Share on Google Plus Share on Twitter Share on Facebook 2 Share on LinkedIn Share on PInterest Share on Fark! Share on Reddit Share on StumbleUpon Tell A Friend 8 (10 Shares)  
Printer Friendly Page Save As Favorite View Favorites View Stats   5 comments

OpEdNews Op Eds

WHAT'S REALLY BEHIND QE2?

By   Follow Me on Twitter     Message Ellen Brown     Permalink
      (Page 1 of 3 pages)
Related Topic(s): ; ; ; ; ; ; ; ; ; , Add Tags Add to My Group(s)

Must Read 3   Well Said 3   News 1  
View Ratings | Rate It

opednews.com Headlined to H2 11/20/10

Author 7471
Become a Fan
  (198 fans)
- Advertisement -
The deficit hawks are circling, hovering over QE2, calling it just another inflationary bank bailout.   But unlike QE1, QE2 is not about saving the banks.   It's about funding the federal deficit without increasing the interest tab, something that may be necessary in this gridlocked political climate just to keep the government functioning.

  On November 15, the Wall Street Journal published an open letter to Fed Chairman Ben Bernanke from 23 noted economists, professors and fund managers, urging him to abandon his new "quantitative easing" policy called QE2.   The letter said:

We believe the Federal Reserve's large-scale asset purchase plan (so-called "quantitative easing") should be reconsidered and discontinued. . . . The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment.

The Pragmatic Capitalist (Cullen Roche) remarked:

Many of the people on this list have been warning about bond vigilantes while also comparing the USA to Greece for several years now.  Of course, they've been terribly wrong and it is entirely due to the fact that they do not understand how the US monetary system works. . . . What's unfortunate is that these are many of our best minds.  These are the people driving the economic bus. 

The deficit hawks say QE is massively inflationary; that it is responsible for soaring commodity prices here and abroad; that QE2 won't work any better than an earlier scheme called QE1, which was less about stimulating the economy than about saving the banks; and that QE has caused the devaluation of the dollar, which is hurting foreign currencies and driving up prices abroad.    

None of these contentions is true, as will be shown.   They arise from a failure either to understand modern monetary mechanics (see links at The Pragmatic Capitalist and here) or to understand QE2, which is a different animal from QE1.   QE2 is not about saving the banks, or devaluing the dollar, or saving the housing market.   It is about saving the government from having to raise taxes or cut programs, and saving Americans from the austerity measures crippling the Irish and the Greeks; and for that, it may well be the most effective tool currently available.   QE2 promotes employment by keeping the government in business.   The government can then work on adding jobs.  

The Looming Threat of a Crippling Debt Service

The federal debt has increased by more than 50% since 2006, due to a collapsed economy and the highly controversial decision to bail out the banks.   By the end of 2009, the debt was up to $12.3 trillion; but the interest paid on it ($383 billion) was actually less than in 2006 ($406 billion), because interest rates had been pushed to extremely low levels.   I nterest now eats up nearly half the government's income tax receipts, which are estimated at $899 billion for FY 2010 .   Of this, $414 billion will go to interest on the federal debt.   If interest rates were to rise just a couple of percentage points, servicing the federal debt would consume over 100% of current income tax receipts, and taxes might have to be doubled.  

- Advertisement -

As for the surging commodity and currency prices abroad, they are not the result of QE.   They are largely the result of the U.S. dollar carry trade, which is the result of pressure to keep interest rates artificially low.   Banks that can borrow at the very low fed funds rate (now 0.2%) can turn around and speculate abroad, reaping much higher returns.  

Interest rates cannot be raised again to reasonable levels until the cost of servicing the federal debt is reduced; and today that can be done most expeditiously through QE2 -- "monetizing" the debt through the Federal Reserve, essentially interest-free.   Alone among the government's creditors, the Fed rebates the interest to the government after deducting its costs.   In 2008, the Fed reported that it rebated 85% of its profits to the government.   The interest rate on the 10-year government bonds the Fed is planning to buy is now 2.66%.   Fifteen percent of 2.66% is the equivalent of a 0.4% interest rate, the best deal in town on long-term bonds.  

A Reluctant Fed Steps Up to the Plate

The Fed was strong-armed into rebating its profits to the government in the 1960s, when Wright Patman, Chairman of the House Banking and Currency Committee, pushed to have the Fed nationalized. According to Congressman Jerry Voorhis in The Strange Case of Richard Milhous Nixon (1973): 

As a direct result of logical and relentless agitation by members of Congress, led by Congressman Wright Patman as well as by other competent monetary experts,   the Federal Reserve began to pay to the U.S. Treasury a considerable part of its earnings from interest on government securities .    This was done without public notice and few people, even today, know that it is being done.  It was done, quite obviously, as acknowledgment that   the Federal Reserve Banks were acting on the one hand as a national bank of issue, creating the nation's money, but on the other hand charging the nation interest on its own credit   -" which no true national bank of issue could conceivably, or with any show of justice, dare to do.

- Advertisement -

Voorhis went on, "But this is only part of the story.  And the less discouraging part, at that.  For where the commercial banks are concerned, there is no such repayment of the people's money."  Commercial banks do not rebate the interest, said Voorhis, although they also ""buy' the bonds with newly created demand deposit entries on their books -" nothing more."

After the 1960s, the policy was to fund government bonds through commercial banks (which could collect interest) rather than through the central bank (which could not).   This was true not just in the U.S. but in other countries, after a quadrupling of oil prices combined with abandonment of the gold standard produced "stagflation" that was erroneously blamed on governments "printing money."  

Consistent with that longstanding policy, Chairman Bernanke initially resisted funding the federal deficit.   In January 2010, he admonished Congress:

Next Page  1  |  2  |  3

 

- Advertisement -

Must Read 3   Well Said 3   News 1  
View Ratings | Rate It

Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling WEB OF DEBT. In THE PUBLIC BANK SOLUTION, her latest book, she explores successful public banking models historically and (more...)
 

Share on Google Plus Submit to Twitter Add this Page to Facebook! Share on LinkedIn Pin It! Add this Page to Fark! Submit to Reddit Submit to Stumble Upon


Go To Commenting

The views expressed in this article are the sole responsibility of the author and do not necessarily reflect those of this website or its editors.

Follow Me on Twitter

Contact AuthorContact Author Contact EditorContact Editor Author PageView Authors' Articles
- Advertisement -

Most Popular Articles by this Author:     (View All Most Popular Articles by this Author)

It's the Derivatives, Stupid! Why Fannie, Freddie and AIG Had to Be Bailed Out

Mysterious Prison Buses in the Desert

LANDMARK DECISION PROMISES MASSIVE RELIEF FOR HOMEOWNERS AND TROUBLE FOR BANKS

Libya: All About Oil, or All About Central Banking?

Borrowing from Peter to Pay Paul: The Wall Street Ponzi Scheme Called Fractional Reserve Banking

"Oops, We Meant $7 TRILLION!" What Hank and Ben Are Up to and How They Plan to Pay for It All