Unwinding QE Might Hurt the Economy
Obama's Quantitative Easing helped stocks but not the overall economy. Ending it means...
Thanks in large part to the Trump administration’s deregulation efforts, and the tax package passed by Congress last month, it appears real growth has returned to the American economy. The headline unemployment rate is at 4.1% (the fuller measure is 8%) and last week, the number of Americans filing for unemployment benefits fell to its lowest level in nearly 45 years. Many companies have announced they would offer bonuses and wage increases, and it’s possible the U.S. will achieve an annualized growth rate above 3% for the first time in over a decade. Yet it is also possible the past may come back to haunt us — and the Federal Reserve will be the proverbial ghost in the machine.
After the 2008 financial meltdown nearly blew up the world’s financial system, former Federal Reserve chairman Ben Bernanke implemented a program known as Quantitative Easing (QE). In short, the Fed printed money and bought up billions of dollars of mortgage-backed securities and longer-term Treasury securities, a.k.a. “bad paper.” This buying occurred on a monthly basis in three separate rounds of QE over five years.
Bernanke combined QE with a zero interest rate policy (ZIRP). Both polices were based on the Keynesian-based economic theory that an artificial and massive “stimulus” program was necessary to jumpstart a moribund economy that couldn’t recover on its own.
Bernanke was half right, as the stock market skyrocketed. Yet the other half of his vision, that this so-called “wealth effect” would invigorate the “Main Street” economy, never happened. Wages remained flat, and Barack Obama became the only president in history who failed to deliver a single year of 3% or greater economic growth.
Moreover, ZIRP amounted to one of the more pernicious “taxes” ever imposed on responsible Americans, who had no desire to take their hard-earned savings and gamble them in the stock markets. That’s because for more than seven years, ZIRP pushed down the yields on traditional interest-bearing assets such as CDs, money markets and saving accounts to historic lows.
Yet ZIRP’s perniciousness pales in comparison to the economy-wrecking possibilities that QE might precipitate. The Fed spent $3.7 trillion during the three rounds of QE, and by last April, the Fed’s balance sheet had risen to $4.52 trillion. As columnist Jeff Cox explained, “The stock and bond markets have come to depend on the Fed’s programs — both the low interest rates and the balance sheet expansion — in the post-crisis years.”
Now that the economy is ostensibly in recovery, the consequences of that dependency must be addressed, and the Fed’s experiment — the largest stimulus program in the history of the world — must be “unwound.”
The Wall Street Journal poses the ultimate question in that regard: “But if QE lifted stocks as it expanded, will the reverse happen as it unwinds?”
The Journal editorial continues, “It’s certainly possible, and students of financial history know that sooner or later rising interest rates will weigh on stock prices. This is another way of saying that the biggest threat to growth and financial markets — Donald Trump’s trade agenda or a Speaker Pelosi aside — may be the Federal Reserve as it reverses Mr. Bernanke’s experiment. Mr. Bernanke has already taken a half dozen victory laps, but they’ll have been premature if the unwinding leads to asset selloffs that create financial disruption and a recession.”
That’s a nice way of saying Bernanke — exactly like our political class in both parties — has been “kicking the can down the road.” In fact, QE, coupled with the Obama administration’s ineffectual “shovel ready” stimulus package, and its trillions of dollars in deficit spending that also failed to jumpstart the economy, increased the national debt by $6 trillion during that period.
While the extra debt was being accumulated, Bernanke and the Obama administration used ZIRP to justify the binge, because they were borrowing “cheap money” to underwrite it, and because ZIRP also kept down the interest payments on the existing national debt, making that borrowing more attractive.
In 2011, columnist Mark W. Hendrickson eviscerated this circular reasoning, explaining, “ZIRP is bailing out our bankrupt government at savers’ expense.”
And while the WSJ is concerned with stock prices, rising interest rates precipitated by QE unwinding won’t just “weigh” on them. In FY2017, the nation paid $266 billion to service our existing debt. The Congressional Budget Office (CBO) estimates debt service payments will triple by 2027 — costing the nation more than the entire defense budget.
Moreover, the binging continues. In the last four months, the national debt increased from $20 trillion to just under $20.7 trillion.
The supposed band-aid for all of it? Increased growth. As the Journal notes, business sentiment “is as bullish as we can recall. Business Roundtable chief Jamie Dimon, also CEO of J.P. Morgan, captured the mood last week when he said ‘animal spirits’ have been unleashed.”
Perhaps they have. But many of these people were the same ones who aided and abetted the unleashing of animal spirits in the housing market prior to the 2008 meltdown. The same people who received $700 billion in TARP funds to save the financial system they crashed — including $25 billion to J.P. Morgan — without a single resignation demanded in return. The same people, as it took a Freedom of Information Act filed by Bloomberg News to discover, whose institutions received more than $7.7 trillion in undisclosed loans — from the Federal Reserve.
These machinations institutionalized “too big to fail,” a noxious concept that may explain why younger Americans are attracted to socialism. A genuine capitalist system punishes incompetence, allowing new entities to replace those that failed.
What we got instead? Andrew Huszar, who personally participated in the Fed’s massive buying scheme, minced no words. “The central bank continues to spin QE as a tool for helping Main Street,” Huszar wrote in 2013. “But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.”
Will the Great Recession, or worse, repeat itself? Absent what would amount to a paradigm shift in congressional spending habits, which, if truth be told, would necessitate a paradigm shift in the American public’s schizophrenic mindset — the one that simultaneously demands fiscal responsibility and an ever increasing cradle-to-grave welfare state — the answer is no. And it doesn’t matter whether a decided lack of statesmanship engenders a decided lack of self-reliance and personal responsibility, or whether it’s the other way around. We are a nation seemingly more comfortable lurching from crisis to crisis rather than finding ways to avoid them altogether — or even hold the people who created them accountable. Yet as economist Herb Stein once stated, “If something cannot go on forever, it will stop.”
America is still kicking the can down the road — but we’re running out of road.