If you do a search for “QE” on this blog you’ll find dozens of posts over the past few years. My contention is that QE does nothing for the economy, it’s simply changing the duration of existing liabilities. I’ve actually been more harsh, I’ve argued it has negative consequences. In yesterday’s Wall Street Journal, a former Fed Official in charge of executing a significant piece of the Quantitative Easing program as it relates to mortgage bonds came forward to let the world know the Fed is the biggest enabler of Wall Street in the world. QE has become the “greatest backdoor Wall Street bailout of all time.”
Andrew Huszar begins his column with an apology for his involvement with the program “I’m sorry, America.” What comes next is the the most succinct takedown of the Fed I’ve seen by an insider since the crisis began.
Huszar starts with a simple statement of what he was charged with doing, buying Agency Mortgage Bonds, something that many have argued is not within the Feds mandate (or at least wouldn’t have been prior to the government takeover of Fannie Mae and Freddie Mac).
In its almost 100-year history, the Fed had never bought one mortgage bond.
The main point Huszar is trying to communicate is that though the big banks helped cause the financial crisis, they became the biggest beneficiary of Fed policies while those on Main Street suffered:
More insidiously, whatever credit they were extending wasn’t getting much cheaper. QE may have been driving down the wholesale cost for banks to make loans, but Wall Street was pocketing most of the extra cash.
The Fed essentially becomes a tool of Wall Street (well, even more of a tool):
Now the only obsession seemed to be with the newest survey of financial-market expectations or the latest in-person feedback from Wall Street’s leading bankers and hedge-fund managers.
Trading for the first round of QE ended on March 31, 2010. The final results confirmed that, while there had been only trivial relief for Main Street, the U.S. central bank’s bond purchases had been an absolute coup for Wall Street. The banks hadn’t just benefited from the lower cost of making loans. They’d also enjoyed huge capital gains on the rising values of their securities holdings and fat commissions from brokering most of the Fed’s QE transactions. Wall Street had experienced its most profitable year ever in 2009, and 2010 was starting off in much the same way.
That was when I realized the Fed had lost any remaining ability to think independently from Wall Street. Demoralized, I returned to the private sector.
The Fed’s QE program was bigger than TARP and has made Wall Street more powerful than ever before – “Greed is good” once again:
QE has become the largest financial-markets intervention by any government in world history.
And the impact? Even by the Fed’s sunniest calculations, aggressive QE over five years has generated only a few percentage points of U.S. growth.
Unless you’re Wall Street. Having racked up hundreds of billions of dollars in opaque Fed subsidies, U.S. banks have seen their collective stock price triple since March 2009. The biggest ones have only become more of a cartel: 0.2% of them now control more than 70% of the U.S. bank assets.
But Main Street is not recovering.
Meanwhile, the country remains overly dependent on Wall Street to drive economic growth.
Too big to fail is no longer a policy, it’s an unstated law:
The implication is that the Fed is dutifully compensating for the rest of Washington’s dysfunction. But the Fed is at the center of that dysfunction. Case in point: It has allowed QE to become Wall Street’s new “too big to fail” policy.
This devastating critique from a credible former Fed insider should make you think twice about the current recovery and whether we’ve learned anything at all from the past.
Scott Dauenhauer CFP, AIF, MSFP