Last Friday, Sept. 14, the US Federal Reserve announced its latest version of massive liquidity (money) injections into the US banking system. Called 'Quantitative Easing 3', it follows earlier QE1, QE2, and QE2.5 money injections, that already amounted to $2.75 trillion of direct purchases of mortgage and other bonds from investors by the Fed, since early 2009 nearly four years ago.
The Fed's immediately preceding QE 2.5 program introduced in 2011 (costing $400 billion) had not yet finished and the Fed nevertheless announced its latest successor version, QE3. Even potentially more generous than its predecessors, QE 3 will be an open ended tab of free money to banks and investors, amounting to $40 billion a month for an undetermined number of months to come. It could therefore be an even greater subsidy to banks and investors, in terms of magnitude, than previous QEs.
The Fed and the US press reported the new QE3 as necessary to boost the stagnant labor market in the US today–which has not been able to create jobs sufficient to even absorb the entry of new workers into the labor force–and to boost the housing market that continues to languish for years now at depression levels. True unemployment today hovers around 23 million, where it has remained consistently now for several years. Housing continues to 'bump along the bottom' in terms of nearly all indicators, as it also has for the past three years.
But QE3 will have no more effect on job creation, housing, or general economic recovery than has its predecessor QEs. QE is not about boosting jobs, housing, or the real economy. QEs are about subsidizing investors and boosting stock, bond, derivatives, and commodity futures markets and therefore the capital incomes and returns of investors, both individual and corporate.
In my article written last December 2011, 'Economic Predictions; Present and Past', which appeared in the January 2012 issue of Z magazine (and is available on this blog and on my website, kyklosproductions.com accessible from this blog's sidebar), I predicted nine months ago that even though QE 2.5 (called 'Operation Twist') had just been introduced by the Fed last October–it would be followed by a subsequent QE3 sometime in 2012.
This prediction was based on the analysis last November, appearing in my April 2012 book, "Obama's Economy: Recovery for the Few (also available this website), in which I showed data indicating an extremely high correlation between the introduction of QE programs and surges in stock and other financial markets: i.e. when markets begin to falter, QEs are introduced, and markets surge once again. Table 5.1 on p. 90 of my 'Obama's Economy' book shows that as soon as the stock market begins to slow and decline, another QE is introduced. Following that introduction, the stock market takes off once again. When the QE in question begins to conclude and wind down, the stock market begins to falter once more, leading to talk again and eventual introduction of another QE–which again results in a resurgence of the stock market. The table 5.1 identified this relationship for QE1 and QE2, which amounted to more than $2.3 trillion injected by the Fed into banks and investors' pockets, in the form of buying from them various subprime and other mortgages and securities at their full purchase values instead of their current depressed values in many cases. In other words, investors and banks ware subsidized as a result of Federal Reserve QE money injections.
Banks and investors then take this 'windfall' from the Fed and invest it into stocks, junk bonds, derivatives, commodities (oil futures being a favorite), emerging markets' exchange traded funds, foreign exchange futures, etc.–i.e. various speculative financial instruments. Or, in the case of some banks, they just take the money and hoard it. Whether hoarded or funneled off to speculators, the QE injection is not loaned to real businesses to create jobs. In other words, what they don't funnel offshore, or into financial securities, they just hoard, which now amounts to around $1.7 trillion in excess bank reserves the banks are simply sitting on. Bank lending to small-medium businesses stagnates or even declines. Very few jobs are the result of the trillions pumped into them by QEs that are either hoarded or diverted.
QEs and the claim they lower interest rates, and that will stimulate lending by banks and investing by business to create jobs, is as false as the similar claim that business tax cuts create jobs. The theory is that by giving banks and businesses more cash (via lower borrowing rates or lower taxes) that the extra cash will result automatically in investing and lending. In actual fact, however, it has only resulted in the hoarding of trillions of dollars by bankers and businesses. It hasn’t led to jobs in either case.
Nor do QE programs have much impact on housing recovery. They may reduce mortgage rates a little, but low rates are not the solution to the lack of housing recovery to date. Banks may publicly report available low mortgage rates but that doesn't mean banks actually lend at those rates except to a very, very small select group of buyers. Despite low rates, banks the past three years have imposed numerous and onerous non-rate terms and conditions for getting a mortgage loan for most home-buyers. A buyer can get a 3.75% mortgage loan, but only if he puts 40% down, has a perfect 800 plus credit score, excess monthly income, and keep $100k in accounts in the bank's branch. A recent front page headline in the global business daily, The Financial Times, indicated the same. Quoting a Deutsche Bank analyst, “Very little is likely to make it through immediately to consumers”.
So QE means little housing and jobs recovery, does nothing to ensure banks will actually lend to small businesses and consumers, and results either in cash hoarding by the banks or in lending to speculators (hedge funds, etc.) who then use the loan to buy up stocks, junk bonds, speculate in spot oil futures (driving up gas prices at the pump) or industrial commodities, derivatives of all kinds, foreign exchange, etc.
QE is for investors, in other words, not for homeowners or unemployed or small businesses.
Pressure for the Fed to introduce its latest QE3 began this past summer, as the stock market began to lag once again. As it became increasingly possible the Fed would introduce another QE in recent months, the stock market began to surge. And once the Fed did announce QE last week, the markets exploded. The Dow and S&P 500 are today almost where they were in 2007 before the financial crash. Stocks have surged (driven largely by 3 QEs the past three years) by almost 150%–i.e. more than doubled. Junk bond returns have been even greater. We've had three oil and commodities price bubbles since early 2009, and unknown fortunes have been made as well from speculative derivatives trading (unknown because they aren't reported anywhere). In contrast, housing, jobs, and general economic recovery in the US for the rest of the non-investor/corporate population has stagnated, bouncing along the bottom, relapsing three times in as many years (also as predicted in the 'Obama's Economy' book a year ago).
Fed QE policies combined with additional free money in zero interest loans available to banks (called ZIRP) together have totaled more than $10 trillion to date in what amounts to Fed subsidized money given to banks and investors–all of which has been designed to bail out the banks and investor community. But bailing out the banks does not in turn mean that the economy recovers. Bail outs to banks don't necessary result in lending to businesses and consumers. Why? Because the bail out money is either hoarded (i.e. remains bottled up in the banks in the form of record excess reserves amounting to $ trillions) or is loaned by the banks mostly to professional speculators and investors who realize highly profitable, quick returns in speculative markets (stocks, junk bonds, derivatives, commodities futures, ETFs, etc). The Fed's QE money injections thus do not produce sustained economic recovery for the general economy.
The significance of the Fed's QE3 move therefore is there will continue to be free money in unlimited amounts to banks and investors to hoard or to speculate and play with, while it's cuts in spending and disposable income for the rest of us. But 'QEs for them' and 'Austerity for the rest of us' will mean continued economic slowdown and recession, accelerating in Europe, more slowly coming in the US, and increasingly on the horizon for even Asia.
That continued economic slowdown—in the US and globally—will make the private banking system in turn even more unstable, regardless of how many FED QEs are introduced. So why do governments continue with ‘austerity’ policies on the fiscal side that ultimately negate QE policies on the monetary side? Because QEs are more profitable to bankers and investors. And those bankers and investors believe if they can just hold out in the short run—with the government and central bank making up for their short term losses with trillions of ‘free money’ injections, in the longer run the capitalist system will self-correct itself on its own. But that proposition—i.e. bail out investors and bankers and let the markets do the rest—is economic ‘ideology’ and not economic fact or science.
Dr. Jack Rasmus is the author of the 2012 book, "Obama's Economy: Recovery for the Few", available on this blog and his website at discount. (see also the new offer for the book with a DVD presentation and 60+ powerpoint slide presentation). His blog is jackrasmus.com and website: www.kyklosproductions.com. Follow Jack and his guests on his new forthcoming weekly radio show, ALTERNATIVE VISIONS, on the progressive radio network, every Wednesday at 2pm New York time, at PRN.FM, or progressiveradionetwork.com