Is QE Socialism For the Rich and Bankers?

DaveFagan said:

USA wages had priced much of USA manufactured goods out of World price ranges. The Oligarchy must drive wages down to keep the same structural manufacturing operation and ownership that they control. The Oligarchy/Banks/Traders/Stock Markets move paper around to generate ever larger profits. These profits are not tied to labor/manufacturing/productive industries, but just paper profits. The massive volume of this wealth is allowing banks/hedge funds/traders to control other Countries and purchase productive assets that use overseas labor and they do this with a "fiat paper" whos' real value is based upon faith. Maybe they can get the Pope to give this faith-based money a little boost with a blessing of the faithful. They's sumpin' slippin' heah, don't ya' know?

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Excellent points. The game is rigged and it has been since the beginning.

QE is basically the sale of high-yield, no-risk bonds at historically low (and artificial) interest rates. Of COURSE it's a giant kickback to the oh-so-punitively-taxed rich.

ttwtt78640 said:

It should also be clear that which party is allegedly running the show does not much matter.

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Agreed. Indeed one will not become President of the United States unless he is willing to sign up to that way of doing things.

Kobie said:

QE is basically the sale of high-yield, no-risk bonds at historically low (and artificial) interest rates. Of COURSE it's a giant kickback to the oh-so-punitively-taxed rich.

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Yep. I certainly appears to be that way. Man, think of it, having a cash cow like the Federal Reserve at your disposal. What a concept.

MildSteel said:

That was the stated intent. However, what makes Fed activity suspect in this instance is that they kept up the activity despite the well known fact that it was doing very little to stimulate bank lending. It therefore begs the question, was the intent solely to prop up the balance sheets of banks?

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"Solely" the intention, no. But it was a listed intention based on how QE1 was to be handled and it ended up being a key reason that banks did not lend it all out. The sobering truth is banks do not lend out reserves they have held as deposits at the Fed gaining interest.

Again, QE by design is about buying problematic assets off the books of the banks as a way to free up capital to lending ratios. So yes, a net effect is cash on hand ("propping up the balance sheet.") Problem is regulations demanded this. You do recall all the "stress tests" the major banks had to agree to back in the 2009, 2010 and to current don't you? The Fed QE1 program helped with that. If things had gone to plan then Congress would have made up the difference by effecting aggregate demand by infrastructure and technology spending. But Congress did a mediocre job at that part so all QE really did was shore up the bank's cash positions and allow the equity markets to go on a historically quick bull market run to the point of a bubble.

If you look at how QE really ended up effecting bank deposits to loan ratios you would see the below graph. The reason the lines were no longer in sync post QE efforts is the difference on what the Fed buys and from whom. When the Fed buys from the banks the exchange is asset off the books to reserves, deposits do not change. When the Fed buys from the public, the banks become the intermediaries of the transaction. "Created currency" that the public receives for selling the asset to the Fed ends up as deposits at the bank (meaning bank deposits rise off those transactions.) QE1 (and arguably all QEs to date since 2008 leaned heavy to bank transactions, meaning a ton of reserves that *do not* end up in the form of cash for the bank to loan out.)

And the real reason that QE was largely ineffective for the 4th through 2nd income quintiles is between Fed action to date and *lack* of government action to date overall aggregate demand for this economy was never addressed. Because the economic model of this recovery has not been all that healthy it is no shock to economists why the banks simply decided to make some money in interest paying less on deposits than they receive on reserves. Which also makes sense as overall QE is designed to keep cash off the sidelines but thanks to confusing economic policy that did not happen so well. We also cannot ignore that any positive interest on excess reserves exists almost exclusively because the banking system by design is forced to hold those reserves and pay the insurance fee for associated deposits. Propping up the banks has to be part of the equation with Fiat Money systems, but does not have to be the sole reason for QE efforts.

In short, you should blame Congress more than we blame the Fed for what ultimately became a wealth based recovery and a race to the bottom 5th income quintile for everyone else. Also, between the Fed and Congress the below was the result.

OrphanSlug said:

"Solely" the intention, no. But it was a listed intention based on how QE1 was to be handled and it ended up being a key reason that banks did not lend it all out. The sobering truth is banks do not lend out reserves they have held as deposits at the Fed gaining interest.

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So again, the question is that if the intention of the Federal Reserve was to stimulate bank lending, then why did they keep doing it when it was obvious that the banks were not doing that, but rather parking the reserves at the Fed as you indicated, and earning interest? One could legitimately conclude that the purpose at the very least, when it became apparent that the strategy was not working, became solely to prop up bank balance sheets in this way and not to stimulate lending.

MildSteel said:

So again, the question is that if the intention of the Federal Reserve was to stimulate bank lending, then why did they keep doing it when it was obvious that the banks were not doing that, but rather parking the reserves at the Fed as you indicated, and earning interest? One could legitimately conclude that the purpose at the very least, when it became apparent that the strategy was not working, became solely to prop up bank balance sheets in this way and not to stimulate lending.

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You are giving the Fed slightly too much credit here. The Fed entirely on their own cannot force lending, but they can encourage it. Our issue for this thread is that effort was submarined by competing economic policy that suggested Banks pass "liquidity" regulations *and* competing Fed policy that relied more on increased reserves over increased currency. This was further compounded by lack of economic action from Congress to effect aggregate demand. Lending itself faced both headwind from competition policy and lack of reason to lend, business models did not suggest going into debt for economic growth which was not there anyway.

It was not quite as sinister as you are making it out to be, but it was at least purposeful in propping up the banks by design. What we cannot forget is how unhealthy the financial system was plagued by a level of "bad debt" taking down institutions that were over 100 years old. The economy was in complete free fall looking for a floor, and we did hear about "run on the bank" concerns. If that had happened the floor would have been much further down. All the Fed really did was exchange "bad debt" for reserves held as deposits, and extension of phantom money in a Fiat Money system such as ours. The point being, stop the bleeding before it took down our entire monetary system.

QE's net effect was slightly different than purpose, but in combination with low interest rates and a lack of economic policy from DC the only plausible outcome was inflated equity markets. We got that, and it explains well why financial stocks themselves are still not too attractive yet every other sector of the market is overbought and well into bubble territory. Or, why wealth won and everyone else raced to the bottom. Aggregate demand was not addressed well enough with the Recovery Act of 2009 (and subsequent spending bills.) Again, aggregate demand cannot be handled exclusively by the Fed dealing with monetary policy.

mildsteel said:

the federal reserve engaged in qe by bailing out the big banks and keeping interest rates low. The fed literally took trillions of dollars in bad debt from the big banks and place it on its books where it sits to this very day. It did not take any debt from ordinary consumers. Not only that, but keeping interest rates low has artificially driven up asset prices, which is where the rich have their wealth. This has resulted in the rich getting richer, while at the same time middle class wages have basically remained stagnant.

Is the fed engaging in socialism for the rich and bankers?

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yes!!!

OrphanSlug said:

It was not quite as sinister as you are making it out to be, but it was at least purposeful in propping up the banks by design. What we cannot forget is how unhealthy the financial system was plagued by a level of "bad debt" taking down institutions that were over 100 years old. The economy was in complete free fall looking for a floor, and we did hear about "run on the bank" concerns. If that had happened the floor would have been much further down. All the Fed really did was exchange "bad debt" for reserves held as deposits, and extension of phantom money in a Fiat Money system such as ours. The point being, stop the bleeding before it took down our entire monetary system.

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The bolded part is right. That "exchange "bad debt for reserves held as deposits" is socialism for bankers. When bankers got in trouble, the Fed stepped in and took the bad debt off of their hands. But when consumers get in trouble, they are told to be responsible and face the consequences of their decisions. Socialism for the bankers and rich, capitalism for the middle class and poor.

MildSteel said:

The bolded part is right. That "exchange "bad debt for reserves held as deposits" is socialism for bankers. When bankers got in trouble, the Fed stepped in and took the bad debt off of their hands. But when consumers get in trouble, they are told to be responsible and face the consequences of their decisions. Socialism for the bankers and rich, capitalism for the middle class and poor.

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Not really. Socialism in the economic sense is about the function of ownership, a government method to organizing both labor under social ownership of the industries.

The Fed is not the government, but rather an independent central bank whom can come up with monetary policy without approval of the President (or any executive department) and they also have no funding appropriated by Congress. The Fed has authority under Congress but not at Congress' micromanagement, which is why the Fed reports to Congress on matters but without seeking approval of future Fed decisions made. Just a back and forth on explanation, or the collision of monetary policy with the politics of economic policy. While not a private owned organization as such, the Fed hardly qualifies as government owned or some function of social ownership. For example, Debt held by the Fed is not Intergovernmental Debt. Another, Assets held at the Fed are not owned by the government. Even though the Treasury is the recipient of most of the Fed's profits, there is stock issuance to member banks (thus profit to member banks.) It is convoluted I know, but it is not socialized in terms of government ownership.

If anything, what has become realized is the Fed is an oligarchical organization protecting wealth.

What *did* become "socialized" was financial institution losses, in the form of bailouts (that some banks did not even want.) In that case, the Treasury was authorized to purchase toxic assets and even put conditions on the banks in the exchange. That was a direct cash infusion into the banks (not reserves from the Fed through QE,) and is a good example of socialized losses when the business model for privatized gains failed for whatever reason. In some cases, there was a stock swap in lieu of the bailout cash. Meaning government ownership stake in these companies. Or, an element of socialized ownership. But, it still was not full on socialism.

The consumer on the other hand was not handled by either Fed actions with QE (any version of,) nor Treasury actions authorized under the Emergency Economic Stabilization Act of 2008 (110th Congress and signed by Bush 43.) Socialism for bankers occurred at the moment they got cash from the Treasury (government,) but that is not quite what the Fed did.

I think your judgement is being clouded by wanting your theory to be true. But in all fairness, you were close.

OrphanSlug said:

What *did* become "socialized" was financial institution losses, in the form of bailouts (that some banks did not even want.) In that case, the Treasury was authorized to purchase toxic assets and even put conditions on the banks in the exchange. That was a direct cash infusion into the banks (not reserves from the Fed through QE,) and is a good example of socialized losses when the business model for privatized gains failed for whatever reason. In some cases, there was a stock swap in lieu of the bailout cash. Meaning government ownership stake in these companies. Or, an element of socialized ownership. But, it still was not full on socialism.

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That's right, it was not full socialism. It was socialism for the rich and bankers and capitalism for the middle class and the poor.

QE has nothing to do with socialism. It is however the wrong answer for the structural problems facing Western economies.