Sunday, September 4, 2016

Effects of QE

In the United States the central bank is the Fed or Federal Reserve Bank. Remember Ben Bernanke and quantitative easing (QE)? Let’s do a quick refresher. First, what does the term quantitative easing actually mean? QE is a device used by the central bank where they buy government securities (Bonds) in order to lower interest rates and increase the money supply in the country. The idea is by flooding the banks with more currency, regular banks would be willing to lend more money, which in turn would generate more borrowing for growth of businesses. It sounds fine in theory. But it was soon apparent the banks were gun shy about lending and people saw no means to pay back loans.

After the housing crisis began in 2006 when Bush 43 was President, The Fed took no action. Bernanke seemed to have no interest in helping the Bush administration. As soon as Obama became President, Bernanke decide he would try and help him revive the economy by applying QE1 in 2009. When that did not work, he tried QE2 in 2011. Again, no apparent help, thus QE3 in 2013.

This result of the FED buying bonds and driving down bond prices was that investors could make no money on bonds. The only place people could invest in the USA was stocks. This drove and is still driving the stock market to higher and higher values. This has created an extreme disparity between wealthy people and ordinary Americans. It also means our money has less value, thus we pay more for all imported goods. The FED also purchased home mortgages from homes that were under water and no way to unload the debt without taking a loss, so all they could do is hold on to the debt. Bernanke finally gave up and retired in 2014 and was replaced by Janet Yellen as chairman of the FED. She was Bernanke’s protégé and continued his policies.

Bernanke and Yellen did not take into consideration that the recent tax increases, both personal and corporate would kill the job market in the USA. They drove many manufacturing jobs out of the country, forced many corporations to move their headquarters out of the country and basically killed all entrepreneurship which kept new small businesses from starting.  At the same time, we were pressing forward with almost unrestricted immigration of people flooding into the country willing to work for lower wages. This meant more people without jobs, who still had mouths to feed at home and less or no take-home pay to do it with.

Now we have a situation where we have increased the cost of government by spending more on food subsidies, more people on disability, more unemployment assistance and housing for children who entered the country without adult supervision.  

Now interest rates are near zero and the FED has no means left to help with the problem, except to buy more corporate debt. The FED debt which was less than one trillion dollars in 2006 is now about $4.5 trillion. They will sit on it.


All the effort the FED has done comes to naught. They tried to help and made everything worse. The FED is now back to watching for inflation. We have more disparity in wealth, no jobs and no prospect of new jobs, higher import prices and no inflation. Everyone is in stall mode awaiting a game changer to come along. Please vote for someone who will actually help our citizens.


2 comments:

  1. My favorite blog entry in a while. One reason is I am an economics nerd. Also, I am reminded why Ben Bernanke got so much press as chairman of the Fed. Last, even people who can not be bothered to learn about macroeconomics and the Federal Reserve system can read this in a few minutes and have a much greater understanding of how we got where we are today. Really enjoyed this one.

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