Guest Post: Does Easy Monetary Policy Enrich The Financial Sector?

Tyler Durden's picture

From John Aziz of Azizonomics

Does Easy Monetary Policy Enrich The Financial Sector?

Yesterday, I strongly insinuated that easy monetary policy enriches the financial sector at the expense of the wider society. I realise that I need to illustrate this more fully than just to say that when the central bank engages in monetary policy, the financial sector gets the new money first and so receives an ex nihilo transfer of purchasing power (the Cantillon Effect).

The first inkling I had that this could be the case was looking at the effects of quantitative easing (monetary base expansion) on equities (S&P500 Index), corporate profits and employment.

While quantitative easing has dramatically reinflated corporate profits, and equities, it has not had a similar effect on employment (nor wages).

However there are lots other factors involved (including government layoffs), and employment (and wages) is much stickier than either corporate profits or equities. It will be hard to fully assess the effects of quantitative easing on employment outcomes without more hindsight (but the last four years does not look good).

What is clear, though is that following QE, financial sector profits have rebounded spectacularly toward the pre-2008 peak, while nonfinancial sector profits have not:

Yet it is not true that in recent years the growth of financial profits or financial assets has been preceded by growth in the monetary base; the peak for financial profits occurred before QE even began. In fact, the growth in the monetary base from 2008 reflects a catching-up relative to the huge growth seen in credit since the end of Bretton Woods. During the post-Bretton Woods era, growth of financial assets in the financial sector has significantly outpaced growth of financial assets in the nonfinancial sector, and growth of household financial assets:

This disparity has not been driven by growth in the monetary base, which lagged behind until 2008. Instead it has been driven by other forms of money supply growth, specifically credit growth.

This is the relationship between financial sector asset growth, and growth of the money supply:

And growth of the money supply inversely correlates with changes in the Federal Funds rate; in other words, as interest rates have been lowered credit creation has spiked, and vice verse:

The extent to which M2 was driven by the Federal Funds rate (or vice verse) is not really relevant; the point is that the Fed’s chosen transmission mechanism is inherently favourable to the financial sector.

The easing of credit conditions (in other words, the enhancement of banks’ ability to create credit and thus enhance their own purchasing power) following the breakdown of Bretton Woods — as opposed to monetary base expansion — seems to have driven the growth in credit and financialisation. It has not (at least previous to 2008) been a case of central banks printing money and handing it to the financial sector; it has been a case of the financial sector being set free from credit constraints.

This would seem to have been accentuated by growth in nontraditional credit products (what Friedrich Hayek called pseudo-money, in other words non-monetary credit) in the shadow banking sector:

Similarly, derivatives:

Monetary policy in the post-Bretton Woods era has taken a number of forms; interest rate policy, monetary base policy, and regulatory policy. The association between growth in the financial sector, credit growth and interest rate policy shows that monetary growth (whether that is in the form of base money, credit or nontraditional credit instruments) enriches the recipients of new money as anticipated by Cantillon.

This underscores the need for a monetary and credit system that distributes money in a way that does not favour any particular sector — especially not the endemically corrupt financial sector.

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Aziz's picture

LawsofPhysics — Surely a self-reinforcing feedback effect. Really awesome graph, Tyler. Thanks.

LawsofPhysics's picture

Pretty strong evidence that in order to bring a sustainable Debt/GDP ratio back to this country we need to kill the bankers and financial houses.

sunaJ's picture

Worse than litigation that enriches lawyers first and best - regardless of the substance or what side they are on - loose monetary policy enriches fincanciers first and best, regardless of the substance or what side they are on.  Both classes are the face-sucking, life squelching professions that attach to the problem in order to benefit from it.  Both professions should be treated as regrettably necessary utilities if we are to have them at all.

AldousHuxley's picture

yes for wall st. partners/owners, no for workers

in nominal terms yes, but manhattan is very expensive.

  1. Take out top 1% earning outliers in wall st
  2. adjust for cost of living (1M for 1bedroom with window looking at a wall)
  3. adjust for additional taxes and fees
  4. divide by hours worked per week
  5. adjust for volatility
  6. adjust for greediest assholes in the industry
  7. adjust for cost of raising a family (good schools, safety, etc.)

I'm sure wall st. workers don't get paid that much when you look at quality of life. only the top 1% partners get paid.


most people I know don't get paid enough to work there so they quit.


walküre's picture

Pretty much. We're top heavy in every aspect of the economy. The fuckers won't realize this of course. Their religion of blind entitlement and privilege doesn't allow them to take a step back. I hate the spilling of blood but rest in the fact that greater minds than myself had to come to the same conclusion or the guillotine wouldn't have been invented.

engineertheeconomy's picture

"In order to maintain a surplus in this country"

fixed it for you

engineertheeconomy's picture

There were never any foreclosures, the Banks don't own all the homes, thats a conspiracy theory

/sarc off

Aziz's picture

CMEX broke all my commodities. 

fuu's picture

They have broking everything.

dcb's picture

Oh, I have explained this to krugman and the nytimes more often than I can count, but of course mr easy money krugman refuses to acknowledge it. that he helps to create wealth inequality

andyupnorth's picture

Fantastic chart!

Thanks Tyler!

Dr. Engali's picture

Does easy monetary policy enrich the financial sector?

Yes... No need to read any further.

Carl Spackler's picture


Easy monetary policy does not enrich the entire financial sector.  It does, however, grossly enrich the PRIMARY DEALERS and those key partners of the primary dealers.

Look at NET INTEREST MARGINS of all U.S. banks and thrifts, the their traditional earnings engine (i.e., playing the carry trade).  NIMs are way down since QE this and Twist that because cost of funds cannot go any lower but Interest Revenue sure can.

The next questions is WHY?  I opint that such is because the monetary policy distribution mechanism is centralized (not decentralized) through the primary dealers, and they control how much and how fast any stimulus gets around the broader economy.  Of course as gatekeepers, they charge a price/tax on everyone else to spread that liquidity around...thereby enriching themselves at the broader economy's and community banks' expense.

Uncle Miltie's "helicopter drop" (a decentralized method) would't empower the primary dealers, but I don't have a method for enacting such..  

Mountainview's picture

It just kept some lousy structures in the game (half nationalized or taken over by strong hands)...and the healthy structures obviously cashed in extra benefits...The same game takes now place in Europe...The whole thing looks rigged and insane from a monetary policy standpoint...Try to hide your assets in real value...

Hedgetard55's picture

I think 90% of ZH readers knew this.

Shizzmoney's picture

Right.  Good charts, but this falls under: "Bears, Do in Fact, Shit in Woods" category.


Cognitive Dissonance's picture

Money for nothing and the (Federal Reserve) chicks checks are free.

Life of Illusion's picture



“Debt Processing Plant” in peak production.

q99x2's picture

Doesn't hurt to be able to pencil in an extra zero here and there without the threat of law. 

Turin Turambar's picture

Thanks for the elaboration Captain Obvious.

Fishhawk's picture

While the conclusion is obvious, I appreciate his effort to put together the data to prove that bears do shit in the woods.  The final thought, that we need to change the money distribution process to eliminate the 'first users' advantage for financials, is a timid start.  The clearly obvious solution is simply to eliminate fictional reserve banking.  


forrestdweller's picture

yes it does, but the lack of monetary policy will not do the opposite.

ebworthen's picture

"Does Easy Monetary Policy Enrich The Financial Sector?"

Is the Pope Catholic?

Bankers would of course argue that they pass the easing on.

Funny, I haven't received a 0.5% loan on 100 million - nor a $1 million bonus yet.

walküre's picture

If you and I got that, who would be left foolish enough to do the heavy lifting and paddling for THEM.

JR's picture

Audit the Fed in the RNC Platform? | The LRC Blog

Posted by Lew Rockwell on August 8, 2012 09:53 AM

Let's face it: the Republican party platform is a bunch of balderdash. Can you name anything now in it? Yet, as another step forward in Ron Paul's long war against central banking, it does mean something to discuss the idea, whether it ends up in the platform or not. The senate and the prez would never agree to audit the Fed, and therefore its passage by the house means nothing legislatively. But it was a huge publicity coup for Ron, even though virtually no one in the house except him would have voted for the bill if it had meant an actual audit. Ron Paul's target is not politicians, though he is glad to get a few defections from the regime, but the people of America and the world. There, he is gaining victory after victory. Combine that with the crash of '08 and the worsening depression, and you have the makings of an ideological revolution that does indeed keep Bernanke and the banksters awake at night. Romney is a flash in the pan. Ron Paul is the continuing influence. For the first time in 100 years, he has made central banking and its partner in crime, fractional-reserve banking, issues that people care about. Among the crooked and bloodthirsty pygmies who constitute the Republican convention, Ron Paul is the giant. And note: though Ron used politics as his educational platform, he is in politics but not of it. His magnificent achievements, which will continue and build, have nothing to do with the lust to rule that otherwise defines that despicable occupation. (Thanks to Travis Holte)


reader2010's picture

Throughout the world's financial history, great finanical engineering technologies, aka frauds, have evetually brought chaos, and have always ended in both tears and blood. THIS TIME IS DIFFERENT? YES?

csmith's picture

"In fact, the growth in the monetary base from 2008 reflects a catching-up relative to the huge growth seen in credit since the end of Bretton Woods."


Funny you should phrase it this way. I see the recent growth in base money as a way of "catching" the collapsed system as it imploded in on itself after decades of unbridled growth, growth which was encouraged by the masters of the financial universe. Of which Bernanke is just the latest iteration.

larz's picture

Im borrowing all kinds of stack and lending to my relatives times have never been better!

earleflorida's picture

'there is an never was a john galt?'

chogopogo's picture

Wealth transfer.

CulturalEngineer's picture

I really assumed it would be obvious to people that that's exactly what it does... and what it's been doing for years.

But apparently there's no limit to the ability of bread and circuses... and a duopoly that loves this eternal feeding trough... to keep people from seeing it... until it all falls apart.

But its great to have some confirming stats!

Ted Baker's picture

Let's focus on marked to market and see what those balance sheets will show