The amount of deposit money created matches the amount of government securities taken off the market if banks fail to make use of their new reserves resulting from their new deposits, which has been the case lately.

The stated goal of the quantitative easing programs was to "inject" fluid money into the economic system through bond purchases by the Fed.  While the "injection" occurred, the "injected" money was largely retained by the banks and brokerages providing the "services in the market place."

For the typical low information voter this does not result in a "public opinion" problem,  At first glance, the image is one where huge financial institutions are passing electronic, theoretical money back and forth to achieve an ethereal, incomprehensibly complex economic result.

However, item six's point is that, thanks to statutory prohibition of the Fed simply purchasing Treasury bonds from the Treasury, those notes must be purchased from a secondary holder. While the most frequently cited villain in this process is Goldmann-Sachs, the entire clutch of oligarch owned financial institutions are essentially also just as involved.

While the desperate American voters are blindly fighting for a seat on a life boat, entities such as Goldmann are churning out and collecting massive "hard earned profits" for their "services in the marketplace."

Yes. the current president of the New York Fed is William Dudley, who served as Chief Economist for Goldman Sachs for 10 years before joining the New York Fed in 2007.

Hmmm.  How in the world did the law wind up written like that?

[7] Now you can't do that for long because people get wise to it and it causes inflation and so on, but that's what it has done: money has been printed to fund the deficit 

Here, we can quote the same Forbes article again.  This is appropriate, because the Forbes article contains the You Tube animated cartoon selected by MeanMesa as a sort of rebuttal to what's been presented so far. [The original Forbes article is further excerpted below.]

It’s bad enough when critics of the Fed get it wrong. It’s maddening when they get it exactly backwards. The Fed doesn’t go into the back room with the Treasury to swap pieces of paper or account balances because that practice has traditionally been viewed as subject to potential abuse. I used to call it monetary incest. To reduce that possibility, and the appearance of it, the Fed has traditionally conducted its open market operations at arms length from the Treasury—buying and selling outstanding securities from and to the marketplace rather than new issues directly from the Treasury itself.
Just as you and I would use a broker to conduct such transactions, the Fed does its buying and selling through pre-approved so-called primary broker-dealers. I believe there are 19 of them at last count. Yes, Virginia, Goldman Sachs is one of the 19. The transactions are done through an auction process with the dealers competing on price and the Fed accepting the low bids for buying and the high bids for selling. There is no sweetheart deal with “the Goldman” or anyone else.
. . .
I know I’m spitting into the wind. The cartoon is just too clever. We want to believe it. It makes us feel better to ridicule smart dedicated public servants like the “Ben Bernank.” I guess it makes the rest of us feel smarter. Maybe the mob will end the Fed and restore the gold standard. Then, a few years down the road we can ask how that’s working out for us.

Of course everyone will want a chance to watch the cartoon video after all this introduction.  No problem.  It comes up in the next section of the post.

The Problematic Cartoon
Quantitative Easing's worst night mare?

Quantitative Easing Explained - You Tube [6:49]
MeanMesa will sheepishly admit to posting two of these animated talks -- cartoons -- rather than just the one. Nonetheless, we are inescapably "here now," so relax and have a look at both of them. Here are the titles and links.

Quantitative Easing Explained - You Tube [6:49 min]

Quantitative Easing Revisited - You Tube [5:15 min]

Everyone will be relieved to hear that "school is now officially over."  Naturally, MeanMesa has just a few more comments to add before we close up shop.

Just a Few More Comments
Yawn. No, it isn't even dawn yet...

September, 2008, didn't actually catch the Bush W. government by as much surprise as one might have thought from watching it reported on television.  For years the Bush II administration had continued and violently expanded the unsustainable borrowing binge introduced by Reagan and Bush I as a "matter of course."  The national debt -- even when viewed as exclusively the "reported part" -- had mushroomed.  Interest on that debt in all its various pieces was running at  around $250 - $300 Bn per year.

While the smoldering wreckage of the housing and mortgage market drew the task of being the "number one offender," the remainder of the economy which would have normally been available to "nurse" the thing back onto its feet had also been "hollowed out" to an extent never seen before.

Not only were "the shelves empty," but there was no more credit, and the bank account was gigantically over drawn, too. There were no customers and no employees left in the store.  Even the cash register was empty.

The oligarchs were complaining about "no credit," but everyone else was far more concerned with issues such as "no money" and "no jobs."  The total value of the vast wealth of the US which had traditionally been sequestered in slowly growing real estate equity, pension plans, 401Ks and the like was reduced to 40% of its previous value in a period of 45 days.

Everyone on Main street was suddenly poor -- and suddenly frightened.  Very frightened.

The US government didn't patiently thread its exploratory planning effort through a long variety of possible, optional mitigations.  It raced to desperately embrace the "last resort" -- quantitative easing --  almost over night.  It also didn't "quantitatively ease" just a little here and there, either. It threw Treasury cash at the program in quantities which would cause sheer apoplexy in lesser economies around the world.

Regardless of the soothing complexities carefully packed into the economic explanation and justification, QE is selectively inflationary.  

Now, try to guess who has and will suffer from that inflation.  Here's a clue.  If you have a personal wealth over a $100 million you probably won't feel a thing.

MeanMesa's sentiment falls firmly on the side of the cartoon.

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