Does Quantitative Easing Benefit the 99% or the 1%?

Forget Competing Theories … What Do the Facts Say about Quantitative Easing?

Paul Krugman says that QE, expansive monetary policy and inflation help the little guy (the 99%) and hurt the big banks (the 1%).

Of course, followers of the Austrian school of economics dispute this argument – and say that it is only the big boys who benefit from easy money.

As hedge fund manager Mark Spitznagel argues in the Wall Street Journal, in an article entitled “How the Fed Favors The 1%”:

The relentless expansion of credit by the Fed creates artificial disparities based on political privilege and economic power. [We have repeatedly pointed out that Fed policy increases inequality.]David Hume, the 18th-century Scottish philosopher, pointed out that when money is inserted into the economy (from a government printing press or, as in Hume’s time, the importation of gold and silver), it is not distributed evenly but “confined to the coffers of a few persons, who immediately seek to employ it to advantage.”

In the 20th century, the economists of the Austrian school built upon this fact as their central monetary tenet. Ludwig von Mises and his students demonstrated how an increase in money supply is beneficial to those who get it first and is detrimental to those who get it last. Monetary inflation is a process, not a static effect. To think of it only in terms of aggregate price levels (which is all Fed Chairman Ben Bernanke seems capable of) is to ignore this pernicious process and the imbalance and economic dislocation that it creates.

As Mises protégé Murray Rothbard explained, monetary inflation is akin to counterfeiting, which necessitates that some benefit and others don’t. After all, if everyone counterfeited in proportion to their wealth, there would be no real economic benefit to anyone. [Remember, even Keynes himself - and Ben Bernanake - said that inflation is a stealth tax.] Similarly, the expansion of credit is uneven in the economy, which results in wealth redistribution. To borrow a visual from another Mises student, Friedrich von Hayek, the Fed’s money creation does not flow evenly like water into a tank, but rather oozes like honey into a saucer, dolloping one area first and only then very slowly dribbling to the rest.

The Fed doesn’t expand the money supply by uniformly dropping cash from helicopters over the hapless masses. Rather, it directs capital transfers to the largest banks (whether by overpaying them for their financial assets or by lending to them on the cheap), minimizes their borrowing costs, and lowers their reserve requirements. All of these actions result in immediate handouts to the financial elite first, with the hope that they will subsequently unleash this fresh capital onto the unsuspecting markets, raising demand and prices wherever they do.”

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The Fed is transferring immense wealth from the middle class to the most affluent, from the least privileged to the most privileged. This coercive redistribution has been a far more egregious source of disparity than the president’s presumption of tax unfairness ….

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Before we start down the path of arguing about the merits of redistributing wealth to benefit the many, why not first stop redistributing it to the most privileged?”

And Ben Bernanke himself said in 1988 that quantitative easing doesn’t work. As Ed Yardley notes:

Two economists, Seth B. Carpenter and Selva Demiralp, recently posted a discussion paper on the Federal Reserve Board’s website, titled “Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist?” [Here's the link.] [The study states:] “In the absence of a multiplier, open market operations, which simply change reserve balances, do not directly affect lending behavior at the aggregate level. Put differently, if the quantity of reserves is relevant for the transmission of monetary policy, a different mechanism must be found. The argument against the textbook money multiplier is not new. For example, Bernanke and Blinder (1988) and Kashyap and Stein (1995) note that the bank lending channel is not operative if banks have access to external sources of funding. The appendix illustrates these relationships with a simple model. This paper provides institutional and empirical evidence that the money multiplier and the associated narrow bank lending channel are not relevant for analyzing the United States.”

Did you catch that? Bernanke knew back in 1988 that quantitative easing doesn’t work. Yet, in recent years, he has been one of the biggest proponents of the notion that if all else fails to revive economic growth and avert deflation, QE will work.

Indeed, Fed policy itself has killed the money multiplier by paying interest on excess reserves. And a large percentage of the bailout money went to foreign banks (and see this). And so did most of money from the second round of quantitative easing.

Forget Theory … What Do the Facts Show?

But let’s forget ivory the tower theories of either neo-Keynesians like Krugman or Austrians … and look at the evidence.

Initially:

[The] Treasury Department encouraged banks to use the bailout money to buy their competitors, and pushed through an amendment to the tax laws which rewards mergers in the banking industry.

Similarly, former Secretary of Labor Robert Reich points out that quantitative easing won’t help the economy, but will simply fuel a new round of mergers and acquisitions:

A debate is being played out in the Fed about whether it should return to so-called “quantitative easing” — buying more mortgage-backed securities, Treasury bills, and other bonds — in order to lower the cost of capital still further.