Quantitative Easing: the Opiate of the Banks
Courtesy of Jesse’s Café Américain
Much is being made of Bernanke’s program of quantitative easing, which is nothing more than an extreme form of artificially low rates of interest in the aftermath of a financial crisis.
The current program of quantitative easing is not only no miracle cure, it will not work at all, will not ‘fix’ the problems that are plaguing the American economy in any substantial manner.
Quantitative easing would only be a cure if the crisis had been caused by an exogenous credit shock, a sudden withdrawal of liquidity due to an event unrelated to the workings of the domestic economy like a war or an act of nature.
But this is clearly not the case. For the cause of the financial crisis was in fact a lengthy period of artificially low interest rates under the chairmanship of Alan Greenspan, which allowed all manner of financial excess and malinvestment and even fraud to fester in the real economy for a protracted period of time until it became embedded, and one might even say a dominant force, in the economy.
Applying quantitative easing may relieve the symptoms of the credit crisis but is merely a palliative, not a cure. It is similar to the case of a debilitated addict who being denied his marcotics goes into shock and suffers a heart attack. Yes, a resumptio of the drug will relieve the short term symptoms perhaps but will do nothing for the underlying deterioration which will continue to worsen.
The very low rates of interest have ‘cured’ the short term credit seizing in the financial markets, thereby providing time and opportunity to engage in real systemic reform and rebalancing to fix what caused the crisis in the first place: an outsized and corrupt financial sector, and a system of global trade that is freakishly imbalanced and manipulated by command economies and multinational corporations.
Until those reforms are made, the US economy will experience a series of bubbles and crisis that will shake the reserve currency governments of the world to their foundations.
