Special Report from Money Morning
by Shah Gilani, Money Morning
The growing income and wealth gap between the rich and poor, most of whom used to be called middle class, has many fathers. But behind the scenes one primary cause emerges. It’s the greatest financial disruptor of modern times: Quantitative Easing (QE).
While the jury’s out on whether QE will eventually be the step-ladder that lifts us out of the lingering Great Recession, as its proponents argue, the facts demand that the verdict on QE’s egregious enrichment of the rich and subjugation of everyone else is: “guilty.”
And the trouble won’t stop now that the United States has begun winding down its quantitative easing – the Eurozone and Japan each have massive QE programs.
Here are the facts. Policymakers and struggling middle class and poor people must take a strong stand to fight this financial plague. Here’s how…
A Chicken and Egg Story
Quantitative easing is the term America’s central bank, the U.S. Federal Reserve, came up with for its experimental policy of buying trillions of dollars’ worth of U.S. government bills, notes and bonds (Treasurys), and mortgage-backed securities (MBS) from banks.
This was new. Typically, when financial or economic troubles befall the U.S., the Fed lowers interest rates in order to make more money available to financial institutions and the public, providing liquidity to banks and capital to consumers and producers.
The Fed lowers interest rates by offering banks cheap loans. The idea is that if banks have more money to lend, lower rates will work their way into the economy and stimulate consumption and production.
When the credit crisis hit in 2008, the Fed lowered its target rate to zero, essentially making loans between banks free. But banks still wouldn’t lend to each other – they were afraid borrowing banks could go toes up at any time. Big banks were virtually insolvent.
The Fed’s response to this emergency? It cooked up QE.
The Fed was able to pump money directly into ailing banks by buying bank loans, Treasurys, and mortgage-backed securities from them.
The banks eventually made out like bandits because in later rounds of QE they bought Treasurys and MBS in the open market, knowing they were just going to flip them to the Fed at inflated prices.
Fed purchases from big banks started in 2008 and continued throughout 2009. That wasn’t enough to save the banks. In 2010 the Fed stepped up its purchases under the banner QE2, buying $600 billion worth of assets that year. That still wasn’t enough.
Meanwhile, the economy, which had shown signs of perking up, slipped backwards. So in September 2012, the Fed began QE3, purchasing $85 billion a month of assets ($45 billion of Treasurys, $40 billion of MBS) for the next 24 months.
By the time it was done, the Fed’s balance sheet had ballooned from $750 billion in 2007 to more than $4.25 trillion dollars, and big banks were making record profits again.
The Greatest Wealth Redistribution Ever Conceived
The Fed’s ZIRP, or zero interest rate policy, restored banks’ balance sheets, grossly enriching them in the process. Low rates allowed corporations to borrow cheaply to buy back their shares and eventually raise dividends. Low rates allowed well-heeled speculators to margin and leverage their bets on rising financial asset prices.
Cheap money fed private equity companies and venture capital firms’ ambitions, backing start-ups like Uber, AirBnB, Snapchat, and others. Financial intermediaries, once again, reaped big fees from arranging loans, orchestrating mergers and acquisitions, and taking companies both public and private.
Pre-existing owners of financial assets and financial intermediaries have enjoyed a windfall at the expense of the middle class and the poor. And it was planned that way.
Money Morning Editor’s note: In this groundbreaking analysis, Shah reveals how quantitative easing – a misguided multi-trillion dollar central bank policy and the greatest financial disruptor of our time – has distorted the global economy, made many traditional investments unprofitable, and stoked wealth and income inequality. But Shah says there are steps we can take to limit some of the damage – if we act now.
