Is the economy-strangling Great Recession finally over? Or is this just the calm before the next economic storm?
The Federal Reserve (FED) is hoping, no, betting it’s over.
State legislators, PERS officials, university endowment managers and other public money managers should pay attention.
Five years ago attention focused on the Troubled Asset Relief Program (TARP) passed by Congress to stop the bleeding on Wall Street. TARP was projected to spend $700 billion but actually spent about $431 billion.
Less noticed in November 2008, a month after President George Bush signed TARP into law, the FED launched an unprecedented credit expansion program labeled quantitative easing (QE). Originally projected to cost $1.25 trillion, it has now topped $4 trillion and continues to grow by $85 billion per month…more than 10 times the cost of TARP.
What the FED does is buy about $40 billion of mortgage-backed securities and $45 billion in U.S. Treasuries each month. This huge demand artificially lowers bond rates, mortgage rates, corporate borrowing rates, and margin borrowing rates for investors.
The FED’s stated goal was to drive down the cost of credit to help people and businesses hurting from the bad economy. It hasn’t worked that way. Main Street, America’s main employer, has seen slow economic growth, but Wall Street has boomed.
“The central bank continues to spin QE as a tool for helping Main Street,” writes Andrew Huszar, the former Wall Street executive who managed the first round of quantitative easing for the FED.
“I’m sorry, America,” he says. “But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.”
Now the FED is having trouble weaning Wall Street off the program. Forbes contributor Richard Finger calls it an “addiction.”
When the first round of QE ended in 2010, bond markets fell 14%. The FED immediately started a second round, then a third round in 2012. This past June the FED announced it would begin to wean Wall Street by tapering its bond purchases. Bond markets fell 4.3%.
The FED has delayed any tapering until sometime in the future.
The risks from prolonged quantitative easing are multiple. First, the FED, has never managed a program like this one, much less one this large. Second, “it will end in inflation,” says Finger. Third, artificial rates distort markets:
“QE has become the largest financial-markets intervention by any government in world history,” says Huszar.
Quantitative easing is contributing to “bubble-like markets” says Blackrock Investments CEO Larry Fink.
Bursting financial bubbles fuel economic storms.
Bottom line – the FED is making a massive bet it can wean Wall Street while keeping markets stable and sustaining economic.
So, legislators, PERS officials, et al, are you feeling lucky? Or wary of the risks?