PERI’s Gerald Epstein says monetary policy itself won’t narrow the gap because weak unions, anti-union governments, low bargaining power of workers, and lack of access to credit for the poorest remain central problems
SHARMINI PERIES, EXEC. PRODUCER, TRNN: Welcome to the Real News Network. I’m Sharmini Peries coming to you from Baltimore. It has been a year since the Federal Reserve ended its policy of quantitative easing. This is where the Federal Reserve bought up over $4 trillion in financial assets of the big banks following the onset of the great recession. What do we know about the effects of this policy and the impact it has had on us in the U.S.? Joining me now to discuss all of this is Prof. Jerry Epstein. He is the co-director of PERI at UMass Amherst. Jerry has just authored a paper with Juan Antonio Montecino titled, Did Quantitative Easing Increase Income Inequality? Let’s talk about it. Jerry, thank you for joining us. GERALD EPSTEIN: Thanks for having me, Sharmini. PERIES: So Jerry, did quantitative easing increase income inequality? EPSTEIN: Yes, it probably did. But not probably by quite as much as some of the strongest critics have suggested. You know, there’s a big debate now among economists and politicians and others about the effects of quantitative easing. And even though it ended over a year ago, as you said, it’s still a big debate because the Federal Reserve has still, as you know, continued to keep interest rates down at zero. And so some of the same arguments and debates about quantitative easing apply to the issue of what is the impact of the zero interest rate policy, and if and when the Federal Reserve should start raising interest rates again. PERIES: Right. And why does the Federal Reserve do this, implement such policy? EPSTEIN: Well as you said, it related to the great financial crisis, the financial meltdown that occurred in 2008. The Federal Reserve, acting as the lender of last resort, came in and wanted to try to bail out the banks. In the hope of, bailing out the banks partly in the hope of keeping a floor under the crashing U.S. economy and global economy. So by the end of 2008 the interest rate was down to zero, pretty much. The Federal Reserve had lowered the interest rate so much. But they realized they still needed to do more, so they figured out, well, what can we do. Ben Bernanke, the chair, had been thinking about this for quite a while because Japan had been in a similar situation about a decade before, and he and some of his colleagues, along with the people at the Bank of England, devised what they called quantitative easing, which is really just a fancy word for the Federal Reserve printing money, buying various kinds of financial assets with the hope that the financial asset values would go up. This would help the banks get some bad assets off of their books, but it would also, they hoped, lower interest rates, increase liquidity, so that there would be real investment in the economy generating more employment and more output. But it didn’t quite work out that way. PERIES: So you mentioned earlier that it had a modestly dis-equalizing effect despite of having equalizing changes to, say, employment or mortgage financing. Explain that a little bit more, the different effects it has had. EPSTEIN: Right. So the debate is–some people say, look, the Federal Reserve, as I just said, they buy up all these financial assets, and that increases the value of these assets. And who owns the assets? Well, it’s well known that it’s primarily the 1 percent, and the 0.01 percent of the income and wealth distribution that own most of the financial wealth. So by definition, when the Federal Reserve is doing something, printing money to buy financial assets, driving up their prices, that’s going to immediately help the rich and the banks that own these assets first. And in fact that’s what we found out, by looking at these data. However, as Ben Bernanke and Janet Yellen and other economists have argued, that’s not the only effect. In fact, various channels through which this quantitative easing can affect people in the economy. As you said, it can also, lower interest rates generate more investment and employment. Another thing it can do is lower refinancing costs for people who have home mortgages or student loans. That can help people in debt, who are typically people in the middle or lower end of the income distribution. But on the other side it can also lower interest rates for savers. People who have money in the checking and savings account, which tend to be more middle class people. So their returns on those kinds of investments go down. So the real thing that’s difficult and that we tried to do was to, how do you balance off all of these impacts? How do you estimate these countervailing impacts? So what we found was that overall, equity prices went up significantly, and did help the wealthy significantly. And there was some decline in financing costs, but that didn’t really help the poorest and the people who are in the most trouble, because they were completely blocked out of refinancing. They were completely blocked out of credit. So they weren’t helped at all. The one positive thing–and lowering interest rates on savers hurt middle class and poor people. The one thing that the quantitative easing did do is it helped to generate some employment and for workers and people in the middle and the lower end of the income distribution. The problem is, wages actually–real wages actually fell over this period. Not only were they stagnant, they actually declined. So overall, the benefit for most people was pretty modest because of the terrible state of labor markets, the unions, and so forth. So overall, it did increase inequality. But there’s this paradox which we point out, namely for most of the post-war period, and in fact for most of the last couple hundred years, when progressives talk about the evils of central bank monetary policy, or certain kinds of monetary arrangements, the typical criticism is that interest rates are too high. You know, if interest rates are too high, that helps the banks. But it harms debtors, and it makes it harder to generate employment. In this debate, progressives are saying, well, the problem is that interest rates were too low. That’s what helped the banks and hurt workers and the debtors. And the question we ask is, can you have it both ways? And what we are arguing is that, unfortunately in our current situation, whether the central bank raises interest rates or whether it lowers interest rates, it’s either going to hurt or not help workers and poor people very much because the central problem is that the unions are so weak, the government has done as much as it can to smash unions, globalization has undermined the bargaining power of workers, and the government has not done enough to really try to change the structure of the financial system so that the poorest people and others can actually get access to credit. So in the end, monetary policy by itself, without better fiscal policy, restructuring banks and so forth, isn’t going to help workers much either way. PERIES: And Jerry, this is exactly the policy that they are implementing in Europe, faced with similar situations as we were faced with in 2007-08. EPSTEIN: That’s right and there probably the results are going to be very similar. Because given the strictures, the straitjacket of austerity and the [inaud.] the euro is what you’ve been reporting on. The way that they’re treating debtor countries like Greece. This quantitative easing is only going to probably help the wealthiest and the banks. PERIES: Jerry, I appreciate it every time you do reports like this and you analyze the impact it has had on us. Or not had on us, in this case. Thank you so much. EPSTEIN: Thanks, Sharmini. PERIES: And thank you for joining us on the Real News Network.
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