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Why Quantitative Easing Won't Work

letsgetitdone's picture

Today I was planning on a post about Quantitative Easing (QE), because it seemed to me that it would never work. However, today, Randy Wray beat me to it with another great post, this time at ND20, reviewing the whole situation in detail, placing it in political context, and explaining why it's very unlikely that it will allow the economy to recover much more than it has already. Here are some key quotes from Randy's piece.

. . . The Fed is in a Catch 22: Interest rate policy will not spur borrowing until economic recovery is underway, but recovery will not begin until spending picks up. Only jobs and income will stimulate spending, but the Fed cannot do anything in those areas.

This is the basic problem. Fooling with interest rates to increase business borrowing just won't stimulate much spending in the present situation of the American economy.

No matter how mad at banks we might be, we have got to leave them with a way to return to profitability that does not rely on speculative bubbles, pump-and-dump schemes, and accounting fraud. Pushing returns on relatively safe assets toward zero is not the answer. Pumping banks full of reserves that pay very low interest will not help, either. What Bernanke might understand, but most in the mainstream media do not, is that banks do not and cannot lend reserves. Reserves are just an entry on the Fed’s balance sheet — a liability of the Fed and an asset of banks. Rather, banks make loans by accepting the IOU of the borrower and issuing a demand deposit. Only financial institutions have access to the Fed’s balance sheet, so it is literally impossible for a bank to lend out reserves.

That's the key; QE will flood the banks with reserves. But banks can't lend reserves. They need borrowers to lend, and they're unlikely to get borrowers unless there's sufficient demand out there. No one will do “if you build it, they will come,” these days.

Note that if we really wanted to use our central bank to resolve this economic crisis, it would be far better to have it directly buy houses and create jobs for the unemployed. But it makes far more sense to use our fiscal authorities for that.

But, of course, Congress and the Administration don't want to do anything about that right now, because they are paralyzed by austerity ideology, and don't understand that (1) the US can't run out of money because it spends by marking up accounts, and (2) Government deficits ADD to non-Government savings dollar for dollar.

QE2 does not represent a solution to our current quagmire. No, this Titanic is still headed underwater. The sooner that the Obama administration recognizes that what we need is jobs, more jobs, and mortgage relief, the sooner we can get this ship afloat.

QE isn't like Government spending. It doesn't add to non-Government sector savings. What it does is SWAP cash reserves from the Fed for financial assets held by the banks. So, there's no accretion to non-Government savings or other financial assets, and very little impact on increased business activity.

But enough of my palaver. Read Randy's full piece, if you want a more full narrative of why QE won't work, and want to keep it in mind when you read about Bernanke's futile actions in the coming weeks

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

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chicago dyke's picture
Submitted by chicago dyke on

"quantative easing." oh, how it makes my blood boil. it's elegant propaganda and highly effective. and it provides cover for what is essentially rape and theft. of the trust and resources and future of the american people, because a handful of banksters will do anything to avoid what must be done in order for this country to have a thriving economy again: nationalization. the banksters played a game and lost, they blew it, and they know they've fucked up. all this terminology is designed to obfuscate those facts. there's nothing "there" there. bankster books are crooked, and they're lying about "the value of their assets." i know it. you know it. i'm so fucking sick and tired of the SCLM willingness to invent "new" ways of describing these basic facts such that only informed people like us can understand how it is lying.

ok, rant off. it's Day 12 without a cigarette, and i'm still pretty punchy. sorry.

Submitted by libbyliberal on

But, of course, Congress and the Administration don't want to do anything about that right now, because they are paralyzed by austerity ideology ...


And these guys are millionaires and it is game playing to them, lust for power and control and the blockage to solutions from ego-investment. They are not motivated by conscience and a sensibility to truth and to justice and to goodness and TO VIABLE SOLUTIONS.

Media will pick up the worst possible drumbeat to the people... austerity ideology. Makes for a simple sound bite. As deep as U.S. A.D.D. critical thinking capacity will allow ... even though it is wrong-headed ... and good for manipulation. My Dad used to call the tube the "idiot box". Wow, he was so right.

letsgetitdone's picture
Submitted by letsgetitdone on

the idiot box, both because it make people idiots and has idiots talking to us all day long.

letsgetitdone's picture
Submitted by letsgetitdone on

these days. Just gotta keep, keeping on, I guess.

Interesting exchange at FDL with a character named Synoia on Randy Wray's mortgage fraud piece.

Looks like it spawn another piece from Randy and Bill Black about steps in taking the big banks down.

Submitted by Hugh on

No matter how mad at banks we might be, we have got to leave them with a way to return to profitability that does not rely on speculative bubbles, pump-and-dump schemes, and accounting fraud.

I don't think there is a way for banks to return to profitability, or rather solvency. What Wray points out as ways not acceptable to recapitalize the banks is actually a nice snapshot of exactly what the current Bernanke-Rubin-Summers-Geithner-Obama strategy is. I would throw in foreclosure fraud and increased fees as well.

From my view point of kleptocracy, QE is just a way to keep the bubbles inflated a little longer, extend and pretend in other words. The stock markets have been going sideways for months and only recently took off in anticipation of cheap money from QE2. If you look at the underlying fundamentals there is no there there, but for speculators it was enough to know that the casino was going to stay open. In essence, QE2 is a further redirection of wealth into the least productive economic sectors, the hands of the kleptocrats. So it weakens the country even as it does not fix the problems.

From the neo-classical view of the Fed and Treasury, another round of QE looks quite attractive. You see their prescription is austerity at home and exports abroad. Just talk of QE2 has engendered a devaluation of the dollar. This makes imports from countries other than China with its dollar peg more expensive and it makes our exports cheaper. And even for the Chinese it forces them to keep buying dollars if they want to maintain the peg. Not a bad deal all in all. Well, except for the fact that it won't work. This is all classic "beggar thy neighbor" type stuff, and the problem is that everyone is doing it. So what we have internationally is an escalating race to the bottom with successive rounds of devaluation and increasing protectionism to protect any gains. But as everyone is doing this, relatively speaking most of the effects of these policies cancel each other out or their worst effects get dumped on smaller players, i.e. developing countries.

letsgetitdone's picture
Submitted by letsgetitdone on

It is race to the bottom stuff. Seems to be I did a post on that sometime ago now.

letsgetitdone's picture
Submitted by letsgetitdone on

I still lived in New York State so I could vote for him.