Saturday, October 16, 2010

QE2

So, Ben Bernanke has all but formally announced another round of quantitative easing. I know I promised to stop making predictions, but this one is a no-brainer.

Quantitative easing will not decrease the unemployment rate. If done exactly the wrong way, it might help the banks survive their latest round of self-inflicted trauma. Ignore the Fed's history of putting the interests of banks before the interests of human beings, and we might be able to convince ourselves that another round of quantitative easing might be another desperate stab at reviving the economy (albeit the equivalent of drawing to an inside straight.) Well, maybe the Fed governors are well-intentioned — but before we evaluate their intentions, we'll have to wait and see just how badly QE2 is done. Then we'll have a better idea.

In its first round of quantitative easing, the Fed spent about $1.5 trillion on longer term T-bills from Treasury and a big batch of toxic assets from the largest banks. Buying the T-bills probably held down long-term interest rates, like mortgages — not that anybody's buying houses at the moment. Buying the toxic assets — mortgage backed securities — was just another bailout to the banks. The money used to pay for it all, of course, was created by the Fed out of thin air. It wasn't all bad — the value of the dollar dropped against most other currencies (but not the renmimbi), and whatever growth we've seen since then has come from exports.

Girls and boys, we are not going to export our way out of disaster — certainly not when every other developed or developing country in the world is simultaneously trying to do the same thing. What's needed is a genuine and concerted redistribution of wealth, so that our working and middle classes can afford to buy the products we produce. More demand equals more products equals more employment equals more demand. It's a virtuous circle, and one we sorely need.

But, getting back to quantitative easing, we'd best have a look at how it might be done.

If the Fed bought all T-bills with the new money it creates, the banks would not be especially happy. On all their outstanding loans, the money they collected would be worth less than the money they loaned to debtors. It would be kind of like going back to William Jennings Bryant and free coinage of silver. Other losers would include people living on fixed incomes, whose money would buy less than before.

More likely, of course, would be another round of Fed purchases of mortgage-backed securities — inevitably for considerably more than they're worth, since their value is approximately zilch. Yes, America, another bank bailout.

Okay, I'm making my usual pessimistic predictions. Sorry. I sincerely hope I'm wrong this time.

Just the same, I actually was paying attention during the Japanese "lost decade," and noticed just how well quantitative easing worked for them. Yes, I know, some economists today say they just didn't do enough of it, and that's why it accomplished nothing — but nobody seems to know how much is enough.

Right now, banks are awash in cash, but still not lending to small businesses. Heavens! It's just too risky! At the same time, they're borrowing money at near-zero interest and charging 18% and more on credit cards. Other corporations are also hoarding cash, hoping to survive if everything nose-dives again. Any new money the Fed pumps into the economy is likely to go straight into speculation in the commodities markets, not into job creation.

Yes, the threat of deflation is scary — but creating new money and tossing it at the banks by buying their worthless CDOs will not do a damned bit of good. Unfortunately, the Fed has no means —even if it had the will — to direct its newly created bucks to the people who actually would spend it on goods and services, thereby lifting the economy. The only institution capable of shifting wealth from the elite groups to those of us in the lower classes is Congress — and you know what that means.

We're fucked.

No comments: