Headquarters of the Federal Reserve in Washington, D.C. Image: AgnosticPreachersKid/CC-BY-SA-3.0
An operative apologizes because the Federal Reserve’s bond-buying programs exclusively help Wall Street
It was a sensational apology that Andrew Huszar published last Tuesday in a Wall Street Journal op-ed. He served as a Federal Reserve official from 2010 to 2011 for the execution of a core piece of the Fed’s first bond-buying experiment ("Quantitative Easing"), which is known as quantitative easing ("QE") is well known: "All I can say is, I’m sorry, America!"
Because while the central bank continued to sell QE as a tool to help Main Street, he had discovered what it was really about:
I’m sorry, America. But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.
Now it’s not news that the Fed’s purchase program, which has increased the Fed’s balance sheet from about $900 billion to $3.85 trillion from 2008 to the present and continues to increase by $85 billion every month, has provided considerably more gross benefits to the financial markets than to the real economy. What is new, however, is that now, for the first time, a manager involved in the matter has dared to say openly what has so far been stated with such clarity mainly in critical blogs:
Contrary to Fed rhetoric, my program has not made it easier for average Americans to access credit; rather, banks have extended less and less credit. (…) Whatever credit was ied didn’t get much cheaper either. As a result, while the program lowered banks’ funding costs, Wall Street took the lion’s share, also raking in large capital gains on its securities holdings and fat commissions on the settlement of QE transactions, allowing Wall Street to post the highest profits in its history in 2009.
Huzar says he left the Fed in 2008 after six years because he was frustrated by the ever-increasing caving in to Wall Street that he was seeing there. Consequently, he had hesitated when, after landing at the Wall Street investment bank Morgan Stanley, he was offered by the Fed the "Dream Job" was offered, namely to operationalize the $1.25 trillion first QE program.
However, high Fed officials had openly admitted their mistakes and committed themselves to him to a far-reaching reform of Wall Street, desperately needing reinforcement. After the Fed, mindful of its century-long history, had not bought a single real estate bond until then, its program was now supposed to take in such rough amounts of them every day that there had always been a danger of driving prices too far up and crashing global confidence in key financial markets. "We have therefore worked feverishly to maintain the impression that the Fed knew what it was doing."
"Fed’s only obsession is latest financial market expectations"
Although, according to Huszar, the first program had already been unsuccessful, all warnings fell on deaf ears:
Previously, Fed leadership had obsessively weighed the benefits of each major initiative against the drawbacks. Now, the Fed’s only obsession lay with the latest financial market expectations or the latest personal feedback from leading Wall Street bankers or hedge fund managers.
So instead of questioning the wisdom of QE, a year later it only took a 14 percent drop on Wall Street to launch the next program, which led Huszard to conclude that the Fed was "had lost any remaining ability to act independently of Wall Street." Demoralized, he left the Fed and became an economics professor at Rutgers Business School.
Although Huszar refrains from addressing the global dislocations that the QE programs have caused, especially in the "emerging markets" the failure of the program is evident today. And while even the Fed credits the QE programs with only a few percent in additional economic growth, private analysts like Mohammed El Erian of the world’s largest bond trader Pimco come up with just 0.25 percent of U.S. GDP, according to Huszar: "Thus, the nearly four trillion in bond purchases have brought just $40 billion in real economic growth."
But because QE has pumped unrestrained money into the financial markets for five years now, the U.S. government has been spared having to worry about the "Structurally Unhealthy" US economy to woe. While the spectacular rally in the financial markets has breathed life back into private pension plans, Huszar wonders how much longer, given that financial bubbles are already back in place and economic growth remains overwhelmingly dependent on Wall Street.
QE became the new "too big to fail"-Wall Street policy
Even if he admits the weaknesses of the QE programs, Fed Chairman Bernanke argues today that they were still better than doing nothing at all. In this, his likely successor Janet Yellen agrees with him.
Accordingly, the Fed was only doing its duty and, moreover "the utmost to compensate for the dysfunctionality of the rest of Washington". According to Huszard, however, it is the Fed that is at the center of this dysfunctionality, because it has made Wall Street dependent on these liquidity boosts and allowed quantitative easing to become Wall Street’s new "too big to fail"-become the new policy of Wall Street.