Very interesting op-ed about QE, although it's really just confirming what many already believe about the Fed and Wall Street. From WSJ:
Andrew Huszar: Confessions of a Quantitative Easer
We went on a bond-buying spree that was supposed to help Main Street. Instead, it was a feast for Wall Street
I can only say: I'm sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed's first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I've come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.Five years ago this month, on Black Friday, the Fed launched an unprecedented shopping spree. By that point in the financial crisis, Congress had already passed legislation, the Troubled Asset Relief Program, to halt the U.S. banking system's free fall. Beyond Wall Street, though, the economic pain was still soaring. In the last three months of 2008 alone, almost two million Americans would lose their jobs.
The Fed said it wanted to help—through a new program of massive bond purchases. There were secondary goals, but Chairman Ben Bernanke made clear that the Fed's central motivation was to "affect credit conditions for households and businesses": to drive down the cost of credit so that more Americans hurting from the tanking economy could use it to weather the downturn. For this reason, he originally called the initiative "credit easing."Trading for the first round of QE ended on March 31, 2010. The final results confirmed that, while there had been only trivial relief for Main Street, the U.S. central bank's bond purchases had been an absolute coup for Wall Street. The banks hadn't just benefited from the lower cost of making loans. They'd also enjoyed huge capital gains on the rising values of their securities holdings and fat commissions from brokering most of the Fed's QE transactions. Wall Street had experienced its most profitable year ever in 2009, and 2010 was starting off in much the same way.
You'd think the Fed would have finally stopped to question the wisdom of QE. Think again. Only a few months later—after a 14% drop in the U.S. stock market and renewed weakening in the banking sector—the Fed announced a new round of bond buying: QE2. Germany's finance minister, Wolfgang Schäuble, immediately called the decision "clueless."
That was when I realized the Fed had lost any remaining ability to think independently from Wall Street. Demoralized, I returned to the private sector.
Where are we today? The Fed keeps buying roughly $85 billion in bonds a month, chronically delaying so much as a minor QE taper. Over five years, its bond purchases have come to more than $4 trillion. Amazingly, in a supposedly free-market nation, QE has become the largest financial-markets intervention by any government in world history.
And the impact? Even by the Fed's sunniest calculations, aggressive QE over five years has generated only a few percentage points of U.S. growth. By contrast, experts outside the Fed, such as Mohammed El Erian at the PIMCO investment firm, suggest that the Fed may have created and spent over $4 trillion for a total return of as little as 0.25% of GDP (i.e., a mere $40 billion bump in U.S. economic output). Both of those estimates indicate that QE isn't really working.
Unless you're Wall Street. Having racked up hundreds of billions of dollars in opaque Fed subsidies, U.S. banks have seen their collective stock price triple since March 2009. The biggest ones have only become more of a cartel: 0.2% of them now control more than 70% of the U.S. bank assets.
As for the rest of America, good luck. Because QE was relentlessly pumping money into the financial markets during the past five years, it killed the urgency for Washington to confront a real crisis: that of a structurally unsound U.S. economy. Yes, those financial markets have rallied spectacularly, breathing much-needed life back into 401(k)s, but for how long? Experts like Larry Fink at the BlackRock investment firm are suggesting that conditions are again "bubble-like." Meanwhile, the country remains overly dependent on Wall Street to drive economic growth.
full story: http://online.wsj.com/news/articles/SB100014240527023037638045791836807…
The fun has just begun. Just wait till the ECB starts doing the same, then it'll be a party.
Apology not accepted.
From his Rutgers bio:
"Previously, Andrew managed for the Federal Reserve Bank of New York ("FRBNY") the $1.25 Trillion Agency MBS Purchase Program (the centerpiece of "QE1"). In this role, Andrew managed the program's portfolio design and trading strategy, as well as the creation of a permanent, in-house Federal Reserve MBS business platform, encompassing front, middle and back office components."
This is like an execution trader apologizing for a PMs poor performance. Until someone that is more hawkish than Richard Fisher on the FOMC apologizes, none of this is really news.
Exactly. I am sure he is a very smart man, but this would be much more noteworthy if it were someone in an actual decision-making or influential economic post were saying it.
Duh...if they wanted to help they would have sent 60b+ to every taxpayer each month or paid off every mortgage...it should be criminal what they did.
What an idiotic piece... This guy is another publicity hungry douche, a la Greg Smith. I can see a book deal in the pipeline already.
The simple point is, you can't inflate your way out of a recession when the government is trying to regulate it all to hell, and seemingly doing everything it can to kick the private sector in the crotch while its trying to stand up.
I liked it better when W mailed out the checks... why does stimulus need to be more complicated than that?
I have mixed emotions on this. On one hand, millions of people have saved thousands of dollars a year refinancing their mortgages at lower rates; quantitative easing kept the real estate market from complete collapse; and after the financial collapse destroyed pension funds, equities were recovered largely because of QE. Every day I'm seeing absurd interest rates (prime + 0.5% and similar) for highly speculative commercial loans--this is obviously benefiting Main Street somewhat. Without QE the economy would have been in utter shambles.
On the other hand, this guy's arguments are spot on--the strong majority of stocks are held by the wealthy and institutional investors, which have disproportionately benefited from the huge stock market increases. Bond investors, who are largely institutional, have made a killing on asset appreciation. Banks have been making a killing as they have been paying out virtually nothing in interest on demand and time deposits. The last few years we've seen total stagnation in median incomes while the rich have gotten disproportionately wealthier off of the monetary policies of the Fed. It's not stupid--it's undeniable.
So the question is, was it worth giving away the farm to make the wealthy even wealthier in order to save the economy from total collapse? Yeah, to me it probably was worth it. The problem is, I think we may be re-inflating a bubble. I can't even imagine what's going to happen when QE is pulled back--stocks will be in a race to the bottom and the real estate market will slam on the brakes as bond prices tank 500 bps in the matter of a few days. It could be an epic thing to behold.
yes, on the homes that are worth 1/2 of what they were 3 years ago in a never before seen plummet of real property values...yes the refi's were worth it.
qe didn't keep the re market from collapse, it did collapse. and the resultant collapse in tax revenue put countless municipalities in a bind. and the pension funds that 'recovered' emotionally invested like many personal 401k's and missed the 'euphoric times' as most corp profits are held in offshore tax havens and stocks are trading at ridiculous p/e due to the need to chase yield beyond the sub 3% yield in 2008...yes qe saved us all
Mr. Wall-Mart: Housing prices are 1/2 of what they were 3 years ago? I'm about 90% certain that you live in Outer Space, or with the Fish in the Ocean. Real estate, I'd say, has plummeted 20-25%% since the housing bubble went Ka-Boom (Doe!!) as of today. However, this enabled the big boys (and banks such as Blackrock) to start buying up properties. I think we will see Housing Prices rise substantially in the near future. Unfortunately, this will further leave behind the individuals who were unable to afford their mortgages, or the paranoids that now Rent instead of Own.
Let me also add that I'm a libertarian leaning conservative Republican and I think the big banks need to be split up. No bank should be so big that its failure will wreck the economy. The top 5 bank holding companies have $9-10 trillion in assets. That's just obscene. If anyone of them failed they would have to be bailed out by the tax payers or the entire system would collapse. Could one of the big banks fail? Maaaaaaybe. Bank of America was a POS for a while after acquiring Countrywide. A few poison pills like that at some point in the future could tank one of these banks.
I have the same views as you. Well said.
I would tend to agree with you. I don't think any of these policies were designed to increase the wealth disparity, but that could only ever be the outcome when taxes have either stayed the same or increased depending on who you are, we've had massive increases in government spending which does not do anything for the economy other than crowd out private investment, and we've had regulatory increases that have really made doing anything difficult. Add the healthcare disaster on top of all of this, and there was no way the average person was going to benefit in any meaningful way from any of what has gone on the last 5 years.
There's definitely risk of re-leveraging, and for some reason no one seems to care. This is exactly the same mentality that got us here. It just doesn't seem so dangerous yet because fiscal policy by the current administration has been so appalling bad that it's largely canceled any effect the Fed could ever hope to have with its monetary policy. And now we have the worst of both worlds. At this point, we more or less have an entirely subsidized economy, all the while nobody wants to look behind the curtains. They just all want to pretend that it's all pure growth, when really it's not. It's all artificial. Really, I just hope we can keep the illusion going until we see some new monetary policy (and legislation) that will actually simulate the growth needed to support even the middling economy we have now.
EvanM:: "I don't think any of these policies were designed to increase the wealth disparity, but that could only ever be the outcome when taxes have either stayed the same or increased depending on who you are...and there was no way the average person was going to benefit in any meaningful way from any of what has gone on the last 5 years."
My man, after that first statement regarding wealth disparity and Taxes, it looks like you paid a little too much attention in your Economics courses. You still need to lift some veils.
And what exactly is your take on it?
I find the author's conclusion misdirected. His real point is that government has used QE as an excuse not to do anything significant.
“Because QE was relentlessly pumping money into the financial markets during the past five years, it killed the urgency for Washington to confront a real crisis: that of a structurally unsound U.S. economy. Yes, those financial markets have rallied spectacularly, breathing much-needed life back into 401(k)s, but for how long?”
He admits that QE worked to some extent—enough to “kill[] the urgency for Washington,” and this success allowed Washington to be idle. His conclusion is to blame QE for Washington's inaction and the "real crisis". But what he is actually pointing out is a problem in our political system (i.e. the inability to make change proactively), not in our monetary policy. “Blame Wall Street” is a good cop-out for the democratic party.
Still, the whole argument is built on unrealistic expectations. QE is lessening the pain of an economy that is adjusting to a new normal (lower standards of living). Americans still feel entitled to a standard of living that may not be a reality in this world (at least not in the near term). As Americans lower their standards and adjust expectations, pain is inevitable. Deal with it.
But here is what I know:
Two years ago, I quit Wall Street because it wasn’t so attractive anymore in my opinion (…but I thought QE made Wall Street rich!?!).
I invested my life's savings of $75,000 in the stock market and realized good capital appreciation (thank you, QE) while I worked on start-up ideas.
Six months ago, I took out a bank loan (…but I thought the banks were hoarding all the QE money for themselves!?!). I bought a small business with my entire net worth plus the loan. I bought the business from someone else, so my money (and the bank’s money) is now in his pockets. I spent money on construction. I employ six employees in addition to myself. I created jobs and I pay taxes. I like to think that this has helped the economy.
Would all of this have been possible without loose monetary policy and QE? I don’t know, but I am not complaining. And this is not an example of QE benefiting the rich. I started with a hard-earning life's savings of $75k. It is an example of monetary policy giving opportunity to a smart and ambitious person.
For every penny in GDP you've created millions have lost money by not being able to get returns on their non-stock investments. QE definitely didn't universally benefit wealthy Wall Street warriors but it absolutely did disproportionately benefit them. 9 out of 10 of my clients are medium-to-high net worth individuals, families or companies. They are absolutely killing it. New college grads, on the other hand, can barely find skilled work. Wages have completely stagnated. I don't blame that on QE--that's really a structural issue with the economy. But quantitative easing really hasn't helped the common person that much. It's been a total bonanza, however, for people in the right place to take advantage of those policies.
I think we agree on the main issue that the problems in our economy have nothing to do with QE. But I think the point that QE has disproportionately benefitted the upper class is not so true and clear as it would seem. It is very easy to see the benefit of QE to those with appreciable assets but more difficult to quantify (and understand) the benefits to the lower class.
Take, for instance, the Miller family with $1M net worth of house, stocks, bonds, 401k etc. Let's say investable assets have gone up on average 50%. Well, the Millers just got $500,000 richer thanks to QE while Joe Schmo made shit because he doesn't own shit. QE is unfair :( However, Joe Schmo got a job thanks to QE (unemployment has gone down from 10% to 7%). And let's be realistic, 7% unemployment--even considering alternative measures of unemployment--isn't so bad compared to much of the world (remember two things: #1. The new norm is dictated by global economics/competition; #2. Life's not fair--monetary policy will never be able to change this). But Joe Schmo's job isn't worth $500,000. QE is still unfair :( Joe Schmo's job isn't worth $500k, BUT it is worth a full stomach. It is worth a rent check. How much are those things worth? The difference between eating and not eating, being homeless and not being homeless is larger (and more significant) than the difference between $1M net worth and $1.5M net worth. So, it seems to me, that Joe Schmo got the upper hand. If you don't buy that, then what about this: during the crash, the Miller's lost 50% of their assets' value and Joe Schmo lost his job. Now, they're both back to even. Seems fair.
I'm not arguing that QE has been better for the lower class; I am arguing against the notion that QE has definitively benefitted the upper class disproportionately. Real-life economics are too complex/random/variable to make a statement like that, yet the public feels very confident throwing it around as fact. I am providing a counter argument to this rhetoric.
Does my point make sense or am I just retarded?
If anyone thinks that unemployment has actually decreased in a meaningful way since its lowest point in the last 5 years...you aren't paying attention to reality. It's simply not true. Anecdotal stories about starting your own business and making money are great...and I truly love reading stories as such. However, that is not the norm. The average person has not benefitted much from what has happened the last few years. I guess the flip side is that without QE, we wouldn't have even stayed even, as we have. Things would have been much worse. But now, we basically have a federally subsidized economy. I'm not ok with that.
KermitBee, as a new member with 5 posts, 3 of which are on this thread, it might not be the best idea to insult other members who have been here longer than you and to throw monkey sh*t at others for no reason. Just a thought.
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