A sort of joke making the rounds a few years back had (billionaire) Bill Gates walking into a working class bar. The joke was that the moment he did everyone in the bar on average became a billionaire. Understand—he didn’t give away any money or, other than possibly ordering a beer and paying for it, did any money change hands. But through the miracle of statistics the gargantuan difference in wealth between Mr. Gates and the other bar patrons was converted to faux equitable distribution under the measure of ‘average’ wealth.
A paper recently released by the Bank Of England (BOE) (link) finds this as the working principle behind the economic policies of central banks across the West since 2009, including our very own Federal Reserve. Through the practice of financial asset purchases known as Quantitative Easing (QE), Western central banks have boosted the fortunes of the nascent plutocracy under the historically demonstrable un-truth that if they are made richer, we are all made richer. And where Bill Gates comes in is that this gift to the rich is reported as ‘economic growth’ by the obfuscating souls doing the counting, as if everyone benefited.
The good folks at the BOE pointed to other benefits of QE as well. In descending order we have (1) stock and bond prices manipulated higher, (2) bank asset prices pushed higher and capital ratios enhanced and (3) corporations able to sell stock at higher prices and borrow money at lower rates. Openly rigging financial markets in favor of the already rich bestows an interesting question on said already rich—how can they claim to have ‘earned’ their fortunes when some material proportion was simply re-gifted from we in the poverty-tariat via the Fed? (Question: who is being told to bear the brunt of ‘deficit reduction’)?
The situation for the banks requires multiple additional layers of public assistance to make sense of. In 2008 it became obvious that most of the large banks in the West (Wall Street) were insolvent. That is, bad loans exceeded bank capital and cross-liabilities exceeded systemic capacity to pay. With QE (and multitudinous other public assistance programs) the Fed was able to raise the prices of bank assets above what they otherwise would be. QE also allowed banks to raise cheap capital by selling stock and bonds at much better prices than they otherwise would have received. And finally, government guarantees (too-big-to-fail—‘TBTF’) allow Wall Street to continue to exist by perpetuating the illusion that individual bank failures won’t lead to systemic collapse (as they did in 2008).
Related to this, in a separate BOE paper written in 2010 (link), Andrew Haldane estimated that this too-big-to-fail guarantee was worth $60 billion per year to UK banks alone. This amount is more than their total annual profits before the financial crisis began in 2008. However, the method used to estimate this subsidy looked at banks individually—with the TBTF guarantee and without it. With (1) more QE in one form or another imminent (within months), (2) bank assets still held at par value (rather than market value) and (3) TBTF explicitly the implicit government policy in the West, all signs from the political establishment point to continued banking crisis management mode. A reasonable market-funding rate for the banks without QE and the TBTF guarantee is likely well north of 15%, a rate that would immediately, instantaneously, put Wall Street out of business. In other words, Wall Street continues to exist through public assistance.
Additionally, Mr. Haldane’s estimate of the U.K.’s TBTF subsidy in excess of bank profits raises interesting questions for those who recall grade-school arithmetic. If the TBTF subsidy is greater than total bank profits and profits equal revenues minus costs, then some or all banker bonuses (costs) paid in the U.K. are gifts to bankers from the good citizens of the U.K. And given points 1, 2 and 3 in the paragraph above, this goes doubly in the U.S. That electricians in Des Moines and janitors in Atlanta are paying banker bonuses in New York comes as no surprise to those of us on the left. But to see this all written out with equations and ‘evidence’ from the U.K.’s central bank suggests official acceptance of the narrow point we already knew—Wall Street needs us far more than we need Wall Street.
Next up in the roster of QE beneficiaries (according to BOE) are corporations that can sell stock at higher prices and borrow money at lower rates. In the mythologies of the West, this benefit seems closer to home—picture the brave entrepreneur who against all odds builds the workhorse of American enterprise. But forty years of financialization have rendered this ‘benefit’ other than what one might expect. Before QE large corporations already could borrow to their wee hearts’ content at low cost in capital markets.
Small companies are more likely to borrow from banks and less likely to issue stock (by necessity). And mid-sized companies to a material extent have been ‘Romneyed,’ turned into zombies through looting so that they exist only to issue stock (when they can) and ‘roll’ debt. In each of the last Fed-engineered financial ‘recovery’ cycles (1990, 2002, 2009) Fed policy has managed to keep an increasing proportion of zombie companies alive. (‘High yield’ debt of companies with the worst business prospects increased the most in value because of continued funding indirectly provided by the Fed, not because their business prospects improved).
In the larger picture Quantitative Easing is a variant on the monetary policy that in recent decades has increasingly replaced fiscal policy, or direct government spending on goods and services, to boost economic output. Fiscal policy is the great bugaboo of the radical right through a combination of religious conviction that economic circumstance is evidence of god’s grace / one’s moral rectitude, deep confusion over the relationship between debt and money in a nation with a fiat currency, and more to the point, monetary policy benefits the rich and connected while fiscal policy benefits the rich and connected plus everyone else.
The economic mainstream in the West, and in particular the U.S., has been so lobotomized in recent decades that even economists of the ‘New Keynesian’ persuasion were initially dubious of the argument that QE mainly benefits the rich. This, even though Fed Chair Ben Bernanke explained the process in his 2010 Jackson Hole speech and in subsequent interviews. And it is Mr. Bernanke’s explanation of the ‘portfolio balance channel’ (link) that the BOE expanded on with theory, models and empirical evidence in their above referenced paper.
Given the Bank of England’s claims, the question then is: if a relatively small group of CEO’s, Wall Street financiers and residual plutocrats own most of the financial assets and central banks in the West rig financial markets to make financial asset prices rise, are they (central banks) responding to a set of static economic relations or are they creating new economic relations? If we take this question back forty years and look at tax policies that favor debt over equity and capital over labor and central bank policies that are designed to benefit the owners of financial capital, can current economic relations in any way be considered an accident of history? And if I may, it seems a peculiarly American ignorance of history and social struggle that the question even needs to be asked.
The implications of intentional (policy driven) income distribution versus ‘natural,’ market or theistic come down to the question of what legitimates it? A monkey that inherited a stock portfolio in early 2009 (Donald Trump in 1970?) would have doubled its money since then. If, as the U.K.’s central bank claims, the rise in share prices is largely attributable to efforts by central banks in the West to boost share prices, can it be said that the monkey ‘earned’ its gain? And if not, then what of the CEOs, Wall Street financiers and residual plutocrats who so selflessly warmed their chairs for the last several decades as financial beneficence accrued?
According to Forbe’s magazine’s account (Forbe’s 100 list), the great fortunes in recent history have been made in finance and technology. As argued above, finance is a rigged game that wouldn’t exist without multiple layers of public assistance. The fortunes in technology derive from relatively minor innovations on inventions created at public expense—computers and the Internet. These innovations are real enough, but they aren’t the main source of the fortunes.
The source of these fortunes is the collective resources used to create the underlying inventions and labor stolen through institutional arbitrage (outsourcing subsidized with tax breaks, unrestrained ability to destroy the environment and a standing army). Add Wal-Mart, which uses monopoly purchasing power to squeeze labor and suppliers and pharmaceutical firms subsidized by the government and the great fortunes in recent history all come from rigged games. (Monopoly power is illegitimate coercion in capitalist economics). Claims that these fortunes are ‘legitimate’ depend on alternative explanations of their sources.
Finally, it should be noted that in centrist discourse Fed policy is politically and economically neutral. If monetary policy is considered to benefit anyone, it is considered to benefit everyone. What the Bank of England makes clear in their paper, while trying very hard to maintain a centrist gloss, is the benefits of Quantitative Easing hugely favor the rich. What this implies is what the left has long known—centrist policies are tools of the ruling class and they represent their interests against the interests of the rest of us. The American myth that the ‘truth’ lies in the political and economic centers is a hoax with a purpose—to maintain a system that benefits some at the expense of the many. And if that sounds radical, tell it to the Bank of England.
Rob Urie is an artist and political economist in New York.