Yellen’s Tapering of Quantitative Easing Disruptive at Home and Abroad
Friday, February 14, 2014
JAISAL NOOR, TRNN PRODUCER: Welcome to The Real News Network. I’m Jaisal Noor in Baltimore. And welcome to this latest edition of The Epstein Report.
We’re now joined by Gerald Epstein. He’s the codirector of the Political Economy Research Institute and A professor of economics at UMass Amherst.
Thank you so much for joining us again.
GERALD EPSTEIN, CODIRECTOR, PERI: Thanks for having me.
NOOR: So there’s a lot been happening recently in the world of economics. We know Janet Yellen just appeared in front of Congress for her first testimony as the Federal Reserve chair. She talked about her plans to taper quantitative easing.
So talk about why the Federal Reserve wants to do that now. We know–The Real News has been hammering home that point that the emerging markets are very volatile right now. They’re in crisis. So let’s start there.
EPSTEIN: Okay. Yeah. The emerging markets, some of them, certainly, Turkey and Argentina and several others of them, are having financial crises now, partly as a result of problems created by the tapering of quantitative easing. And yeah.
So the question is: why would the Fed do that now, especially when the economy’s still very sluggish? Unemployment is still high, anywhere between 6.6 percent, which is the official rate, to well over 12 percent [incompr.] discouraged workers, etc. Yeah. So why would the Fed do that?
Well, part of it is just continuing the legacy that Bernanke wanted to leave. He didn’t want to go out the door with quantitative easing still in place without any kind of hope for tapering.
But this largely comes about as a result of the fact that there is a lot of fighting within the financial sector about quantitative easing. Some sectors within the financial industries are benefiting from the very low interest rates, and others are actually being hurt now that interest rates have been so low for so long.
NOOR: And so, Professor Epstein, that’s actually a point you raised in your last interview with us. Talk about who–like, what these groups are and what their motivations are. Who’s going to benefit from a higher interest rate, and who’s going to benefit from a lower interest rate?
EPSTEIN: Well, the ones that benefit from a very low interest rate are mostly the traders and the–there are two groups, mostly the traders and the speculators, who can borrow at very low interest rates and then go searching around the globe to find countries that have securities that have high interest rates. It’s called the carry trade. So they borrow very cheaply, they invest in–before, they were investing in Turkey and Argentina and other developing countries, and then, when interest rates shift around, they pull their money out, hot money, and they go someplace else. And if they’re smart, they usually make quite a bit of money from this carry trade. So they’re just as happy to keep the interest rates low. And as long as it creates some kind of volatility, they like it, ’cause they can benefit from it.
Also the big investment banks and commercial banks that are still sitting on billions of dollars of toxic assets that they’re not valuing appropriately, because they’re trying to hide their losses. They’d still like to have interest rates quite low so that it’s easier for them to carry these assets on their books, get inflated values, that low interest rates inflated values. So they like it okay as well.
It’s the long-term investors–pension funds, life insurance companies–that have to actually return high rates of return to their workers, to their policyholders. They’re having a lot of trouble making high rates of return as savers, as holders of long-term assets. And they’ve been crying for quite a while about this low interest rate environment.
So in a sense these two sets of financial actors are really duking it out. And the Federal Reserve is kind of listening to both of them and saying, we’ll go down the middle. We’ll say that we’re going to raise interest rates, but we’re really not going to raise them by very much.
The problem is it’s creating a lot of uncertainty in the global financial markets and [incompr.] explaining some of this enormous volatility that we’re seeing in places like South Africa, Turkey, Argentina, and elsewhere.
And in the meantime, the Federal Reserve isn’t doing much of anything to really help workers and the unemployed here in the United States.
NOOR: How long can the Fed continue doing these policies?
EPSTEIN: Well, it can continue doing what it’s doing for quite a while, as long as it’s not under any pressure to do something different.
Now, luckily, there are some senators and some congresspeople–Elizabeth Warren and Sherrod Brown and others–that are trying to push the Federal Reserve to take some more aggressive action, to dry to do something to reduce unemployment in the United States, to try to generate more jobs and invest in more long-term investments. I mean, there are a lot of things that the Federal Reserve in principle could do, but because they kind of backed themselves in a straightjacket of more or less conventional type policies, they’re not doing as much as they could do.
Quantitative easing still has the potential to do some good, but they could be doing a lot more if they were being a lot more experimental and a lot more creative.
NOOR: And it did make some news that Yellen brought up inequality in her testimony. But how much of her policies are actually addressing inequality and the structural roots of it in America?
EPSTEIN: Well, I think Janet Yellen, if she had her own way, perhaps would eventually, when she establishes her kind of hardcore central banker reputation, would perhaps do some more aggressive things. So, for example, the Federal Reserve could be buying long-term infrastructure bonds or could be buying bonds to invest it in green technology, or the local regional Federal Reserves could be helping to support more local, regional investment in creating jobs and transformation into green and renewable energy sources and so forth. The Federal Reserve could be a lot more aggressive in buying assets or lending beyond just government securities or housing and so forth. And perhaps Janet Yellen on her own would be willing to do some of these kinds of things.
One thing I’m worried about, though, is that the standard constituency of the Federal Reserve are these financial institutions. So they’re mostly listening to them.
And Stanley Fischer, who was the vice president of the IMF and who worked at Citibank for several years, and most recently was the governor of the central bank of Israel, he’s a very straight-laced economist with an enormous reputation. So if he gets confirmed as the vice chair of the Federal Reserve, I’m afraid he’s going to be a voice for more conventional and more conservative monetary policy. So even if Janet Yellen would want to do some more unconventional things, she’s going to have to probably fight him every step of the way.
NOOR: Gerald Epstein, thank you so much for joining us.
EPSTEIN: Thank you.
NOOR: You can follow us @therealnews on Twitter. Tweet me questions and comments @jaisalnoor.
Thank you so much for joining us.
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