Now, let's be clear. The government, through the Federal Reserve, hasn't printed trillions of dollars the old fashion way. It's not turning on the printing press. Nor is it calling up Kinko's and saying "print up more cash" (as it were). It simply credits accounts with more money electronically.
So, yeah, while we're not actually printing more money the effect is the same as if we did. We're dumping more money into the system (I've written about QE many times, here, here, here, here, and here).
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| What Quantitative Easing (QE) is really all about. |
The logical follow up to the government printing money is, Why are we dumping more money into the system? The answer is quite simple. With the economy still in trouble from the 2008 market crash, and with consumers effectively scared or tapped out, the federal government has determined that it needs to keep markets vibrant.
So, through the Federal Reserve, the U.S. government is shoving more money into our nation's financial infrastructure. The problem is that the money isn't making it to you and me.
HOW QE WORKS
To put more money into the economy the Federal Reserve does two things. First, it lowers interest rates, which encourages more borrowing. Second, it purchases financial instruments (like public and private bonds) through a variety of programs.
Lower interest rates (currently .25%) are designed to encourage commercial banks to borrow more money from the Federal Reserve. The banks, in turn, are supposed to turn around and lend to people like you and me. When this happens Economics 101 tells us that more economic activity will be the result.
The second part of the plan - bond purchases - begins with the Federal Reserve (and the Treasury Department) creating numerous purchasing and credit programs. These programs are backed with trillions of dollars, which allow the Federal Reserve (and the Treasury Department) to make major bond purchases in the market. These programs are designed to keep the banking community - but especially investment banks - afloat.
So, yeah, the Fed is literally dumping loads of cash into the financial sector.
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| What Quantitative Easing looked like 85 years ago. |
The real beneficiaries here are the commercial and investment banks. In effect, with their QE purchases of their assets, the Federal Reserve is telling the world that the private sector has nothing to worry about because it will purchase all the private and public bonds it's selling. And, yes, this includes the Treasury notes the investment banks are holding, which is a windfall for the banks because (in the "WTF" Department) the Fed can legally purchase Treasuries only from investment banks.
Added up these bond-asset purchasing programs are backed with at least $14 trillion in government guarantees.
One way of looking at Quantitative Easing is to understand that by putting a large quantity of money into the system the Federal Reserves programs are easing pressure on markets - hence Quantitative Easing. At this point about $4 trillion has already been "eased" into the market.
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| A look at the programs that allow the federal government to put more money into the economy. |
So, yeah (and, again), there is no free market. The game is rigged. The federal government has become one big ATM for America's largest financial institutions.
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| What the Treasury Department actually does when it buys private sector "assets" or loans money. |
WHAT'S EXPECTED ... AND WHAT'S ACTUALLY HAPPENING
When the Federal Reserve (i.e. government) puts more money into the system the stock market and the economy are supposed to stabilize or grow. In theory the primary beneficiaries are supposed to be you and me because we're supposed to have access to more loans.
But our nation's financial institutions are afraid of you and me. They understand that we have to live in the real world, which the bankers wrecked. They understand that we don't have access to bailout funds. So the banks don't trust our capacity to pay the money back. So instead of lending us money the banks are keeping it (see here, here, and here), and gambling on commodities and derivative products.
By hoarding cash and making speculative bets the banks, and especially the market players on Wall Street, are the only groups benefiting from Quantitative Easing.
In reality, Quantitative Easing is just another form of corporate welfare.
For a somewhat humorous explanation of QE check this out (a more serious description here) ...
Let me restate the above.
America's financial institutions are getting trillions in dirt cheap money from the Fed. But they're not recirculating it. The long-term stability and growth we're supposed to be experiencing because of the Fed's money dumps isn't happening because the banks and Wall Street aren't doing their part.
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| The Bankers Ball ... celebrating years of Quantitative Easing? |
At the end of the day, the Federal Reserve is being played the fool by the banks. So is the American taxpayer.
THE END (not really, the crash is next)
In the FYI category - and to be fair - one industry analysis of QE (from EconoMonitor) argues that because of low interest rates the real losers in our economy are the banks. Why? Because our nation's financial institutions are being robbed of the opportunity to charge higher interest rates. According to this line of thinking, because interest rates are kept artificially low QE actually removes money from the system, which makes QE a tax (an I argument I don't buy).
While this "QE is a tax" argument is self-serving and couched in industry-speak, I encourage you to read it anyways, here (for no other reason to see how market players think, and how they convince themselves about something).
At the end of the day, the banks are hoarding money. Worse, Wall Street is using cheap money to speculate on commodities, while making bigger and bigger derivative bets. They are not lending, as they should, or using money to make sound financial decisions.
This is why QE is not working.
- Mark
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