'Look—we have the worst revival of an economy since the Great Depression. And believe me, we’re in a bubble right now. The only thing that looks good is the stock market. But if you raise interest rates, even a little bit, that’s going to come crashing down. We are in a big, fat, ugly bubble…. And we have a Fed that’s doing political things…. [T]he Fed is doing political things by keeping interest rates at this level. When they raise interest rates—you’re going to see some very bad things happen.'
Donald Trump in the first electoral 2016 debate (after he was elected he performed a Trump-esque U-Turn and pressured the FED to keep low interest rates, i.e. maintain the "bubble"!)
'It's a very dangerous gamble... a bargain with the devil'
Thomas Hoenig on post 2010 FED QE policies, originally the sole objector to QE sitting on the 12-man Federal Open Market Committee (FOMC).
'It has, I believe, had a wealth effect, but principally for the rich and the quick—the Buffetts, the KKRs, the Carlyles, the Goldman Sachses, the Powells, maybe the Fishers—those who can borrow money for nothing and drive bonds and stocks and property higher in price, and profit goes to their pocket”
Richard. W Fisher reflecting on recent policies of QE, a former CEO of the Federal Reserve Bank of Dallas and fellow FOMC objector).
Key Points
It is crucial that the public knows about the real effects of Quantitative Easing (QE) and the seismic role of leading Central Banks in provoking financial crises of the past in destroying any healthy global financial market equilibrium in the present and inevitably, in propping up the next asset bubble and future world economic crisis.
The media both downplay and inaccurately portray central banks and their roles in the economies.
In reaction to the last great asset bubble 2008 recession, in one year (late 2008-2009) the Fed printed a trillion, equivalent to what had been previously printed over a hundred years, and more than doubling what economists call the monetary base. The FED never looked back.
All other large central banks e.g. the BofE and ECB, copied the FED and went on a splurge of Quantitative Easing. The most deadly economic tool ever created.
In reaction to COVID, between March – June 2020 and the Fed printed $3 trillion, as much money as the Fed would have printed in roughly three hundred years at its normal pace, before the 2008 financial crisis.
Quantitative Easing combined with reckless zero-interest rate policy (ZIRP) era, as investors do not trust the economy to spend and rather save.
The stock market is now so over-inflated, that popping its bubble will create a tsunami effect on the economy, and no politician has the stomach to do it, so they continue to make it larger and larger, resulting in surely the end of capitalism.
The great problem of asset inflation
In order to put perspective on the effect of QE, first consider how damaging asset inflation is for society and why it is worse than price-inflation. It provokes severe recessions and unemployment when corrected as shown by the 2008 financial crisis triggered by a mortgage-industry bubble. Equally, when left uncorrected it widens inequality like nothing else observed - consider the US Anexos Jan 2024 inequality report findings that the wealthiest 10 percent hold about 93 percent of U.S. households stock market wealth, whilst the wealthiest 1% owns 54 percent or public equity markets. If QE, a policy only globally widely adopted post 2008 provokes asset inflation, then it is a very serious problem for nearly all considering its record use.
Who are and what were the world leading central banks
Historically, there have been three word-leading central banks - issuers of the world’s reserve currency. First, the Bank of Amsterdam (BoA) was created and became the world's leading central bank in 1609; second came the Bank of England (BofE); and finally, the Federal Reserve (FED) became most prominent. It is notable that the BofA and the FED were both created primarily with stock-market interests in mind (the former for the first joint-stock company, the Dutch East India Company (DEIC) and the Amsterdam Bourse, the latter for the bankers headed by J.P. Morgan who secretly formulated it in Jekyll Island and Wall Street). Hence central banks typically serve both public and stock-market interests in a manner very dissimilar to any governments; history showing serving primarily the stock-market interests first though not always depending on the leadership. Despite the names, all these central banks are by and large totally independent entities to the government and unaccountable politically and in fact the FED itself is not really a banks per se, but more a system that institutionalises and conducts a form of banking called fractional reserve banking. The FED permits 24 primary dealers (banks like J.P. Morgan, Goldman Sachs, Citigroup etc.) to hold reserve accounts at the FED which would be filled in accordance with the central banks ethos to boost investment. In this way banks are allowed to lend out more money than they actually have in their vaults, and in fact these primary dealers also now act as middle-men for hedge-funds to borrow billions off the FED too.
Feel free to skip this section from here if you suffer from information overload but to understand the mechanisms of the FED itself, it is important to know how it is influenced by both the government and by private forces. It is the privately-owned member banks of each Federal Reserve Bank that vote on the majority of the reserve bank's directors (the Head Offices of each Reserve Bank has a board of nine directors and six are privately picked) and those directors vote on members to serve on the FOMC, which determines monetary policy.
However, there are also a board of governors (seven including the Chairman in total) appointed by the serving US government, who only in unique times of emergencies can bypass the rest FOMC to implement monetary policies.Wall Street is at the core of the FOMC, with tradition holding that the president of the powerful New York Federal Reserve Bank be given the vice chairmanship of the committee and be made a permanent committee member (the other 11 Reserve Bank presidents rotate in rounds of four when voting to complete the 12). The Federal Chairman is nominated by the US President and approved by the Senate and legally he and the FED must be transparent to the government and public, but neither he nor the FED is technically accountable to either. For instance, the Chairman cannot be told what to do or be fired by Congress or the President, nor be voted out in any kind of democratic-election.
As former chairman Alan Greenspan said - 'the Federal Reserve is an independent agency, and that means there is no other agency of government that can overrule actions that we take.' This was always the case as shown by a 1928 Supreme court ruling that deemed 'instrumentalities like the national banks or the federal reserve banks... are private corporations in which the government has an interest.' Likewise, the BofE was founded in 1694 as a private bank owned by private shareholders for their private profit with a charter from the king that allows them to print the public's money out of thin air and lend it to the crown, and has remained independent ever since. The pound was considered the strongest currency till the dissolution of the British Empire and the BofE, led by Sir Isaac Newton, cemented its status by ensuring only the pound could be backed by gold. Above all, inspired by Walter Bagehot, the bank took up a role as 'lender of last resort' when overseas bank runs threatened global financial stability. The BofA meanwhile was a regional bank vouched for by the city of Amsterdam, and was the first bank to legally enforce the scrapping of alternative metal currencies in exchange for its own, the bank guilder (or florin); to conduct fractional reserve banking (DEIC) and to perform open market operations to ensure a consistent and liquid market for its depositors; in other words to regulate and support the Bourse, which for centuries was the largest in the world stock-market.
This is all slightly complicated but relevant to know, as it is the Fed that has ended up most distorting the financial markets and inflating asset prices to a degree never known before, through the utilisation of QE permanently and falsely as 'last resort', above all since the last 2008 financial crisis (as shown below). It's also worth remembering the FED was the third American central bank, as the two first ones created in 1791 and 1812, each ended after its twenty-year charter. Early Americans despised the concept of a central bank and so suffered having thousands of currencies. When Andrew Jackson revoked the charter of the second U.S. national bank in 1836, he called it 'dangerous to the liberties of the people'. It is perverse people care less now about such dangers, when you would imagine we would be more liberal minded - the slave trade ended and all.
The staggering incremental increase of Quantitative Easing under the Federal Reserve (a short-run game)
Cristopher Leonard, journalist and author of 'The Lords of Easy Money: How the Federal Reserve Broke the American Economy', summed up how QE was utilised in a whole new way since the 2008 Financial Crisis by the FED, on a scale that previously would have seemed unimaginable, writing - ‘between 1913 and 2008, the Fed gradually increased the money supply from about $5 billion to $847 billion. This increase in the monetary base happened slowly, in a gently uprising slope. Then, between late 2008 and early 2010, the Fed printed $1.2 trillion. It printed a hundred years’ worth of money, in other words, in little over a year, more than doubling what economists call the monetary base…’ This was primarily to bail out banks, insurance and finance corporations such as AIG, which alone needed a bailout worth 700 billion. However it didn’t stop. The FED defended continuing QE primarily as a means to boost the economic recovery from 2008 onwards, even though statistics show they failed to make any meaningful contribution after the economy recovered from recession. Overall, Leonard tells that ‘between 2007 and 2017, the Fed’s balance sheet nearly quintupled, meaning it printed about five times as many dollars during that period as it printed in the first hundred years of its existence.’
However, post 2017 the picture became extreme on another level. No longer was the FED bailing out over-risk taking banks and insurance giants, now it was bailing out also wounded hedge-funds who had mistakenly hijacked the REP market and gone out of control, with a 700 billion bailout. Then, Covid hit and QE escalated became maniacal.
In response to panicked actions from companies over-drawing upon revolving credit facilities, again threatening to catastrophically bring down over-leveraged banks, between March – June 2020 and ‘in roughly ninety days, the Fed would create $3 trillion. That was as much money as the Fed would have printed in roughly three hundred years at its normal pace, before the 2008 financial crisis.’ The Fed, through various special-purpose vehicles (SPVs) was now purchasing corporate debt directly (CLOs) and even corporate junk debt if it had previously been viewed as investment-grade before the pandemic, nicknamed in Wall Street as ‘Fallen Angels’. The Fed was now the reliable savior of greedy hedge-funds and private-equity firms, mismanaged and even-obsolete corporations, and the ever compromised powerhouse banks. By 2022 the Fed balance sheet reached roughly $9 trillion (though since it has decreased to $7.5 trillion) over ten times the size of what it was in 2008 before the economic crisis when it was around 800 million (which was considered high and partially the cause of the crisis by many economists at the time). Without doubt the whole field of Economics has changed these past twenty years; it is the FED more than any government or body of government that manages the world economy and they do it directly in Wall Street and other global financial markets interests, not the civilian of any other class.
Former FOMC member Joseph Hoenig (who was the sole QE critic in the FOMC around 2010) once remarked - 'we are responsible for the long run, so the short run can take care of itself' since the Fed was insulated from democracy and elections. Paul Volcker, the last Fed chairman to seriously tackle inflation, described how the job of central banks resolved around harmonising two kinds of inflation: asset inflation and price inflation, which he called “cousins,” and acknowledged were both created by Fed policies. However, whilst before 2008 QE was regarded as a tool of central banks used primarily to hit their inflation targets and to only boost the economy in times of the most serious emergencies, due to a lack of powerful alternative fiscal policies, by now that view is dead.
Central bank leading officials worldwide only pursue endlessly expansive short-term policies to cover up their disastrous policies of the past which created multiple giant asset bubbles. A particularly obvious asset bubble that the FED created is the US stock-market, yet equally it is considered FED policies even inflated the prices of fine art too)- The long-run vision that Hoenig saw is past saving: long-run policies are unpalatable due to how sever the short-run destruction of them would be.
Central Bankers have known this for a very long time. Consider the following stock markets graph:
Fascinatingly this near 100% universal increase in stock prices across the 3 indexes is from a point where stocks were already overly inflated and in a bubble, hence why all three markets price-change were nominally negative around 2011 even in spite of inflation. Asset inflation had to be reversed. That bubble was known as the 2000.com bubble.
Now, consider that between 2010 and 2016, the value of one of the oldest and most commonly followed equity and stock market indexes - the Dow Jones Industrial Average (DJIA), rose by 77 percent, as the graph shows. Over the seven years that this happened the real average US growth rate was average at best, growing at 2.27% (considering it was recovering from a recession) and average price inflation was 1.73%. QE had made minimal changes to employment according to independent researchers from the central banks.
Therefore, it is clear the stock market was signalling a giant asset bubble in 2016, as large as and if not, larger than the 2000 .com bubble and 2008 CDC and home-mortgage bubble, which both triggered sobering and stark financial crashes as the graph shows. However, the US stock market had a life of its own - totally separate to the fate of the US. In fact, this is best shown by how on January 7, 2021; the day after the United States Capitol was laid seiged on by thousands and American society was most shown to not trust the government, well the DJlA jumped 1.4 percent, closing at a record high. It's plausible to believe from that angle the better the stock market is going, the worse the government and society is doing, otherwise what on earth else explains such inverse fortune.
However, instead of popping the bubble in 2016 and using long-term anti-asset deflation policies, the FED hid behind the media who outrageously naively describe such worrying asset inflation as a positive stock-market 'booms' and went and did the opposite. It subsequently implemented policies that were more aggressive and larger than ever to keep inflating the stock-market more than ever, reaching astronomical levels during the pandemic. The only questions now are, when will the asset-bubble pop? And how will the world survive an actual realistic popping of the asset bubble - which by now is larger than any asset bubble that has ever existed? By now QE is arguably the most shocking mainstay of mainstream economics- the killer poison ever rapidly destroying society and a beast ten times larger to topple than what it was less than twenty years ago
The Fed's Zero Interest Rate Policy (ZIRP era)
The FOMC meets every six weeks to set interest rates, known as the Fed Funds Rate. When the Fed lowers interest rates, it speeds up the economy, and when it raises interest rates it puts the brakes on it. The Fed fund rate was around 5% at the start of 2007, and as high as 20% under Fed Chair Paul Volcker. However, post 2008, for the first time they were set to 0. When rates are zero, money is effectively free for the banks who can get it straight from the Fed. Crucially there is no incentive to save - other than to avoid risks, and inflation may actually mean savers are punished for caution.
At the same time, the Fed did something else completely new that in the past would have been considered extreme. The Fed had always bought short-term debt because its job was to control short-term interest rates, but that changed - the Fed under Chair Bernanke brought long-term government debt, like 10-year Treasury bonds to reduce its supply, encouraging at the same time all financial entities to look elsewhere for their investments - and find riskier investments; the goal was to leave no safe profitable place left. Short term risks were seen as best.
But let's step back. This was crazy. What had led to the 2008 crisis? Well risky debt, and over-leveraged financial entities not having enough safe investments. But here the Fed said to the banks, private equity firms, hedge-funds etc., we've bailed you out (well not you Lehmans Brothers) , now do it again please on a scale never known before.
ZIRP lasted seven years. Afterwards, interest rates rose tentatively to 2.16% averaging just over 1.6%. And then when COVID hit in 2020, ZIRP was resumed for 2 more years. Other countries followed suit- just consider this BofE interest rate chart -
What was the defense for such policies? Well it was meant to help the civilians themselves right. But as Leonard demonstrates, this was pure fantasy, by comparing the Fed in the 2010s to itself in the past under Alan Greenspan in the 1990s during the great moderation - when interest rates were set on average at 5% and when QE wasn't a policy whilst federal spending was actually cut from 21.9 percent of GDP to 18.2 percent over the period. Money supply increases with fiscal governmental stimulus packages, so the US Government and Fed policies were to decrease the rate of growth in money supply in the 90s, in polar opposite to the QE expansion policies in 2010 conducted by the Fed which drastically increased it.
Leonard writes- 'In the 1990s, labor productivity in the United States increased at an annual average rate of 2.3 percent. During the decade of ZIRP, it rose by only 1.1 percent. Real median weekly earnings for wage and salary employees rose by 0.7 percent on average annually during the 1990s, but rose by only 0.26 percent during the 2010. Average real GDP growth, a measure of the overall economy, rose an average of 3.8 percent annually during the 1990s, but by only 2.3 percent during the recent decade. The only part of the economy that seemed to benefit under ZIRP was the market for assets... These periods were comparable because they were both long periods of economic stability after a recession'.
This is a completely valid though not perfect comparison- the US stock market did crash on October 19, 1987 and took two years to recover, whilst the US economy did suffer a gulf war recession in 1980 which was short and ended in 1991 (-1.5% GDP and 5.5% unemployment), whilst the 2008 crisis was harder though equally short and hit both the stock-market and put the economy in recession (-4.3% GDP and 9.5% unemployment). The argument is completely clear - trillions of QE and record ZIRP failed completely to help the Average American salary rise, and the economy under-performed too considering it. Another comparison can be made - whilst both periods saw the stock market more than double in value and thrive, shortly after the 1990s there was the Dot-Bomb Recession and a steep stock market crash - wiping out $1.76 trillion of value in 280 Internet stocks between March and November. However, when Covid provoked recession in the 2020s, the US stock markets continued thriving. Thus, the comparison shows that the only notable beneficiaries of the mammoth QE program and ZIRP appear to be the stock-markets once more .Bad economies usually hurt both workers and investors, but now the wealthy investors are the ones with all the insurance and insulation from economic recessions, or so it seems.
In fact, central banks continued ZIRP and QE for half a dozen years after extensive academic studies had shown it wasn't helping the average person in the street. Take a report on BofE QE effects between 2007 and 2012 titled 'Strategic quantitative easing' by the New Economics Foundation that found that while most families saw no benefit from Quantitative Easing, the richest 10% of households would have each been between £128,000 and £322, 000 better off from UK QE. In 2013, the McKinsey Global Institute issued a detailed report on the ’Distributional effects and risks’ of ‘QE and ultra low interest rates.’ Despite the goal of central banks not being to make profits, that is exactly what they did the report tells as ‘by the end of 2012, governments in the United States, the United Kingdom, and the Eurozone had collectively benefited by $1.6 trillion, through both reduced debt service costs and increased profits remitted from central bank’. No wonder governments were so supportive of central bank's QE policies from the offset.
However, the report considered that it was corporations were the big winners of QE writing ‘non-financial corporations across these countries benefited by $710 billion through lower debt service costs…’ and that ‘the value of sovereign and corporate bonds in the United States, the United Kingdom, and the Eurozone increased by $16 trillion’ (though there was ‘little conclusive evidence that ultra-low interest rates have boosted equity markets...ultra-low rate policies do spark short-term market movements in equity prices, these movements do not persist in the long term’). Finally, the report revealed that US banks were global winners due to the Fed’s status as the world's leading central bank, showing ‘from 2007 to 2012, the net interest income of US banks increased cumulatively by $150 billion.’
All this came with a cost, but who lost out according to the report on QE distributional effects? Sadly, the primary losers were the average households in the US, UK and Eurozone; household owners in the US and UK; pensions and life-insurance companies; and finally the European Banks that were less important in the time than American banks.
The report found ‘households together lost $630 billion in net interest income, with variations in the impact among demographic groups’ whilst ‘At the end of 2012, house prices may have been as much as 15 percent higher in the United States and the United Kingdom than they otherwise would have been without ultra-low interest rates, as these rates reduce the cost of borrowing…’ Moreover, it found ‘many US public sector pensions (state and local governments) have been underfunded for some time, and the underfunding gap increased by $450 billion between 2007 and 2012. This (rising) unfunded liability has not been due to the decline in interest rates as in the case of corporate defined-benefit pension plans... European corporate pension funds have also experienced an increase in unfunded liabilities due to lower interest rates’. The situation was even more stark for the life insurance industry as ‘life insurance companies, particularly in several European countries, are being squeezed by ultra-low interest rates.....(meaning) the industry will shrink—a dynamic observed in Japan over the past 15 years... If the ultra-low interest rate environment were to persist for an additional five years or more, many insurers may find that they have to restructure their portfolios dramatically or be forced out of business. In Japan, the pre-tax profits of life insurance companies have dropped by around 70 percent over the past 15 years due to ultra-low interest rates...Finally, given that the majority of their assets are in fixed-income securities whose value is marked to market, life insurers would be vulnerable if interest rates were to start rising very rapidly, leading to a significant decline in the market value of their fixed-income portfolios. Additionally it revealed ‘effective net interest margins for Eurozone banks have declined significantly, and their cumulative loss of net interest income totaled $230 billion between 2007 and 2012... Over this period, therefore, there has been a divergence in the competitive positions of US and European banks. The experience of UK banks falls between these two extremes…’
Central banks, the media and governments on the QE bandwagon just do not care that is has been shown to be ineffective by historical comparisons and that the losers of QE have been shown to be households and important industries like that of pensions and life insurance. All that they seem to care about is that corporations and American banks made record profits and the bond market (previously considered boring and unstable) becomes a lucrative money-maker, as if it were risky. The report also warned that ‘purchases of emerging-market bonds by foreign investors totaled just $92 billion in 2007 but had jumped to $264 billion by 2012.... In some developing economies, including Mexico and Turkey, the percentage increases in capital inflows into bonds have been even larger. Emerging markets that have a high share of foreign ownership of their bonds and large current-account deficits will be most vulnerable to large capital outflows if and when monetary policies become less accommodating in advanced economies and interest rates start to rise…’ In other words whilst foreign investment rose it also was now overly tied to interest rates of the FED, BofE and ECB and therefore could lead to instability and has increased the vulnerability of the recipient of the foreing investment. This was subsequently proven true as when it was believed the FED would raise interest rates in the 2013 ‘Taper Tantrum’ foreign investors dumped their bonds in countries such as Turkey, Brazil, Mexico and Poland causing their currencies' values to decline 4-5 pecent. However, when the Fed performed a backtrack and didn't taper, the value of these currencies mostly jumped back again, though only half way by about 2 percent.
Banks between 2008 and 2013 had to abide to the international Basel III accord, requiring them to show that they could cushion the blow if asset values fell rapidly by having sufficient reserve capital. In line with all banking regulation policies in those years the Basel Committee on Banking Supervision (BCBS) found a way to make such a law less strict by stating banks needn't hold any capital on debt considered safe, such as the national debt of Greece for example. Baell III was so lenient that when J.P: Morgan Chase reported in 2013 that's its capital ratio under Basel III was '11.94%', it was shown by Basel III critics that under the more traditionally used measure leverage ratio 'JPMorgan had only a 6.22 percent cushion. When you applied international accounting standards, things were even worse, with a mere 4.22 percent cushion.'
Risk taking was so encouraged by the Fed that US investors took risks in fracking even when knowing that the industry was mostly led by con artists. According to an Wall Street Journal investigation 'two thirds of the production estimates made by leading fracking companies in Texas and North Dakota between 2014 and 2017 were inflated... The estimates were, on average, about 10 percent too high'. Leonard writes 'in 2017 alone the fracking industry borrowed $60 billion' and 'by one estimate, oil industry debt tripled between 2005 and 2015, rising to $200 billion... Between mid-2012 and mid-2017, the biggest fracking exploration and production companies had a collective negative cash flow of $9 billion every quarter. And still the money flowed to them in the form of corporate bonds and leveraged loans.'
Meanwhile, risk taking was so encouraged by Sweedish, German and Denmark Central Banks and the ECB that they even put up negative bond interest rates. Yet, investors were so worried about the volatitiy of the markets that they brought these bonds, as Leonard writes - 'by 2016, they accounted for 29 percent of all global debt. About $7 trillion worth of bonds carried negative rates. Bond investors were so desperate to find a safe haven for their cash that they were willing to pay a fee to governments like those of Germany and Denmark to safeguard it.'
The modern media great cover-up
I believe the sheer scale that hyper-aggressive monetary policy has been unleashed, particularly by the FED but also by the BofE, European Central Bank (ECB), Japanese, Chinese and just about every other national bank, makes it about the most regressive, undemocratic and overused economic policy ever widely used by developed nations in semi-modern times. Yet, the modern media paint a pretty picture of QE, and make out that it is a safe, progressive and even life-saving economic policy, brainwashing the masses to believe in the economic policy equivalent of snake-skin oil. The root of the problem is that central banks, run by unelected officials, have now become too big for their boots and more powerful decision makers in the world’s economies than the governments themselves. Yet few people understand them and rarely are they talked about with any accuracy at all, let alone properly regulated and run.
The media is at worst whitewashing the situation and instead continues promoting the facade that these central banks are run by heroes, who permanently rescue the world’s economies every few years. Mostly though, the media ignore the situation – in the US, a social researcher called Carola Binder analysed ‘media coverage of the Fed and quantitative easing between 2007 and 2011, using a database of more than 300,000 news stories.’ Whereas President Barack Obama was lead newsmaker of about 8% of all stories, the Chairman of the FED Ben Bernanke was lead newsmaker in 0.13% of all stories. This meant the President was reported on 61 more times than the Fed Chairman during the period, yet the economic crisis meant that between 2007 and 2011 the decisions of the Fed Chair Bernanke were far more influential on the US economy and on near universally all US civilians than Obama’s decisions. It is without a doubt now that the Fed props up not just the US economy more than the US government, but actually are serious managers of the world’s economies as issuers of the world's reserve currency. The whole world is fatefully entangled in the Fed's policies and the media barely cover it at all.
Would central banks lie to you?
Sadly, following the crisis Bernanke was shown to be just as slippery as any politician- whilst his predecessor Alan Greenspan and successors Janet Yellen and Jay Powell have been equally slippery too. On TV Bernanke was once asked by reporter Scott Pelley relating to QE - ‘You’ve been printing money?’ to which he answered ‘Well effectively, and we need to do that…’. Then just over a year and a half later on the same show to the same reporter this chairman went and said - ‘One myth that's out there is that what we're doing is printing money. We're not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way…’ While he was literally correct the second time round, he completely omitted that he himself was evidently responsible for having created such a myth about QE and much worse, he followed up his statement with a complete lie stating that ‘the money supply is not changing in any significant way’. That ladies and gentlemen was the chairman of the FED, giving the public information that even an 16 year old school kid who studies economics should know to be wrong - after having distorted the money supply in the US economy more than any other individual had in the history of the country. It’s diabolical.
It's worth knowing that Bernanke was promoted to chairman and headed the FED's reaction to the 2008 Financial Crisis, having publicly completely been shown to lack any economic foresight during the year prior that very crisis. As Leonard wrote - 'in 2007, when mortgage borrowers started defaulting in large numbers, Bernanke said during an industry conference that the problems in subprime mortgages weren’t that dangerous - “We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.' What does it say that the world's most powerful bank and organisation was run by an individual who was so horrendously wrong about the cause of the crisis and that the US government made him chairman and the Fed's face in the fight to contain the crisis?
When the National Bureau of Economic Research released a paper in 2020 titled 'Fifty Shades of QE: comparing findings of central bankers and academics', it cut to the heart of how worldwide central banks were over-positive and biased regarding QE, in that way misleading governments and the public, arguably over their own importance and feats. The study revealed 'that central bank papers report larger effects of QE on both output and inflation. Central bank papers are also more likely to report QE effects on output that are significant, both statistically and economically. For example, while all of the central bank papers report a statistically significant QE effect on output, only half of the academic papers do. In addition, central bank papers use more favorable language—more positive adjectives and, to a lesser extent, fewer negative adjectives—in their abstracts. Overall, central bank papers find QE to be more effective than academic papers do.' The report intuited that the reason for this mismatch was to do with how Fed researchers were rewarded for positively framing QE with promotions and wage rises finding that 'authors whose papers report
larger effects of QE on output experience more favorable career outcomes' and that this was inevitable due to a very obvious conflict of interest, that the researchers reported to the very central bank leaders who wanted to implement QE. A good example of this issue is shown by how Fed researchers Seth Carpenter and Michelle Ezer forecasted in 2013 to the FOMC, at a time where theire research was highly influential and massively changed Fed monetary policy, that short term interest rates would be pinned at zero only for 2013, and would reach historically normal levels around the year 2017 and 4.5% at 2018. Yet interest rates remained at 0 till the end of 2016 and half way through 2018 were only at 2%. The researchers predicted the Fed’s balance sheet to in 2013 ‘level off at round $3.5 trillion after the Fed was done buying bonds. After that, the balance sheet would start to shrink, gradually, as the Fed sold off all the assets it bought, falling to under $2 trillion by 2019.’ Yet from 2016 till 2018 the balance sheet was around $4.2 trillion (roughly twice the predicted amount during that period). The researchers also over-predicted inflation for almost all years between 2012 and 2020 and home-loan rates during the same period (which were predicted to hit above 6% but never came close, being only 3.5% in early 2020).
Based on all this, how much confidence can anyone really have in Fed research and policies? The answer is very little. Yet among themselves, Fed officials feel that they are heroes, as shown by how former Chairwoman Yellen congratulated her successor Powell and the Fed on their record 2020 QE policy and the re-installation of ZIRP, following the pandemic, that was according to her 'centered in the shadow banking system' saying 'I think they’re heroic, and I’m really supportive. I’m really impressed by what they did.' It is clear, central bankers now feel it is there job to be the protectors and advocates for the riskiest hedge-funds, private equity firms and corporations making up the shadow banking system, not just the traditional banking system.
Bear in post crisis, the bank presidents who oversaw their banks' lending practices were, as directors of the Fed's reserves, the ones who voted on how trillions of dollars were invested despite a clear conflict of interest. A 2011 Government Accountability Office (GAO) report examined how $16 trillion of the bailouts made by the Fed was decided. It unraveled a shocking scale of conflict of interest showing that whilst the many of the director's owned stock or worked directly for the banks that the Fed supervised, they were not restricted at all in influencing the Fed over how their affiliated banks were supported.
Being wall-street dominated this conflict of interest was particularly notable in New York. For example, Jeffrey Immelt was both chief executive of General Electric and a director on the board of the Federal Reserve Bank of New York when the Fed provided $16 billion in financing to General Electric. Stephen Friedman was chairman of the New York Fed, sat on the Goldman Sachs board of directors and owned Goldman stock (which was permitted by the Fed) when the the New York Fed let Goldman Sachs become a bank holding company to have access to cheap Fed loans. At that time, the GAO report found that Friedman brought more Goldman stock. JP Morgan Chase Chief Executive Jamie Dimon was a member of the board of the New York Fed when the Fed lent in emergency $391 billion to his own bank and $29 billion in financing to acquire Bear Stearns plus extra support, as well as providing JP Morgan Chase many more financial boosts such as an 18-month exemption from risk-based leverage and capital requirements. How surprising is it that all these Fed-connected banks recovered to record record profits at the same time that the average worker was still suffering from real wage decreases in the aftermath of the crisis?
The present and future effects
Only now in 2024 has the Fed risen interest rates to 5.25%, last seen in 2006 before the 08 crisis. Likewise in September 2023 the BofE rose interest rates to 5.25%, while the ECB rose interest rates to 4.5%. Likewise the balance sheets of major central banks like the Fed and BofE have only just begun to fall - I would say 15% at most to the original levels pre-2008 crisis. And yet the stock-markets have kept thriving. What is happening now following normalisation defies logic, as there has been no stock-market crash despite the value of stock market shares being higher than any other time since the dot-com boom, when compared to actual company revenue and that led to a huge nasdaq crash. The strangeness of the modern economy was epitomised by a Bloomberg study in 2020 that analysed three thousand large, publicly traded firms and found a fifth were 'zombies' - which are totally nonsensical financial entities that cannot survive on their own without constant infusions of new credit and whose survival stops investments going elsewhere in new innovative or higher performing companies. Who will be brave enough enough to take on Wall Street and the asset-holding ruling class, after all the Fed has done?
To conclude, over the last decade, worldwide central banks have been run by some of the worst economists in human history, as a tool to essentially profit banks, corporations and hedge funds; to swell global stock-markets to probably well over twice their natural value; to save any flagging and failing financial entity – even by buying corporate junk bonds; all at the cost of the future tax-payers who must suffer losses in ever-day spending power due to belated inflation (maybe even in future-hyper-inflation in a worst case scenario now), a loss in savings, an inevitable depreciation in currency and a trickle-up effect from repeated asset bubble bailouts. Above all it puts the world's economies at jeopardy, as when asset bubbles pop, recession almost always follows hitting the poorest hardest. In fact, let me be even more doomsday-like- it is my view that QE is so harmful to society, that when it is used at the rate its has been this last decade, it is allocatively unjust enough to actually bring capitalism and all modern capitalistic institutions to its knees. I may sound silly in the future, but I predict a cataclysm within the next couple of decades, my lifetime at least– in short, Rome (that is - life as we know it) to burn down. That's why understanding QE and central banks is so important, much more than the media and governments would ever want you to know.
References
[1] The Lords of Easy Money: How the Federal Reserve Broke the American Economy, Cristopher Leonard, 2022
[2]Positive Money, ‘How Quantitive easing works’, https://positivemoney.org/how-money-works/advanced/how-quantitative-easing-works/
[3]The new Economics Foundation, July 2013, Pg 28,’Strategic Quantative Easing’, https://neweconomics.org/uploads/files/e79789e1e31f261e95_ypm6b49z7.pdf
Comments