The Fed and Wall Street like to give complicated sounding names to their quackery to make it seem like they are doing something intelligent and good for the economy. Giving the name "quantitative easing,' or QE, is typical of this tendency.
In fact, QE is nothing more complex than printing money out of thin air. The Fed has many responsibilities but among the most important are to:
1. Control the money supply to avoid inflation
2. Maintain low unemployment
The Fed has two primary tools in its tool box. It can create money and it can set the interest rate (the "discount rate') at which their member banks borrow money. Beyond that the Fed has little effective power over the economy. It's like having aspirin and bandaids to cure all ills.
The way the Fed controls the money supply is to buy bonds from their member banks. It sets the discount rate at which it is willing to buy bank bonds. When the economy is heating up too much the Fed sets the discount rate high. This has a dampening effect on the economy. When the economy slows, they lower the discount rate.
When the economy crashed in 2008 the Fed told us the way to stimulate the economy back into good health was to lower the discount rate and buy bonds from their members. Since the member banks own the Fed, this amounted to private banks printing money to give themselves. The Fed established a goal of pumping money into the system. This was the first attempt to stimulate the economy, called QE 1. Since then they had a second round of money printing, QE2. Both of these attempts failed abysmally to change the direction of the economy. This failure should not be surprising to any seasoned economist as it did nothing to address the underlying economic problems we face. Like any fix, one must know what is broken before one can effectively fix it.
But fixing the economy was not on the Fed's mind. What the Fed was trying to do was to save their member banks, banks that had lost trillions due to their insatiable addiction to gambling. And the discount rate set for their member banks was historically low, about one quarter of one percent. The discount rate has a knock on effect for overall market interest rates. When the discount rate lowers, so do the prime and other lending rates. Hence we have seen very low rates in the marketplace. The Fed used the excuse that printing up money would cause banks to lend and thereby support businesses who desperately needed funds. In turn this would cause the economy to right itself. But this excuse was a feeble cover for their primary goal of saving their members from default and bankruptcy.
And what have those banks done with the money? Certainly they have not lent it to those who need it the most. Why? Because in order to lend money regular businesses and people need to be credit worthy. And with demand at historic lows due to the growing unemployment there are simply no businesses and consumers who are credit worthy in these times. Demand is so low it cannot support investment by businesses which require growing demand to purchase their products. And with growing unemployment, consumers are in no shape to borrow.
So what happened to the money? Primarily two things occurred. First, the money drained out of the US to overseas markets, particularly emerging markets, where employment has been growing steadily for two decades. Second, and this is the interesting part, the US government has been in dire need of money to compensate for the massive loss in tax income. Moreover, with interest rates so low, banks could not invest their newly printed money in normal market rate investment instruments. So the US government provided a perfect place. The US decided it would pay between 3 and 4 percent for borrowing and in turn issued bonds on the market at these higher than market rates. Banks jumped on the bandwagon and purchased US Treasuries on a massive scale, often through their foreign counterparts. This was very convenient because it provided the government with the desperately needed cash to keep the nation running. The hidden benefit was also a boon for the banks. Suffering from horrid balance sheets banks needed to make money fast to compensate for losses from the mortgage market and related CDO's (collateralized debt obligations). These latter instruments, such as credit default swaps, were also proving to be an incredible drain upon bank resources and threatened to take down the entire financial system. The estimate of these non-reported and unregulated credit default swaps have stretched from as low as $50 trillion to one quadrillion dollars. No one knows for sure.
So who pays the difference between the low discount rate of .25% and the Treasury rate of 3-4 %? Why the US taxpayer of course! And this difference further goes into the pockets of the banks who otherwise should have failed in 2008 and early 2009. The Fed continued this policy and printed in a two year period about 23 trillion dollars. This amount not only dwarfs the US debt but it makes the mortgage problem of about $2 trillion seem trivial.
All while this was going on the Fed, Wall Street, and their paid shills in the media and government, calmly told US citizens that the reason for the economic downturn was that Freddie Mac and Fannie Mae lent too much money to black people who could not afford to pay their home loans. That's right, they blamed African Americans for the falling apart of their house of cards. It is interesting to note that if this were true, and it's not true, it would be a helluva a good plan for minorities to strike back at a system that has held them down for almost two centuries. But it is just a convenient lie to divert our attention from the man behind the curtain.
Americans have listened to talking heads on Fox, CNN and other propaganda "news outlets' for the past three years telling them all sorts of hogwash. Looking back we have heard such lies as: "The downturn will have a soft landing;" "We are not in a recession;" "The economy is recovering," and other pure tripe. Not once have these high paid so-called experts been correct. Yet we continue to be fed a constant string of lies and phonyism from these folks, all of whom have skin in the game. We have been told that the markets have fallen due to lack of "confidence,' vague references to "uncertainty,' "the US debt problem,' and too many people on the dole. On and on drone the talking heads using this economic catastrophe to promote every far right policy they have for years only dreamed of implementing. And their puppets in Congress and the White House have played along with the music score being conducted by Murdoch, Koch and other oligarchs. The faux press has provided cover for the perps in Washington to carry out the biggest transfer of capital in US history from the bottom 99% to the top 1%. And they have yet to be held accountable.
Throughout this symphony of madness economists on both sides have preached their own fix to the problem. The lefties have said the government must spend, spend, spend, the same way FDR spent to minimize the damage of the Great Depression. On the right the pundits have said, cut spending, cut spending, cut spending. Unfortunately neither of these old school philosophies addresses the real problem and therefore neither will have any effect on the downward spiral of our economy.
The old time solutions cannot address our New World problems. Why those like Krugman and Reich have been able to preach Keynesian solutions and have not been called out for it is simply because Washington will not even attempt to implement Keynesian economics today because of the accelerating trend towards the far right and the inevitable onslaught of the MSN. So Krugman and Reich are given a free pass to sit on the sidelines and throw stones at Washington policies but never have to be held accountable.
Only now are they waking up to the real problem, unemployment. And no amount of government stimulus spending will correct that. Why? Because all that spending will only drain away from the US and go to Asian emerging markets where our goods are now manufactured and where the price of labor is between $2 and $12 per day. Whatever money we spend as consumers will only drain off and benefit communist China and other emerging nations. This is the way our economy has been re-structured over the past thirty years. And it will take another thirty years to undo the damage, if we start today.