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Now that Quantitative Easing is going away, what did it do?
By Robert Coutinho
Quantitative Easing (QE) has been used by the Federal Reserve Bank to try to stimulate the economy. It was a controversial program where the Fed bought treasury notes and mortgage backed securities (you know, those toxic assets that the banks had that were going to send them to the poor house?) In total, the Fed bought somewhere around $4.2 trillion in treasuries and mbs. http://www.dailykos.com/story/2014/11/02/1340170/-Quantitative-Easing-and-Wealth-Inequality# has a good breakdown of what went where.
What did it do? Well, according to Allan Greenspan, “Effective demand is dead in the water” and the effort to boost it via bond buying “has not worked.” On the other hand, boosting asset prices has been “a terrific success.” During this time (from about 2008 to now), the economy has been sluggishly moving along. The stimulus did much more than QE appears to have done. Meanwhile, the fiscal restraint on the part of the federal government may have actually been a slight drag on the economy, while at the same time QE was trying to stimulate it.
Now, let me try to explain something that is nearly incomprehensible to a rational person. When the Fed bought up US treasuries, they put them into their balance sheet. The treasuries are bonds that will pay a given interest rate, when redeemed. They are, of course, issued by the US Treasury Department. Meanwhile, the Federal Reserve Bank is a public/private entity. However, all of its profit go to the US Treasury Department. So…we created bonds (borrowed money)…money that the Treasury Department has the sole permission to print…the bonds pay interest from the Treasury Department…which will go to the Federal Reserve Bank…which will give it to: The US Treasury Department.
Try rereading that last sentence about ten or fifteen times until it finally begins to sink in.
Meanwhile, there is really no reason for the Treasury Department to issue bonds, since Congress could (and should) just order the Federal Reserve to credit the account with whatever money it needs in order to buy the goods and services it requires. In addition, the president could just have the Treasury Department print a bunch of platinum coins valued at…anything he wants…and deposit them into the US account at the Federal Reserve.
So: when the Republican Congress decides to shut down the government again over raising the debt ceiling, try to remember this post and congratulate the Republicans on being able to frighten the country over something that should not exist.
Meanwhile: QE did also get the Fed to purchase all the toxic assets that the largest banks were holding. Since the Fed is, more or less, a government agency (at least as far as its assets go), that means that the federal government purchased all those toxic mortgages that the banks could not unload on each other. Now the banks are back to making money hand over fist, they have discarded a bunch of the bad loans they wrote, and they are busy supporting candidates from both major parties. You can’t easily find out how much, because Citzens’ United has allowed them to put that money into shadow agencies. Btw, the private part of the Federal Reserve is that the private banks get to pick who runs the various Federal Reserve Banks (with some input from the President and Congress).
Robert Coutinho is a disabled pharmaceutical chemist living in Massachusetts. He has been learning about life, the universe, and everything since he was born in 1963. He has had little else to do since his disability began in 1997. He has written a fictional novel, Their Last Best Hope, which is currently available at Tate Publishing, internet venues, and bookstores.
graphic via shutterstock.com