Quantitative Easing Won't Help the Economy, But Will Just Create Another Wave of Mergers and Acquisitions

→ Washington’s Blog

As I noted when the government started bailing out the big banks:

[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.

Yesterday, former Secretary of Labor Robert Reich pointed 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.

The sad reality is that cheaper
money won't work. Individuals aren't borrowing because they're still
under a huge debt load. And as their homes drop in value and their jobs
and wages continue to disappear, they're not in a position to borrow.
Small businesses aren't borrowing because they have no reason to
expand. Retail business is down, construction is down, even
manufacturing suppliers are losing ground.

That leaves large
corporations. They'll be happy to borrow more at even lower rates than
now -- even though they're already sitting on mountains of money.

But
this big-business borrowing won't create new jobs. To the contrary,
large corporations have been investing their cash to pare back their
payrolls. They've been buying new factories and facilities abroad
(China, Brazil, India), and new labor-replacing software at home.

If
Bernanke and company make it even cheaper to borrow, they'll be
unleashing a third corporate strategy for creating more profits but
fewer jobs -- mergers and acquisitions.

Similarly, Yves Smith reports that quantitative easing didn't really help the Japanese economy, only big Japanese companies:

A few days ago, we noted:

When an economy is very slack, cheaper money is not going to induce much in the way of real economy activity.

Unless
you are a financial firm, the level of interest rates is a secondary
or tertiary consideration in your decision to borrow. You will be
interested in borrowing only if you first, perceive a business need
(usually an opportunity). The next question is whether it can be
addressed profitably, and the cost of funds is almost always not a
significant % of total project costs (although availability of funding
can be a big constraint)…..

So cheaper money will operate
primarily via their impact on asset values. That of course helps
financial firms, and perhaps the Fed hopes the wealth effect will
induce more spending. But that’s been the movie of the last 20+ years,
and Japan pre its crisis, of having the officialdom rely on asset price
inflation to induce more consumer spending, and we know how both
ended.

Tyler Cowen points to a Bank of Japan paper by Hiroshi Ugai, which looks at Japan’s experience with quantitative easing from 2001 to 2006. Key findings:

….these
macroeconomic analyses verify that because of the QEP, the premiums on
market funds raised by financial institutions carrying substantial
non-performing loans (NPLs) shrank to the extent that they no longer
reflected credit rating differentials. This observation implies that
the QEP was effective in maintaining financial system stability and an
accommodative monetary environment by removing financial institutions’
funding uncertainties, and by averting further deterioration of
economic and price developments resulting from corporations’
uncertainty about future funding.

Granted the positive above
effects of preventing further deterioration of the economy reviewed
above, many of the macroeconomic analyses conclude that the QEP’s
effects in raising aggregate demand and prices were limited. In
particular, when verified empirically taking into account the fact that
the monetary policy regime changed under the zero bound constraint of
interest rates, the effects from increasing the monetary base were not
detected or smaller, if anything, than during periods when there was no
zero bound constraint.

Yves here, This is an important conclusion, and is consistent with the warnings the Japanese gave to the US during the financial crisis,
which were uncharacteristically blunt. Conventional wisdom here is
that Japan’s fiscal and monetary stimulus during the bust was too slow
in coming and not sufficiently large. The Japanese instead believe,
strongly, that their policy mistake was not cleaning up the banks. As
we’ve noted, that’s also consistent with an IMF study of 124 banking crises:

Existing
empirical research has shown that providing assistance to banks and
their borrowers can be counterproductive, resulting in increased losses
to banks, which often abuse forbearance to take unproductive risks at
government expense. The typical result of forbearance is a deeper hole
in the net worth of banks, crippling tax burdens to finance bank
bailouts, and even more severe credit supply contraction and economic
decline than would have occurred in the absence of forbearance.

Cross-country
analysis to date also shows that accommodative policy measures (such
as substantial liquidity support, explicit government guarantee on
financial institutions’ liabilities and forbearance from prudential
regulations) tend to be fiscally costly and that these particular
policies do not necessarily accelerate the speed of economic recovery.
Of course, the caveat to these findings is that a counterfactual to the
crisis resolution cannot be observed and therefore it is difficult to
speculate how a crisis would unfold in absence of such policies. Better
institutions are, however, uniformly positively associated with faster
recovery.

But (to put it charitably) the Fed sees
the world through a bank-centric lens, so surely what is good for its
charges must be good for the rest of us, right? So if the economy
continues to weaken, the odds that the Fed will resort to it as a
remedy will rise, despite the evidence that it at best treats symptoms
rather than the underlying pathology.

As I pointed out on August 11th:

"Deficit doves" - i.e. Keynesians like Paul Krugman - say that unless we spend much more
on stimulus, we'll slide into a depression. And yet the government
isn't spending money on the types of stimulus that will have the most
bang for the buck: like giving money to the states, extending unemployment benefits or buying more food stamps - let alone rebuilding America's manufacturing base. See this, this and this.  [Indeed, as Steve Keen demonstrated last year, it is the American citizen who needs stimulus, not the big banks.]

***

Keynes
implemented his policies in an era of much less debt than we have
today.

We're now bankrupt, with debt levels so high that they are dragging down the economy.

Even
if Keynesian stimulus could help in our climate of all-pervading debt,
Washington has already shot America's wad in propping up the big banks
and other oligarchs.

***

Keynes implemented his
New Deal stimulus at the same time that Glass-Steagall and many other
measures were implemented to plug the holes in a corrupt financial
system. The gaming of the financial system was decreased somewhat, the
amount of funny business which the powers-that-be could engage in was
reined in to some extent.

As such, the economy had a chance to
recover (even with the massive stimulus of World War II, unless some
basic level of trust had been restored in the economy, the economy would not have recovered).

Today, however, Bernanke, Summers, Dodd, Frank and the rest of the boys haven't fixed any of the major structural defects in the economy.
So even if Keynesianism were the answer, it cannot work without the
implementation of structural reforms to the financial system.

A
little extra water in the plumbing can't fix pipes that have been
corroded and are thoroughly rotten. The government hasn't even tried to
replace the leaking sections of pipe in our economy.

Quantitative easing can't patch a financial system with giant holes in it.

What's
needed has been obvious to independent observers for years: Break up
the big banks, prosecute the criminals whose fraud caused the financial
crisis, and restore the rule of law and transparency.

Until those basic steps are taken, nothing else will work to fix our broken economy.

Comments

[Oswald Spengler]

Democrats don't relate to middle-class people. 
Charles Schumer 

[Seer]

And you find that shocking?  Geez, that's why there are classes, so people can step on others, and justify it!

[Miramanee]

This is THE critical issue....something that the melting middle class simply don't get. Stimulus $$$ and QE $$$ only serves to line the coffers of the rich; its impact upon the middle class is virtually nil. AND, over the long haul, the pressures that such monetization place upon the ever-expanding class of neo-feudal poor is increasingly destructive and "enslaving", if you will.

[crosey]

More M&A means shrinking supply, more layoffs, and the downward spiral accelerates.

UEI becomes a "living wage" with 25+% of the population becoming wards of the state, producing nothing, consuming at a subsistence level, etc......

Who rented this movie?

[tony bonn]

"Similarly, Yves Smith reports that quantitative easing didn't really help the Japanese economy, only big Japanese companies:"

that's the whole point of the engineered crisis....the rockefeller banksters wanted to destroy the competition.....

"What's needed has been obvious to independent observers for years: Break up the big banks, prosecute the criminals whose fraud caused the financial crisis, and restore the rule of law and transparency.

Until those basic steps are taken, nothing else will work to fix our broken economy."

i knew good old george could not tell a lie....best commentary in a looong time.

[Seer]

"the rockefeller banksters wanted to destroy the competition"

Likely yes, but one has to ask why that is the objective, and whether, in the end, it would be inevitable anyway.

Competetive nature suggests that one believes one has a better or more meaningful way of doing something.  What if the "rockefeller banksters" see the end-of-growth wall coming and see consolidation as they only way to try and maximize actions to acomodate it?  It's hard to get multiple people to agree on something, therefore minimizing the numbers who have input (be they corporations or people) is viewed as the way out (history tells us that it's the most common approach, one which always fails- but the elites believe that they know best, and attempt to save Their system with Their flawed logic).  In no way do I believe that this would work, but I suspect that the upper echelon may feel like it's the only try that's available: it's the same losing strategy of invading Iraq, that it was better to make up the most insane story imaginable and trash an entire country and its people in an attempt to hang on to some of the last vestiges of oil than it was to encounter a quicker collapse (which the people would be all too quick to pounce on said "decision-makers").

Yves suggests that we need to get to the root of the problem, and that by identifying said root that we can fix/resolve the problem.  I'm not so certain; no so certain, that is, that even with a system that's pure that it would work so long as it perpetuated the growth model.

Death By Growth

http://www.countercurrents.org/harrington270810.htm

[tempo]

Bloomberg reports Obama has lots of room for more stimulus spending.  IMO, 30 year interest only 1% loans are on the way to spur housing.   If everything is doom and gloom in the US is the dollar the strongest currency and 10 year rates are at all time lows.  

[Miles Kendig]

The 10yr lasted for more than a decade under 2% before....

[Miles Kendig]

Consolidation is now a national security imperative for everyone but the defense department.  The DNI must be having a great time....

[TheMonetaryRed]

Banksters created a "Market For Lemons" in American credit. It's just that simple. 

To reassure the credit markets you had to provide massive backing to the nation's portfolio AND trim that portfolio of bad assets. 

Chaining down the nation's banks for years in bankruptcy proceedings would have been impossibly destructive. So, for the revaluation to have happened in an orderly way, it would have meant regulators' (i.e., government) wiping out bank shareholders at a stroke and forcing a massive capital raise.

Who here was willing to do that?

[RingToneDeaf]

HelicopterBen is not listening.

He is listening to the people who pull his strings.

I would love to pull the string of a Guillotine.

[downrodeo]

"What's needed has been obvious to independent observers for years: Break up the big banks, prosecute the criminals whose fraud caused the financial crisis, and restore the rule of law and transparency."

This is proof positive that our elected officials do not work for us, despite the fact that our names are on their paychecks. Funny, that...

[knukles]

Sumptin' 'bout the disambiguation of the terms "Elected" and "Representative" that them folks've let slide.

[MayIMommaDogFac...]

Disambiguation is clearly not the strong point of most of those 'folks.'

[Vampyroteuthis ...]

The end of the Roman Republic (Julius Ceasar came to power) came when 5 % of the population had the vast majority of assets leaving the other 95 % impoverished. Roman citizens often found their land usurped by larger, wealthy estates. It created an unstable political system where Roman generals would ask for a soldier's loyalty instead of to the state. Legions would then march on Rome at the generals' will. The only difference I can see here is the top 5 % of the US population has "corporations" to use in their plundering.

[Sudden Debt]

Julius Ceasar build most things you now see when you visit Rome to see the Ruins.

He slaughtered the Gauls in a trick when he first promised them safe passage through todays northern germany and robbed them from their gold and enslaved the rest in their goldmines.

And the reason why Rome fell was because the roman citizens didn't wanted to enlist in the army anymore and they had to hire mercenaries who happend to sack rome in the end because they didn't got what they where promised.

[knukles]

The greatest thing that ever came from Rome was the movie Caligula. 

[Miles Kendig]

lmao...  Too bad Caligula could never learn how to play at Micky Rourke's game of guess the couple action.  He might have lasted longer if he had.

[VWbug]

bravo gw!

(bet you never thought you'd hear that from me huh?)

I actually read the whole thing this time, and agree with most of it.

Only thing i am not sure about is breaking up the big banks...maybe, maybe not...really don't know how to handle that problem.

I'd still opt for free market solution, let the people decide where to keep their money...if a big bank is too hard to decipher, your deposits there are at your own risk.

but then we all know that's a utopian scenario that we won't see, at least not in my lifetime.

[Dollar Bill Hiccup]

Bread and Circuses, more entertainment for markets.