The Federal Reserve and Quantitative Easing
Experiences and time have trained me to receive any information or action taken by our federal government with a hefty amount of skepticism. This is especially true as it pertains to macroeconomic management of the U.S. economy, and general fiscal policy. For the vast majority of Americans, following each news headline and press release is simply not feasible. The reports are often times contradictory and designed to immediately grab the audiences attention, no matter the costs nor the factual basis of the data being presented.
The most shocking fact of all the misinformation published or broadcast regarding our nation’s monetary policy is that the Federal Reserve does not operate in the shadows. All of its dealings are published and released weekly for the public to review, yet it is very unlikely many people have the time nor general interest to review the key data points. (https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm)
In order to get a greater perspective of what our nation faces at the moment, we must go back to the last boom-bust cycle from approximately 2004-2008. Some would argue we have to go back to when the U.S. left the gold standard and transitioned to a free-floating fiat currency (https://www.investopedia.com/terms/g/goldstandard.asp). That is an extremely valid argument, since it opens a Pandora’s box into many avenues for manipulating currency to the benefit of a few, at the expense of the many. A very current and ongoing effect of this sort of monetary manipulation can be seen in Argentina (https://www.reuters.com/markets/currencies/argentine-peso-hits-record-low-black-market-economy-creaks-2023-04-20/).
Still, the root causes of our current predicament does not rest in whether or not the U.S. dollar should be tied to gold, nor does it stem purely from poor monetary policy and leadership from the Federal Reserve. The under belly of this Leviathan is much more visceral, and closer to home than most are willing to accept. Let us dive back into the period between 2004 and 2008. That is the one I can relate to most as part of the early millennial generation. The run up in asset pricing, primarily in housing created a wild and unsustainable bubble. I can recall living and studying in South Florida at the time, and folks were driving around in luxury vehicles, purchased not based on income, but on home equity lines of credit.
The banks were more than willing to underwrite these loans. Given the loose banking and financial regulations in our country, they would have been fools to not have taken on the business. I get the feeling that most banks did not set out to willingly deceive consumers, nor did they set out to crash the global economy. They did exactly what any business does, try and make a profit and earn money for their owners (shareholders). As enticing as it would be to rest the blame on the banks, they simply do not hold all of the cards required to make a full deck.
A large portion of the blame rests with consumers. Sure, there are absolute necessities in life; food, clothing, shelter, etc. However, that does not mean we have to always strive for grandeur in every aspect of life, especially as it pertains to material belongings and property (car, home, boats, etc.). I am all for taking a nice vacation, or treating my wife to a nice restaurant, but only if the bank account can reasonably accommodate it. I will never go into debt to finance a trip or a want. That is the classical conundrum of the consumer; needs versus wants or desires.
Yes, this is where the banks and federal government come into the fold. Financial regulations in our country are laughable to say the least. Just taking a peek into the Federal Reserve’s balance sheet clearly indicates how and why banks extend credit to consumers who should otherwise not qualify for it. If we put the financial bailout of 2008 into perspective, it was only a drop in the bucket compared to the fire hose the Federal Reserve and government released beginning in 2020 with the COVID-19 narrative. The official government data indicates approximately $475 billion was used to prop up the companies who facilitated the 2007-2008 financial crisis (https://home.treasury.gov/data/troubled-assets-relief-program). Not including the years of “quantitative easing” as it is called by the Federal Reserve, nearly $5 trillion was created out of thin air starting in March of 2020 and going into roughly the middle of 2022. That raised the Fed’s balance sheet from around $4 trillion to almost $9 trillion. Again, to compare apples to apples, $1 trillion is equal to $1,000 billion.
That is an absurd amount of money to literally be created out of thin air. We are not living in the 70’s, so that money is quite literally not even being brought into circulation in a physical sense, only digitally with the magical stroke of a computer key, or code execution. That is what really scares me. It’s not the government’s never ending pork barrel spending, not extravagant spending by consumers, but who controls and wields the power to create money? From this one power, arises many related challenges and effects. It allows financial institutions to go on with failing and unsustainable business practices because they have come to understand the Central bank will simply create more money to bail them out if they go bust, which in turn allows consumers to finance an unsustainable standard of living fueled by excessive credit. That is insane! What reasonable person or institution can be held in check if there are not any repercussions or consequences to their actions.
Oh, but wait, there are consequences. Now that the cat is out of the hat, the Federal Reserve is having a much more difficult time corralling it back in. In nearly of year of raising interest rates and rolling back easy money policies, it has only been able to off load approximately $500 billion of its balance sheet. The effects of over a decade of easy money has left us worse than we were in 2008. Technology has only multiplied the effect, since even celebrity figures like Elon Musk can rattle markets with a simple Tweet. Like my students in class, if there are no consequences tied to their performance or lack thereof, there is very little incentive to change course. We can correct our past mistakes. With a few large tweaks our financial system can become a better version of itself. If we can rein in our government’s out of control spending, if we can limit the power and scope of the Federal Reserve to create money, if we can place meaningful regulations on our financial industry, and if we come to terms with ourselves as consumers, then I think we have a chance to avoid what ailed Rome in its decadence. Lots of ifs in this formula. The grass roots solution, better educate our children and the next generation to avoid the land mines which are being set today. Even that is a challenge, as connected devices and social media absorb more and more of their attention, the details begin to get blurred and we forget history.
Written by:
1. Ron Stephenson
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