Quantitative Easing and the Left's Relationship to the Rich and to Large Corporations

The Left spends a lot of time railing against the rich and large corporations.  But in practice, they seem hell-bent on lining the pockets of exactly these groups.  Today the ECB announces a one trillion plus euro government buyback of public and private securities.

Between Japan, the US, and now Europe, the world's central banks are printing money like crazy to inflate securities values around the world -- debt securities directly by buying them but indirectly a lot of the money spills over into stocks as well.  This has been a huge windfall for people whose income mostly comes from capital gains (i.e. rich people) and institutions that have access to bond and equity markets (i.e. large corporations).  You can see the effects in the skyrocketing income inequality numbers over the last 6 years.  On the other end, as a small business person, you sure can't see any difference in my access or cost of capital.  It is still just as impossible to get a cash flow loan as it always was.

  • J_W_W

    Yep, this is why Occupy and the Tea Party have exactly the same view of Wall Street. Both parties are selling us out. The Dems are just better at posturing that they are for the little guy. But the Reps do posture that they are for Main Street as well.

    Part of me really wants to see a bloodbath for both parties fueled by the fact that they constantly bail out Wall Street with our money.

    During the crash, I really really wanted bankers to have their lives ruined as the price for ruining the economy for everyone. But they got million dollar bonuses because "what would we do without them".

    When I worked in manufacturing, if a worker caused the destruction of millions of dollars of material they would be fired IMMEDIATELY. The assholes selling mortgage derivatives destroyed BILLIONS of dollars and were given bonuses. IMHO everyone who bought, sold, conceived of and utilized mortgage backed securities should be in JAIL.

  • Trevor

    The banks and traders trading mortgage derivatives were really just responding to the incentives put into place and to the implicit promise that the Federal Reserve would ride again to the rescue (see Greenspan Put). Therefore, I don't really blame the banks for responding to the incentives put into place. It'll be the same if bonds in the oil and gas sector blow up; the banks will be less to blame as they were just seeking a higher yield in a market starved for yield due to artificially low interest rates. How do you blame market participants for responding to price incentives?

    Ultimately, the blame needs to be pinned on the central bankers and politicians....and us. As voters we put up with the manipulation of our money supply by the Federal Reserve.

  • TruthisaPeskyThing

    I agree that the Left does make the rich richer. Because the Left believe that government programs will solve problems. The rich are glad to partner with the government to implement those programs and design those programs to help the rich get richer -- see Warren Buffet. And yes, the actions of central banks have made the rich richer; however, the actions of central banks are not the actions of the Left. Even if the Left controls the administration, they do not control the central bank. The Central Bank operates independently of the Administration.

  • stanbrown

    Wall Street either recklessly or intentionally created products that were fraudulently marketed. The mortgage backed securities were sold as being basically zero risk products. They weren't.

  • Matthew Slyfield

    1. Before the sub-prime mortgage bubble even started, bank regulators in the US created a rule that investments that the regulators didn't consider risk free wouldn't count in full towards a bank's reserve requirement. Mortgage backed securities were one of a very small number of investment products on that list.
    2. Prior to 1, mortgage backed securities were very low risk because they only contained prime mortgages.
    3. In order to meet the increased demand for mortgage backed securities the issuers of mortgage backed securities were forced to include sub-prime mortgages, which is where all the risk came from.

  • Carl

    Are you happy with the effects of the alternative approach of disinflation and deflation previously followed by the ECB and BOJ?

  • marque2

    Well also if you didn't do subprime loans, there would a lawsuit by a group like Acorn, which was essentially paid for by the government, because your bank discriminated against minorities. A lot of banks gave up giving good loans at that point.

  • Trevor

    Maybe, but this is also like saying Ford or GM "recklessly or intentionally" created vehicles that are dangerous. For-profits entities are rarely in the business of running scams, especially entities as well established as Wall Street banks. For me, it's much more plausible to think that Wall Street was simply responding to incentives (albeit misguided) rather than intentionally trying to run a scam.

  • Harry

    Nothing beats a hangover more than a little hair of the dog. My apologies to Coyote for any slur against canines.

  • Canvasback

    I do some independent carpentry for a garden variety Democrat. Pro-union, pro-ACA, pro-all things bureaucrat. In public. At home things are different. The kids went to private school., They hire illegals off the street corner for labor, and they want me to manage and finance the work the illegals are doing. It's crazy. They always pay my bill, but their personal economy is more like Standard Oil or Peabody Coal. As a redneck, I prefer the Republican style of hypocrisy.

  • chembot

    I've always wondered why deflation is considered the evil of evils and yet a policy of permanent debasement of a currency is acceptable as long as it is managed (poorly) at the arbitrary low level of 2%. It is certainly good for governments which finance half their annual budget and need inflation to prevent the fisc from completely collapsing into a black hole, but as for everyone else? I'm not so convinced. Historically speaking, we can count numerous cases of mismanagement leading to hyperinflation and misery for all. As for hyperdeflation crushing the souls of the masses? Nary an example exists.

    As for the current situation, is it really fair that retirees or near retirees have to invest their life savings into junk bonds with a side of greek debt and detroit munis just to get a decent return on their money? Is it fair that those who chose not to participate in the housing bubble and other fiscal irresponsibilities pay the price in their fisc for some person who got burned on flipping their house to get a better mortgage deal now?

  • marque2

    Under normal circumstances mild deflation or inflation are OK and balance out. However over the last 50 years first world countries have supported a policy of slight inflation, and encouraged populations to do massive borrowing. I personally have $550,000 in debt. If we knew the world experiences both inflation and deflation, we would rationally act accordingly and hold less debt, purchase smaller houses, and even big houses would not be valued as highly. However, since we all experience inflation only and the government encourages borrowing, esp for housing, we all have massive mounts of debt. (I know I am repeating myself) This means if you have say 10 years of 2% deflation, your debt level will stay about the same, but in all probability your salary will remain stagnant or decline, after awhile it would become impossible for many of us to pay back our debts.

    So the short answer is. We avoid deflation, to protect the banks.

  • Elam Bend

    Absolutely. The knock-on effect is that it protects other asset holders (including home owners).

  • http://itsaboutliberty.com/index.php MNHawk

    The alternative approach rewards savers, at the expense of debtors. It rewards the right people.

    BUT

    I can see how that might hurt the economy as a whole, as the economy of the whole runs on debt. It's a two edge sword, no doubt about it.

  • Todd Ramsey

    Warren, do you read Scott Sumner's "The Money Illusion" blog? He makes a good case for these huge central bank interventions. He appears to be a libertarian, so I don't believe he has a bias toward big government. You seem to always consider all sides of an issue, so I think you might appreciate Sumner's perspective. P.S. Love your blog.

  • Zeev Kidron

    I'm having a hard time, maybe because I'm not an economist with 2 PhDs understanding some facts:

    1. Most Government (first world, supposedly low risk) bonds are at or very near negative NOMINAL yields.
    2. People/institutions keep buying these bonds, obviously having the cash in the bank to do so.
    3. Now the ECB will join the FED and start buying them, lowering yields even more.

    So, what does it say about people/institutions with a lot of cash in the bank? I see only 3 possible explanations:

    1. People stocked up on instruments the ECB will soon start buying. Buy cheap, sell high, get rich on everybody's expense. Why work for a living?
    2. Expectations of higher inflation coming such that cash in the bank will be worth less that a negative yield instrument.
    3. Expectations of massive bank failures, cash in the bank won't be there when I'll ask for it.

    Please explain why I'm wrong or what I'm not seeing?

    In any case, I fail to see how under these circumstances the ECB QE will stimulate anything but the very rich financial sector.

  • http://devilish-details.blogspot.com/ mesaeconoguy

    Bullshit.

    MBS were rated AAA by the government-cartel ratings agencies, because government had incentivized them, and implicitly backed them with the full faith and credit of the federal government. The banks had nothing whatsoever to do with that.

    That did, however, incentivize banks to create even more of these things, and spinoffs into subprime.

    Please do attempt at least minimal understanding of the subject matter before hurling ignorant accusations. Thanks.

  • mesocyclone

    The bankers and credit rating agencies gave wrong (fraudulent) information about the risks in their mortgage investments, which was the penultimate cause of the crash. The government certainly set up wrong incentives, but there's blame to go around past them. I too wish that a bunch of bankers were now in jail. More importantly, I wish all the too-big-to-fail institutions had been broken up into small-enough-to-fail institutions, with the stockholders paying the piper.

  • Lorenzo from Oz

    Scott Sumner's blog is great. Though he regards QE as a very second-best policy.

  • Me too

    As a painting contractor I have experienced the same thing