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Is our central bank, the Federal Reserve, trying to help Main Street or Wall Street? On November 11, Andrew Huszar, a former Fed official, charged in the Wall Street Journal that it’s the latter. “I’m sorry, America,” he wrote in an essay dripping with repentance.

He had taken the job of quarterbacking the Fed’s massive bond-purchasing program, called quantitative easing, best known as QE. He was assured it would be “a tool for helping Main Street,” he wrote. But, belatedly, he realized it has been “the greatest backdoor Wall Street bailout of all time.”

While driving short-term interest rates that banks pay down to about zero, the Fed over five years bought $4 trillion of bonds, bringing long-term rates down dramatically, too. Interest rates got so low that bonds and cash became dead money: stocks were the only place to go, and Fed chairman Ben Bernanke admitted that this was one of his motivations. He wanted to drive money out of sleepy instruments and into gamier stocks.

Kelly Cunningham.

Kelly Cunningham.

Stocks have far more than doubled from their lows of early 2009 and are now at record highs. But following the worst downturn since the 1930s Depression, the economy has suffered one of history’s weakest recoveries. Huszar quotes one well-respected economist who says that the $4 trillion spent on quantitative easing has netted a meager 0.25 percent rise in economic output.

Two days after Huszar’s blockbuster column, Janet Yellen, who is almost certain to be named the next head of the Fed, said she favors continuation of quantitative easing. Stocks rejoiced.

But San Diego economists have mixed views. “It’s refreshing to hear someone being honest about it. QE has not helped the country or Main Street,” says Kelly Cunningham, economist for the National University System Institute for Policy Research. In San Diego, the lower interest rates have boosted housing prices (as if they needed boosting). In the first half of this year, the median price of a San Diego home was $400,000 and median family income $72,300. “The housing price is 5.5 times what income is. That doesn’t pencil out.”

Marney Cox.

Marney Cox.

At the peak of the bubble in late 2005, San Diego homes sold for 8 times household incomes. Normal is about 4 in coastal California and 2.5 to 3 in the rest of the country. Cunningham suspects that the local housing price boom has come largely from institutional buyers, often purchasing with cash. The wee folks still have trouble getting a mortgage. “QE created dollars for investors,” not average people, says Cunningham.

Marney Cox, chief economist for San Diego Association of Governments (SANDAG), says that quantitative easing “did stabilize the financial community from its free fall” back in the depths of the recession. Without quantitative easing, “the recession would have been longer and deeper, but it is hard to argue that QE is now stimulating the economy. Take a look at the labor force; you can see the economy is weak.” Corporate profits are high because of the low interest rates and companies’ hesitancy to hire. Those factors also boost stocks while Main Street suffers.

Cox notes that at some point, the Fed will have to start selling that $4 trillion in bonds on its balance sheet. Indeed, the stock market falls every time a Fed official even hints that the central bank will have to slow down its monthly bond purchases. Cleaning up that balance sheet “will create additional havoc in the financial community.”

Todd Buchholz.

Todd Buchholz.

Cox agrees with Cunningham that investors — not average people — are driving up San Diego housing prices. “The price increase will probably be short-lived,” he says.

Huszar’s essay is “a narrow-minded conspiracy theory,” says Ross Starr, professor of economics at the University of California San Diego. He cites the positives: “Bringing interest rates down or keeping them from going up encourages refinancing of existing mortgages and encourages new construction,” he says. And he notes that in the deepest periods of the recession, the Fed was helping the Treasury finance the economy. Because of the recession, the deficit soared and the Treasury had to sell bonds. By keeping interest rates down, the Fed helped stem a flood of Treasury bonds pouring onto the market and driving interest rates up.

But Starr, too, is not convinced how effective the Fed’s program is now. “There should be a doctoral dissertation on the effectiveness of QE3 [the current bond-buying program] once it is completed,” he says.

Former White House director of economic policy Todd Buchholz says, “It is an irresponsible canard to say that Bernanke and the Fed plotted to put money in the hands of Wall Street fat cats and deny money to Main Street.” Quantitative easing succeeded in “shoving money out the door. If you look at the economy today, there are very few healthy sectors. One has been autos and the other housing — both interest-rate sensitive” and beneficiaries of the QE programs. “If neither housing nor autos had come back, we would be in the midst of a great recession. The economy is still pretty feeble.”

Ross Starr.

Ross Starr.

Buchholz, founder of a company with an innovative way to teach mathematics to youngsters, notes that Bernanke’s critics said inflation would roar upward and the dollar plummet scarily — but neither happened. However, he believes that quantitative easing “has overstayed its welcome.” The monthly purchases should be reduced. And, he concedes, “There have been victims of QE — older people on fixed incomes and savers have been punished.”

There is one economically destructive aspect to quantitative easing that Huszar didn’t mention. The big run-up in the stock market, combined with the measly interest rates that lower-income people get on their savings, has exacerbated one of our worst economic problems: the wide wealth and income gap between the top 1 percent and the rest of Americans. From 2009 to 2012, incomes of the top 1 percent grew more than 31 percent while incomes of the other 99 percent grew less than half of 1 percent. The top 1 percent now have almost 40 percent of the nation’s financial wealth. Driving up the stock market helps the upper 10 percent, who own 90 percent of stocks, including 401(k) retirement accounts.

And, paradoxically, it is political liberals, the biggest complainers about income inequality, who are leading the cheers for quantitative easing.

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Comments

Visduh Dec. 4, 2013 @ 8:23 a.m.

Don, while I don't dispute anything you said here, one thing seldom mentioned is just how the Fed could have steered the bucks to Main Street. This sort of monetary stimulus used to work to speed up the mainstream economy, and it isn't working this time. You've criticized "trickle down" economics as a flop, yet that is what I see here. That is, this stimulus should have trickled down to Main Street, and may be doing that to a small degree. But that effect is far too little and too late for a robust recovery, which we may never see. The scary part is that this sort of money supply expansion always creates inflation, and the sheer size of the expansion this time is breathtaking. We may be in for decades of inflation as a result, and those of us of a certain age can recall the late 70's and early 80's only with a twinge in the gut. That inflation was corrosive, and coincided with the start of the contraction of real wages in the US that continues to this day. We will live with the effects of this "easing" for a long, long time.

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Don Bauder Dec. 4, 2013 @ 9:47 a.m.

Visduh: Wise observations. Trickle down economics has never worked, yet we keep employing it because those in the upper 1% have so much clout in Congress and at the Federal Reserve.

We may have 10 to 20 years of very slight growth, with the Fed continuing to destroy its balance sheet by buying paper of dubious value. Wall Street has learned to love a very slow-growth economy. And Wall Street usually gets what it wants.

Besides, the Fed is telling the banks to be cautious loaning out money. If the banks made bundles of loans to consumers and small businesses, inflation would shoot up. Best, Don Bauder

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alnc Dec. 4, 2013 @ 2:01 p.m.

The fed's policy of QE is effectively a tax on people with money in savings accounts, cds, and t-bonds. They get next to nothing while the Fed manipulates the bond market for Wall Street.

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Don Bauder Dec. 4, 2013 @ 7:24 p.m.

alnc: Of course. QE is at heart a soak the poor and enrich the rich policy. Best, Don Bauder

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Visduh Dec. 5, 2013 @ 7:59 a.m.

I'm still unclear on this policy. The economists are generally arrayed against it, it hurts the people who vote (senior citizens especially, and they do vote in massive numbers) while making the rich richer. The job market isn't recovering enough to get anywhere near to what we once thought of as full employment, and everyone is complaining. Yet it goes on. Howcum?

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Don Bauder Dec. 5, 2013 @ 8:38 a.m.

Visduh: The scariest thing of all is that the massive easing by the Fed and by central banks all over the world comes from a fear of depression/deflation. And that could be the reason. Bernanke admitted that one reason for the QE program is to boost consumer mood and therefore spending. However, that is a phony: Bernanke knows full well that QE jacks up the stock market and boosts the upper 10%, which controls 90% of stock wealth. A rising tide lifts all yachts...but it sinks the poor folks' rowboats because of measly returns on savings accounts.

Another reason for QE is that with fiscal policy completely stalemated, the only way out of the mess is to have the Fed carry the burden.

Easy money is an addiction, requiring more and more substance to move the needle. That's why economists believe we have to get off the stuff. But we don't seem to be able to do it. We won't break the addiction under Yellen. Best, Don Bauder

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ImJustABill Dec. 5, 2013 @ 9:06 a.m.

Correlation does not equal cause.

But I think positive correlation of certain numbers to strong economies has been used to rationalize many policies which end up shifting money to one well-connected group or another.

A is correlated to strong economic results which is good for B. Therefore we should give money (usually in the form of artificially low interest rates) to help B.

Here's some examples of what that flawed reasoning has led to:

Strong housing sales and rising real estate values are correlated with a strong economy. Therefore the gov't should lower mortgage interest rates which will improve housing sales and increase real estate values. (Long term result: housing crash)

Strong Stock Market indices are correlated with a strong economy. Therefore the gov't should reduce regulation preventing risky trading, then bail out any large Wall St firms which are failing as a result of risky trading. (Long term result: unemployment still high, Wall Street indices at record highs).

Many more examples exist. But I think it's this type of flawed reasoning that has led to many bad policies. A is correlated with B, therefore let's do everything we can to improve A so we can help B. Usually doesn't work. If you want to help B, help B, not A.

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Don Bauder Dec. 5, 2013 @ 11:03 a.m.

ImJustABill: Good analysis. That's what the absurd trickle down economics is all about. The rich get richer and will share those riches with the middle class and poor. But the result is exactly the opposite. The rich try to get even richer at the expense of the poor and middle class. Best, Don Bauder

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ImJustABill Dec. 6, 2013 @ 1:07 p.m.

Ah yes. A prosperous upper class is correlated to a strong economy. A strong economy is good for the lower classes. Therefore, we should make sure the upper class prospers in order to help the lower classes.

God is love. Love is blind. Stevie Wonder is blind. Therefore, Stevie Wonder is God.

Syllogisms are great - the logic sounds good for a half-second until you realize how a correlation or connection is sold as being causation.

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Don Bauder Dec. 6, 2013 @ 3:56 p.m.

ImJustABill: A variation: Love is blind and marriage is an eye opener. Your analysis is right on the money, and you would be surprised how many economists use syllogisms that begin with a faulty premise and therefore end with a faulty conclusion.

You see similar thinking in sports. So-called experts will say that X is a better quarterback than Y because X's team won a Super Bowl. But many other players are involved. The outcome doesn't just ride on the quarterback. Best, Don Bauder

1

ImJustABill Dec. 7, 2013 @ 6:47 a.m.

Eli Manning comes to mind as a QB who is considered to be a future Hall-of-Famer because of 2 SB's despite a fairly mediocre career QB rating.

Of course, as a Charger fan I may be biassed.

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Don Bauder Dec. 7, 2013 @ 9:35 a.m.

ImJustABill: Eli Manning did not want to join the Chargers, who drafted him anyway and traded his rights to the Giants. Most think the Chargers got the best of that deal. Best, Don Bauder

1

Burwell Dec. 7, 2013 @ 11:56 a.m.

The reason why the U.S. economy is bad is because manufacturing has gone offshore. The reason why 60,000 former Marines in San Diego County have disability claims pending with the VA, although most never saw combat or were not injured in combat, is because they cannot find jobs in manufacturing and there are no other jobs for them. If they are going to be unemployed they might as well be unemployed living on disability in San Diego rather than Ohio. The collapse of manufacturing is bankrupting America because imported products cost the government far more in lost tax revenue and social service costs than such products save the consumer in lower prices.

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ImJustABill Dec. 7, 2013 @ 7:52 p.m.

Absolutely. I think there's getting to be a gap in jobs skills-wise. You have jobs which are more or less unskilled and jobs that need advanced degrees - with fewer jobs in between available. Middle class jobs are less common now.

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