Quantitative Easing for Whom? (1/2)
Michael Hudson says quantitative easing is a pretext for assisting banks to make even more profit
SHARMINI PERIES, EXEC. PRODUCER, TRNN: Welcome to The Real News Network. I’m Sharmini Peries, coming to you from Baltimore.
In an effort to relieve some pressure on the struggling European economies, Mario Draghi, president of the European Central Bank, announced a 1 trillion euro quantitative easing package on Monday. Quantitative easing is an unconventional form of monetary policy where a central bank creates new money electronically to buy financial assets like government bonds. And this process aims to directly increase private-sector spending in the economy and return inflation to target.
Well, what does that mean and what might be wrong with it is our next topic with Michael Hudson. Michael Hudson is a distinguished research professor of economics at the University of Missouri-Kansas City. His two newest books are The Bubble and Beyond and Finance Capitalism and Its Discontents. His upcoming book is titled Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy.
Michael, thank you for joining us, as always.
MICHAEL HUDSON, PROF. ECONOMICS, UMKC: It’s good to be here.
PERIES: Michael, the Fed and some economists will argue that this is what got the U.S. out of its 2008 financial crisis. In fact, they put several QE measures into place. So what’s wrong with quantitative easing?
HUDSON: Well, its cover story is it’s supposed to help employment. And the pretense is an old model that used to be taught in textbooks 100 years ago. The pretense is that banks lend money to companies to invest and build equipment and hire people. But that’s not what banks do. Banks lend money to real estate. They lend money to corporate raiders. They lend money to buy assets. They don’t lend money for companies to invest in equipment and hire. Just the opposite. They do lend money to corporate raiders, and when they take over companies, they outsource labor, they downsize labor, and they try to squeeze out more from the labor force, and they try to grab the pensions.
So the Fed was pretty open in what quantitative easing is supposed to do since 2008. It’s supposed to lower the interest rates, which raises bond prices, and it inflates the stock market. And since 2008, they’ve had the largest monetary inflation history–$4 trillion of quantitative easing by the Fed. But it’s all gone into the stock market and the bond market.
So what has this done? Well, it’s helped stock and bond holders get richer. And who are the stock and bond holders? They’re the 1 percent and they’re the 10 percent. And people are wringing their hands and saying, why isn’t the economy getting richer? Why is it since 2008 economic inequality and the distribution of wealth have worsened instead of gotten closer together? Well, it’s because of quantitative easing. It’s because quantitative easing has increased the value of the stocks and the bonds that the 1 percent or the 10 percent hold, and it hasn’t helped the economy at all, because the Fed is really concerned with its constituency, which are the banks.
One of the problems is that quantitative easing hasn’t even helped one class of investors in particular, pension funds. And it’s done just the opposite. Pension funds have made the assumption a few years ago that in order to break even with the rate of contributions that corporations in states and municipalities are paying, they have to make eight and a half percent, eight percent a year rate of return. But quantitative easing lowers the interest rate.
Now, lowering the interest rate has made these pension funds pretty desperate. The risk-free rate of return is less than 1 percent on government short-term Treasury bills. If you buy longer-term treasuries, you can make 2 percent, but then if the interest rates ever go up, you’re going to take a loss on investments. So pension funds have said, we’re desperate; what are we going to do? They’ve turned their money over to Wall Street money managers and to hedge funds. The hedge funds take a huge rake off of fees to begin with. But even worse, the hedge funds and the big banks–Goldman Sachs, Citibanks–when they see a pension fund manager coming through the door, they think, how can I take what’s in his pocket and put it in my pocket? So they ripped them off. And this is why there are so many big lawsuits against Wall Street for mismanaging pension fund money.
So the effect of the quantitative easing has been to make pension funds desperate, and it’s been to support real estate prices on the idea that somehow this is helping the high costs of housing help recovery. Well, they don’t help recovery, because to the extent that there’s been quantitative easing, they mean that new homeowners have to pay even more of their income to the banks as mortgage interest. And that means they have even less money to pay for goods and services, so the actual markets continue to shrink.
And what the quantitative easing has not been used for is really what was promised in 2008. Before President Obama won the election and took office, Congress said that the TARP bailout and the /tɛlf/ was supposed to go for debt reduction, that you didn’t create money, but it was to write down the mortgages, so that people could afford to stay in their home rather than the millions of phone numbers that have been foreclosed on and thrown out. But when Mr. Obama–even before Obama came into office, when the Democrats in Congress and the Republicans–Paulson, the secretary of the Treasury, said, yes, we’re willing to write down down debts. Obama said no, he’s not going to do that, and he ended up supporting the banks. So none of this money has been used for debt write-down. Well, exactly the same phenomenon is happening in Europe.
PERIES: So, Michael, this is exactly what the ECB is now proposing for Europe. So let’s take up the particularity of Europe in our next segment.
Thank you so much for joining us.
HUDSON: It’s really good to be here. Thank you so much, Sharmini.
PERIES: And thank you for joining us on The Real News Network.
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