Posts Tagged ‘monetary policy’


The economic crises that came to a head in 2008 and the massive response—by the U.S. government and corporations themselves—reshaped the world we live in.* Although sectors of the U.S. economy are still in one of their longest expansions, most people recognize that the recovery has been profoundly uneven and the economic gains have not been fairly distributed.

The question is, what has changed—and, equally significant, what hasn’t—during the past decade?


Let’s start with U.S. stock markets, which over the course of less than 18 months, from October 2007 to March 2009, dropped by more than half. And since then? As is clear from the chart above, stocks (as measured by the Dow Jones Composite Average) have rebounded spectacularly, quadrupling in value (until the most recent sell-off). One of the reasons behind the extraordinary bull market has been monetary policy, which through normal means and extraordinary measures has transferred debt and put a great deal of inexpensive money in the hands of banks, corporations, and wealth investors.


The other major reason is that corporate profits have recovered, also in spectacular fashion. As illustrated in the chart above, corporate profits (before tax, without adjustments) have climbed almost 250 percent from their low in the third quarter of 2008. Profits are, of course, a signal to investors that their stocks will likely rise in value. Moreover, increased profits allow corporations themselves to buy back a portion of their stocks. Finally, wealthy individuals, who have managed to capture a large share of the growing surplus appropriated by corporations, have had a growing mountain of cash to speculate on stocks.

Clearly, the United States has experienced a profit-led recovery during the past decade, which is both a cause and a consequence of the stock-market bubble.


The crash and the Second Great Depression, characterized by the much-publicized failures of large financial institutions such as Bear Stearns and Lehman Brothers, raised a number of concerns about the rise in U.S. bank asset concentration that started in the 1990s. Today, as can be seen in the chart above, those concentration ratios (the 3-bank ratio in purple, the 5-bank ratio in green) are even higher. The top three are JPMorgan Chase (which acquired Bear Stearns and Washington Mutual), Bank of America (which purchased Merrill Lynch), and Wells Fargo (which took over Wachovia, North Coast Surety Insurance Services, and Merlin Securities), followed by Citigroup (which has managed to survive both a partial nationalization and a series of failed stress tests), and Goldman Sachs (which managed to borrow heavily, on the order of $782 billion in 2008 and 2009, from the Federal Reserve). At the end of 2015 (the last year for which data are available), the 5 largest “Too Big to Fail” banks held nearly half (46.5 percent) of the total of U.S. bank assets.


Moreover, in the Trump administration as in the previous two, the revolving door between Wall Street and the entities in the federal government that are supposed to regulate Wall Street continues to spin. And spin. And spin.

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As for everyone else, they’ve barely seen a recovery. Real median household income in 2016 was only 1.5 percent higher than it was before the crash, in 2007.


That’s because, even though the underemployment rate (the annual average rate of unemployed workers, marginally attached workers, and workers employed part-time for economic reasons as a percentage of the civilian labor force plus marginally attached workers, the blue line in the chart) has fallen in the past ten years, it is still very high—9.6 percent in 2016. In addition, the share of low-wage jobs (the percentage of jobs in occupations with median annual pay below the poverty threshold for a family of four, the orange line) remains stubbornly elevated (at 23.3 percent) and the wage share of national income (the green line) is still less than what it was in 2009 (at 43 percent)—and far below its postwar high (of 50.9 percent, in 1969).

Clearly, the recovery that corporations, Wall Street, and owners of stocks have engineered and enjoyed during the past 10 years has largely bypassed American workers.


One of the consequences of the lopsided recovery is that the distribution of income—already obscenely unequal prior to the crash—has continued to worsen. By 2014 (the last year for which data are available), the share of pretax national income going to the top 1 percent had risen to 20.2 percent (from 19.9 percent in 2007), while that of the bottom 90 percent had fallen to 53 percent (from 54.2 percent in 2007). In other words, the rising income share of the top 1 percent mirrors the declining share of the bottom 90 percent of the distribution.


The distribution of wealth in the United States is even more unequal. The top 1 percent held 38.6 percent of total household wealth in 2016, up from 33.7 percent in 2007, that of the next 9 percent more or less stable at 38.5 percent, while that of the bottom 90 percent had shrunk even further, from 28.6 percent to 22.8 percent.

So, back to my original question: what has—and has not—changed over the course of the past decade?

One area of the economy has clearly rebounded. Through their own efforts and with considerable help from the government, the stock market, corporate profits, Wall Street, and the income and wealth of the top 1 percent have all recovered from the crash. It’s certainly been their kind of recovery.

And they’ve recovered in large part because everyone else has been left behind. The vast majority of people, the American working-class, those who produce but don’t appropriate the surplus: they’ve been forced, within desperate and distressed circumstances, to shoulder the burden of a recovery they’ve had no say in directing and from which they’ve been mostly excluded.

The problem is, that makes the current recovery no different from the run-up to the crash itself—grotesque levels of inequality that fueled the bloated profits on both Main Street and Wall Street and a series of speculative asset bubbles. And the current recovery, far from correcting those tendencies, has made them even more obscene.

Thus, ten years on, U.S. capitalism has created the conditions for renewed instability and another, dramatic crash.


*In a post last year, I called into question any attempt to precisely date the beginning of the crises.


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While median household incomes in the United States have fallen since the economic recovery began (down almost 6 percent since 2009), incomes at the top (as documented in the chart above) have soared.

The question is, how much of that inequality can be blamed on monetary policy—in particular, on quantitative easing?

As I see it, Richard Barwell, Senior European Economist at the Royal Bank of Scotland and former Senior Economist of the Bank of England, offers the correct answer:

“Given an unequal distribution of income and wealth it is always likely to be the case that a policy which generates a robust and sustained recovery will benefit those at the top more than those at the bottom.”

Of course. Concentrate incomes and wealth in the hands of a tiny minority at the top and a recovery that restores corporate profits and equity share prices will per force lead to more inequality in the distribution of income and wealth.

The issue Barwell and others simply don’t want to address, however, is: has the resumption of the pre-crisis inequality trend, which is a condition and consequence of quantitative easing during the past five years, itself undermined the possibility of a “robust and sustained recovery” going forward?


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Students and friends have been asking me about the current debates concerning monetary policy. I’m certainly no expert on the topic, which means doing a bit of additional reading. And here’s what I’ve come up with.

Walter Bagehot is the name to drop in these discussions (to judge by Ben Bernanke’s talk at the Fourteenth Jacques Polak Annual Research Conference and Brad DeLong frequent references, such as here). So, I went back and read the entirety of Lombard Street: A Description of the Money Market and, in all honesty, I didn’t come away with anything more than what I first learned in Charles Kindleberger’s Manias, Panics, and Crashes: A History of Financial Crises [pdf]. To wit, when financial crises occur, there needs to be a lender of last resort, which means some kind of central bank that lends freely, without any kind of ex ante limit, no playing of favorites, and at some penalty to borrowers.

And that’s exactly what happened in the United States after the crash of 2008. Except that it did play favorites, favoring financial institutions (in the United States and around the world) that did gain access to additional capital, whenever and wherever they needed it—but not offering any kind of bailout to homeowners, who were the victims of predatory lending in the first place.

Not surprisingly, a large part of the discussion has been about the consequences of that monetary policy—of, first, price easing (forcing interest rates down to the zero lower bound), and then, quantitative easing (large-scale purchases of long-term government bonds and other securities). Mark Thoma provides the traditional interpretation of how that Fed policy works (or at least is supposed to work). Andrew Huszar, who actually managed the Fed’s quantitative-easing program during 2009-10, questions the wisdom of that program, which in his view has helped Wall Street but little else.

Even by the Fed’s sunniest calculations, aggressive QE over five years has generated only a few percentage points of U.S. growth. By contrast, experts outside the Fed, such as Mohammed El Erian at the Pimco investment firm, suggest that the Fed may have created and spent over $4 trillion for a total return of as little as 0.25% of GDP (i.e., a mere $40 billion bump in U.S. economic output). Both of those estimates indicate that QE isn’t really working.

Unless you’re Wall Street. Having racked up hundreds of billions of dollars in opaque Fed subsidies, U.S. banks have seen their collective stock price triple since March 2009. The biggest ones have only become more of a cartel: 0.2% of them now control more than 70% of the U.S. bank assets.

The McKinsey Global Institute has conducted the first large-scale analysis of the distributional consequences of Fed policy after the crisis. Their conclusion? The entities that have gained from lower interest-rates are central governments (because borrowing costs have been much lower), non-financial corporations (as a result of lower debt-service costs), and banks (at least in the United States, since they’ve been able to take advantage of the spread between borrowing costs and lending rates as well as the fees generated by securitizing the loans they’ve made).


The last piece of the financial puzzle is the one we (or at least I) have tended to understand the least: the shadow banking system. In 2010 (revised in 2012), the New York Fed [pdf] prepared a useful report in which they documented the institutional features of shadow banks, discussed their economic roles, and analyzed their relation to the traditional banking system. It includes a reminder of how important that part of the financial architecture of contemporary capitalism shadow banking has been and continues to be: by June 2007, on the eve of the crash, shadow bank liabilities had grown to nearly $22 trillion, in comparison to traditional banking liabilities of $14 trillion. And while the shadow banking system has contracted substantially since then, there are indications it’s on the rise again.


Which, ironically, takes us back to Bagehot.

While on the surface of it the modern banking system looks quite different from the one that prevailed in mid-nineteenth century England, Perry Mehrling et al. [pdf] beg to differ:

At its core, modern shadow banking is nothing but a bill funding market, not so different from Bagehot’s. The crucial difference between his world and ours is the fact that Bagehot’s world was organized as a network of promises to pay in the event that someone else doesn’t pay, whereas our own world is organized as a network of promises to buy in the event that someone else doesn’t buy. Put  another way, Bagehot’s world was centrally about funding liquidity, whereas our world is centrally about market liquidity.

In consequence, Bagehot’s “lender of last resort” has had to become a “dealer of last resort,” which involves (as we have seen) a commitment to purchase some set of well-defined prime securities and, with it, the willingness to accept as collateral a significantly larger set of securities in order to put a floor on their price in times of crisis.

What we’re left with then is a Fed that is quite capable of stemming a financial panic, once it begins to happen, but is no more capable than in Bagehot’s time of actually preventing the recurring manias, panics, and crashes that characterize a capitalist economy.


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