I think I see an inverse correlation here and a new econometric model that can be employed by Fed economists. $45 trillion in money stock here we come.
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.
Five years ago this
month, on Black Friday, the Fed launched an unprecedented shopping
spree. By that point in the financial crisis, Congress had already
passed legislation, the Troubled Asset Relief Program, to halt the U.S.
banking system's free fall. Beyond Wall Street, though, the economic
pain was still soaring. In the last three months of 2008 alone, almost
two million Americans would lose their jobs.
The
Fed said it wanted to help—through a new program of massive bond
purchases. There were secondary goals, but Chairman Ben Bernanke made
clear that the Fed's central motivation was to "affect credit conditions
for households and businesses": to drive down the cost of credit so
that more Americans hurting from the tanking economy could use it to
weather the downturn. For this reason, he originally called the
initiative "credit easing."
My part of
the story began a few months later. Having been at the Fed for seven
years, until early 2008, I was working on Wall Street in spring 2009
when I got an unexpected phone call. Would I come back to work on the
Fed's trading floor? The job: managing what was at the heart of QE's
bond-buying spree—a wild attempt to buy $1.25 trillion in mortgage bonds
in 12 months. Incredibly, the Fed was calling to ask if I wanted to
quarterback the largest economic stimulus in U.S. history.
This was a dream job, but I
hesitated. And it wasn't just nervousness about taking on such
responsibility. I had left the Fed out of frustration, having witnessed
the institution deferring more and more to Wall Street. Independence is
at the heart of any central bank's credibility, and I had come to
believe that the Fed's independence was eroding. Senior Fed officials,
though, were publicly acknowledging mistakes and several of those
officials emphasized to me how committed they were to a major Wall
Street revamp. I could also see that they desperately needed
reinforcements. I took a leap of faith.
In
its almost 100-year history, the Fed had never bought one mortgage
bond. Now my program was buying so many each day through active,
unscripted trading that we constantly risked driving bond prices too
high and crashing global confidence in key financial markets. We were
working feverishly to preserve the impression that the Fed knew what it
was doing.
It wasn't long before my old
doubts resurfaced. Despite the Fed's rhetoric, my program wasn't helping
to make credit any more accessible for the average American. The banks
were only issuing fewer and fewer loans. 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.
From
the trenches, several other Fed managers also began voicing the concern
that QE wasn't working as planned. Our warnings fell on deaf ears. In
the past, Fed leaders—even if they ultimately erred—would have worried
obsessively about the costs versus the benefits of any major initiative.
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. Sorry, U.S. taxpayer.
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.
You'd
think the Fed would have finally stopped to question the wisdom of QE.
Think again. Only a few months later—after a 14% drop in the U.S. stock
market and renewed weakening in the banking sector—the Fed announced a
new round of bond buying: QE2. Germany's finance minister,
Wolfgang Schäuble,
immediately called the decision "clueless."
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.
Where are we today? The Fed
keeps buying roughly $85 billion in bonds a month, chronically delaying
so much as a minor QE taper. Over five years, its bond purchases have
come to more than $4 trillion. Amazingly, in a supposedly free-market
nation, 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. By
contrast, experts outside the Fed, such as
Mohammed El Erian
at the Pimco investment firm, suggest that the Fed may have
created and spent over $4 trillion for a total return of as little as
0.25% of GDP (i.e., a mere $40 billion bump in U.S. economic output).
Both of those estimates indicate that QE isn't really working.
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.
As
for the rest of America, good luck. Because QE was relentlessly pumping
money into the financial markets during the past five years, it killed
the urgency for Washington to confront a real crisis: that of a
structurally unsound U.S. economy. Yes, those financial markets have
rallied spectacularly, breathing much-needed life back into 401(k)s, but
for how long? Experts like
Larry Fink
at the BlackRock investment firm are suggesting that conditions
are again "bubble-like." Meanwhile, the country remains overly dependent
on Wall Street to drive economic growth.
Even
when acknowledging QE's shortcomings, Chairman Bernanke argues that
some action by the Fed is better than none (a position that his likely
successor, Fed Vice Chairwoman
Janet Yellen,
also embraces). 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.
Mr. Huszar,
a senior fellow at Rutgers Business School, is a former Morgan
Stanley managing director. In 2009-10, he managed the Federal Reserve's
$1.25 trillion agency mortgage-backed security purchase program.