Andrew Huszar was hired away from a private investment bank to run the Fed’s first foray into quantitative easing (QEI, in the vernacular). He was reluctant to go, as he had already witnessed the Fed having become Wall Street’s lapdog, causing him to leave in disgust the first time. But he thought that this time, in the midst of the greatest financial calamity since the Great Depression, things might be different. He left in disgust for a second time after QEII proved not quite enough. He should have known, things are never different. Here’s how he begins his impassioned apology:
I can only say: I’m sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed’s first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.
Well, of course the Fed bailed out Wall Street, and for the sake of bailing out Wall Street. Anyone who was paying attention at the time could have easily recognized that. But they did not do so through quantitative easing. Their strategy was far less obtuse than buying mortgage and Treasury bonds on the hope that Wall Street might in general benefit from the gusher of money. Instead, the Fed’s strategy, at least initially, mainly consisted of shoveling cash directly the banker’s way.
In the beginning, the Fed basically agreed to mop up bad loans from bank’s balance sheets so that they might not suffer the hit to their capital accounts that nonperforming loans represent. The banks were paid full value for their crappy assets, while the Fed stored them away, to never see the light of a mark-to-market day. But that was hardly all that the Fed did for the banks. It also infused them with capital outright (the TARP infusions that banks were forced to take whether they needed one or not).
And it gave the banks a route to returned profitability so easy to follow that a monkey could have been at the helm of any TBTF bank and steered them to profitability. The Fed allowed banks to borrow from the discount window at near zero interest rates while also paying interest on reserves left on deposit with them (this, for the first time in its history, at a paltry .25% to be sure, but excess reserves have since ballooned from near zero to roughly $2.4 trillion). The total effect was to make the “borrow short, lend long” banking strategy of making money on the interest spread between long and short obligations a guaranteed winner. It amounted to dirt for filling capital holes. It kept banks that were considered too big to fail from doing so. None of this is news to anyone following the Fed’s actions at the time, or unto today.
But the argument that the program of quantitative easing was intended to benefit the financial system is a harder one to make. Aside from the effects attendant to flooding the economic system with oodles of newly minted dollars every month, quantitative easing brings down the long end of the yield curve, making the banker’s work of playing the spread more difficult, if only just a bit, and as it was so painfully easy already, its main benefit to bankers was probably to relieve them of a bit of boredom and not much else. QE is directly targeted, so far as such a thing is possible, to Main Street. It is intended to bring down real wages by instituting real inflation of the type that won’t also inflate the wage rate.
QE tries to reduce real wages in order to that overall employment expands. It is a strategy espoused by Keynes and followed religiously by central banks around the world, though none will admit as much regarding its intended effects on the wage rate. Ben Bernanke won’t come out and say that QE was and is intended to reduce real wages, but it is. Central bankers just say that it is for the purpose of jump-starting overall economic expansion. Guess what is a necessary prerequisite for economic expansion? Job growth. Guess what keeps the demand for employees lower than their supply? The costs to employ them, of which the real wage rate, somewhat manipulable by the Fed, is sadly only one.
Quantitative easing is intended to engineer a decline in wage rates via inflation in everything but wages, thereby making employees relatively less expensive, enough so that the labor market might then clear. It is specifically directed at Main Street. Its unintended consequence is the inflation of asset bubbles, just as was the case in the aftermath of the 2001 recession when the zero bound of monetary tinkering had not been reached and so “QE” was more easily done, through simple asset purchases enough to get a decline in the Fed Funds rate.
In the early 2000’s, almost all the excess money flowed into residential real estate. Today it flows into every asset class, including residential real estate, stocks, bonds, commercial lending, automobile financing, etc. But in this deflationary demand environment, QE has not been capable of engineering inflation in consumer goods sufficient to render wage rates, which are sticky on the downside (exceptionally so at the minimum wage bound), low enough on a real basis such that labor markets can clear. Unemployment recently ticked up a notch, to 7.3%. Consumer price increases remain well below the Fed’s target range of 2%. The labor participation rate (the ratio of the population that is employed) stands at forty-year lows and is falling with each passing month, i.e., population growth is routinely outpacing employment growth. So none of the QE’s have done what it was hoped they would for Main Street, but they have unintentionally made Wall Street, which takes a cut off of each financial transaction in proportion to asset size, quite a bit better off.
It’s sad that Mr. Huszar didn’t understand this simple and basic tenet of central banker economics—that the point of cyclical monetary policies is to reduce real wages so that the labor market clears. Because the irony of the QE’s is that they are not capable of resolving the employment problem. The employment problem is structural, not cyclical, having to do with international wage arbitrage and the soft costs of hiring a US vs. a foreign worker. While the QE’s have done little to help get Main Street back to work, they have gone far in revivifying the financial system imbalances that led to the financial crisis and Great Recession in the first place. When QE Unto Infinity causes the financial system to again collapse, it will again be Main Street who is called upon for Wall Street’s immediate rescue, while Main Street is still hung over from its first bout of rescues, and still has its structural employment quandaries with which to deal. Keynes was wrong. Structural employment market imbalances are not resolvable solely through domestic monetary tinkering.
And that is the real tragedy, that QE can’t do that for which it is intended, while it can and does impose a great deal of collateral damage, a truth which is unfortunately missed by this former Federal Reserve trader, who has quite an exalted opinion of himself, apologizing to America for executing policies several pay grades above his own. His assumption of responsibility for the nation’s errant monetary policies is something akin to a Nazi concentration camp guard having apologized for the Holocaust. Each situation surely reflects the banality of evil, but in the former case it is evil mostly arising from ineptitude and hubris, and not from some nefarious scheme to enrich Wall Street at Main Street’s expense.
But the piece is worth reading, if only for the revealing portrait of megalomania afflicting the average Wall Street trader that it affords.