Most of this post appears in the now mostly dormant thread The Significance of Parrots. The Seminal diary is for further comment and correction.
Quantitative easing looks like a cute way to bolster bank balance sheets. As I understand it the Fed uses its Wizard of Oz powers to create money with the touch of a keyboard. With that money it buys financial instruments, anything from Treasuries to CDO junk, from institutions, e.g., banks, which plump up their reserves. The banks can then use the QE cash to buy paper with higher yields, the technical term for which is “free lunch,” or speculate in, say, foreign exchange markets or derivatives.
That’s well and good for banks. It may also, to the extent the additional liquidity seeks return in the equities market, prop up the S&P for a spell. What it won’t necessarily do is lead to further lending, and if it does, it won’t necessarily be in the U.S. — if loans and investments yield higher returns in Outer Mongolia, that’s where they’ll go. The inherent problem with decimating the middle and working classes is that without demand generated from rising wages or transfers, the economy withers. Debt from credit cards and second mortgages can keep up demand for a while, but eventually the consumer taps out. Then what?
So, QE is a sweet deal for the banks, which can trade shite paper for long Treasuries and AAA corporate bonds with higher yield or chase around the globe for ROI. Meanwhile U.S. taxpayers foot the bill and suffer the consequences of monetary resource misallocation on a grand scale. Worse, insta-debt keyboarded by the Fed for its BFF banks leads to howls for austerity to lower deficits amid high unemployment, which, not coincidentally, further weakens labor and puts a big grin on the faces of corporate persons everywhere.
My impression: technocrats like Paul Krugman mean well but neglect a forensic analysis, which might lead to suspicions that dear colleague Helicopter Ben & Co. are running, with varying degrees of enthusiasm, a classy three-card monte otherwise known as regulatory capture. It’s ultimately an e-confidence game — literally. The idea (or rationalization) must be that to instill consumer confidence — look! the 401(k) is growing! change you can believe in! — it’s necessary to kick-start a virtuous cycle of demand and production, albeit at a lower overall level, say, with 7% to 8% unemployment a new normal. It amounts to a monetary version of trickle down economics.
Of course the principal beneficiaries will be the more equal corporate persons, and the devil take the hindmost. You’ve heard of other people’s money; this might be called other people’s austerity. Somebody’s gotta pay, and it ain’t gonna be the banks and like phyla. You can guess where they’re looking for a patsy.