The man at the center of the storm has blown a giant hole in the notion that the Obama administration is looking out for middle class Americans. “Andrew Huszar: Confessions of a Quantitative Easer,” is piece written for the Wall Street Journal by Huszar himself, revealing that he was the person responsible “for executing the centerpiece program of the Fed’s first plunge into the bond-buying experiment known as quantitative easing.” Four years later, the scales have fallen from his eyes. “The central bank continues to spin QE as a tool for helping Main Street,” Huszar writes. “But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.”
There is a plethora of evidence to back up Huszar’s assertion. While Wall Street continues to flirt with record highs, Main Street is stagnating. Despite the happy talk that constantly emerges from the Obama administration and its media cheerleaders, a record-setting 91,541,000 Americans were not participating in the labor force as of October, according to the Bureau of Labor Statistics (BLS). Between the time Obama entered office in 2009 and last month, more than 11 million Americans have left the labor force. If the trend continues, the number of idle Americans will top the number of working Americans in four years.
Huszar’s entry into the trenches began in 2009, long after Congress passed the Troubled Asset Relief Program (TARP) they believed would prevent the complete collapse of the financial system. It was a financial system largely ravaged by the government’s insistence that home ownership should resemble a de facto affirmative action program. While banks themselves were largely irresponsible for bundling mortgages into another asset they could buy and sell, Americans should never forget that it was the federal government, especially during the Clinton administration, that set the stage for the ensuing carnage. The Clinton administration broadened the scope of the 1977 Community Reinvestment Act so precipitously, that by 2007, Fannie Mae and Freddie Mac owned or guaranteed almost half of the $12 trillion U.S. mortgage market. (Their subsequent failures engendered a $188 billion taxpayer bailout. And while that bailout is close to being repaid, the Obama administration is reprising the insanity, once again forcing lending institutions to make dodgy loans, or face federal reprisals).
Perhaps what rankles many Americans is the idea that we’ll never know whether TARP was really necessary. The opinion is divided. On the left, the New York Times’ Simon Johnson called it a “necessary evil” that prevented the collapse of the financial system. Yet even he conceded that the way it was put in place “was excessively favorable to the very bankers who had presided over the collapse.” According to Forbes Magazine’s William M. Isaac, “TARP did nothing to stabilize the financial system that could not have been done without it,” further insisting that the program “created a political firestorm that will have hugely negative consequences for our financial system and economy for years to come.” For Americans less well-versed in economics, two things stand out: not a single resignation was demanded in return for $700 billion of taxpayer funds, and the now-infamous idea of “too big too fail” was firmly established.
As Huszar notes, it was five years ago this month that the Feds “launched an unprecedented shopping spree” ostensibly aimed at containing the crisis, with Fed chairman Ben Bernanke insisting that massive bond purchases would be undertaken “to drive down the cost of credit so that more Americans hurting from the tanking economy could use it to weather the downturn,” Huszar explains. “For this reason, he originally called the initiative ‘credit easing.’”
Was more credit made available to Americans? Huszar lays the foundation for the answer by first explaining that he had worked for the Federal Reserve for seven years prior this latest offer, but had soured on the job. “I had left the Fed out of frustration, having witnessed the institution deferring more and more to Wall Street,” he explained. “Independence is at the heart of any central bank’s credibility, and I had come to believe that the Fed’s independence was eroding.” He finally took the job of managing the purchase of a staggering $1.25 trillion of mortgage bonds over 12 months, because senior Fed officials convinced him they had seen the error of their ways, and were committed to “a major Wall Street revamp.”
Huszar soon realized he’d been had. More credit wasn’t being made available to ordinary Americans, nor was the credit banks did make available getting any cheaper. “QE may have been driving down the wholesale cost for banks to make loans, but Wall Street was pocketing most of the extra cash,” Huszar reveals.
Even when credit was made available, banks took advantage. In 2011, $4 billion of federal funds were disbursed from the Treasury Department to 332 community banks, with the idea that they would be used to make loans to small businesses. Instead, 137 of those banks used $2.2 billion of the money to repay higher cost TARP debt, leaving only $1.8 billion left over for businesses themselves. This partially explains a study by Pepperdine University revealing that 60 percent of small business loan applications were rejected that year. A year earlier, a congressional oversight panel revealed that the Capital Purchase Program, TARP’s largest lending vehicle, had infused billions of dollars into banks of all sizes, who returned the favor by decreasing lending.
Huszar notes that several Fed managers began voicing concerns that QE wasn’t working as planned. But the Fed ignored them and remained focused on “the newest survey of financial-market expectations or the latest in-person feedback from Wall Street’s leading bankers and hedge-fund managers.” When the first round of QE ended on March 31, 2010, the results were stark: relief for Main Street was “trivial,” compared to an “absolute coup” for Wall Street. “The banks hadn’t just benefited from the lower cost of making loans,” writes Huszar. “They’d also enjoyed huge capital gains on the rising values of their securities holdings and fat commissions from brokering most of the Fed’s QE transactions.”
As a result, Wall Street experienced its most profitable year in history in 2009, “and 2010 was starting off in much the same way,” Huszar confirmed.
That’s only part of the story. Since 2009, banks have seen their collective stock price triple. Furthermore, the nation’s top five banks–J.P Morgan Chase & Co., Bank of America Corp., Citigroup Corp., Goldman Sachs and HSBC Bank now own 52 percent of the market, up from 17 percent in 1970.
Through it all, Huszar revealed, the Fed never wondered whether what it was doing was effective. It had so unquestionably hitched its wagon to Wall Street’s star, that a 14 percent market correction, and a slight weakening of the banking sector early in 2010, gave rise to QE2. “That was when I realized the Fed had lost any remaining ability to think independently from Wall Street,” Huszar writes. “Demoralized, I returned to the private sector.”
The Fed returned to QE3, which currently manifests itself as $85 billion in bond purchases per month. And as always, the theory remains that taking “bad paper” off the hands of banks allows them to loan more money, stimulating the economy. Yet while Wall Street is partying, Main Street has seen wages–as in the salaries millions of ordinary Americans depend upon to make ends meet–decline by 4.4 percent since the recovery began in 2009. Furthermore, since 2009, a net total of 270,000 full-time jobs have been created, compared to 1.9 million part-time jobs, a seven-fold difference.
Most Americans are aware that this represents the weakest recovery since the Great Depression. What they don’t know is that if this recovery had been as good as the average of the last 10, Gross Domestic Product would be $1.3 trillion greater, a number that represents $4,038 for every person in America. If job growth had been average, 7.3 million more people would be employed.
Instead, the $4 trillion in purchases made by the Fed, with money essentially created out of thin air, has debased the currency. In turn, the price of food, fuel and other commodities has increased, putting even more pressure on workers with stagnant wages.
Yet as Huszar notes, that is only half the problem. “Because QE was relentlessly pumping money into the financial markets during the past five years, it killed the urgency for Washington to confront a real crisis: that of a structurally unsound U.S. economy,” he writes.
It is a structural unsoundness that is staggering. In 2012, America paid $360 billion in interest payments, financed at a record-low interest rate of 2.4 percent. The average rate over the last 20 years is 5.7 percent. If we simply reverted to that rate, the interest payment on the current debt would balloon to $777 billion per year, just to maintain our current debt level. Tax receipts are expected to hit a record-setting $2.8 trillion this year. That means if our debt was being financed at historically normal interest rates, it would be consuming 28 percent of every tax dollar sent to Washington. But since we’re spending $3.5 trillion this year, we’re adding yet another $642 billion dollars to the debt. Debt that will eventually drive interest payments even higher, because no one has even the remotest incentive to bring our annual deficits to zero, much less begin paying off the national debt that stands at $17 trillion–and counting.
“The implication is that the Fed is dutifully compensating for the rest of Washington’s dysfunction,” writes Huszar. “But the Fed is at the center of that dysfunction. Case in point: It has allowed QE to become Wall Street’s new ‘too big to fail’ policy.”
As Huszar so eloquently notes, it is a policy that has enriched Wall Street at the expense Main Street. And in doing so, it has revealed the utter hypocrisy of an Obama administration and a Democrat party who have long portrayed themselves as champions of Main Street–even as they back this Keynesian-inspired economic insanity to the hilt. It is truly a shame that so many Americans fail to grasp the monstrosity of what is occurring. For Huszar it’s the greatest backdoor Wall Street bailout of all time. It’s far worse than that. When the proverbial music stops playing, Main Street America could find itself on the wrong end of the greatest swindle in the history of mankind.
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