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QE, Debt and the Myth of a Liberal Left

The economic theories, rhetoric and policies of the current era descended from strategies of repression of eighty years ago. Coming out of the Great Depression liberalism was the ‘pragmatic’ effort to preempt an energetic left by tempering the more suicidal tendencies of unhindered capitalism. But pragmatism that left in place the ideology of capitalism as its explanation left paradox as well. Modern liberals in government and academia have lost all capacity to temper the economic right— neo-liberalism as ‘purer’ capitalism, because they share the relevant frames of reference.

The revival of neo-liberalism from the 1970s forward illustrates a pitfall of this content free pragmatics— modern liberals are battling neo-liberals and neo-conservatives from the shared premise that capitalism is worth saving. Put differently, liberal pragmatists— Keynesians, New Keynesians, etc. support political economy that, as demonstrated by the need for pragmatic ‘management,’ is inherently destabilizing. And rather than preventing economic crises (and social schism) the refrain for decades now has been ‘pragmatic’ recommendations for which there exists no constituency with political power.

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Graph (1) above: it is clear that since 2007 wealth has continued to increase for the very rich while it has plummeted for everyone else. This is the largest reversal of fortune in modern history for the bottom 90% of the population and it is ongoing. The decline is directly tied to the housing boom and bust engineered by Wall Street banks that were deregulated by the (Bill) Clinton administration and resolved and covered up by the Barack Obama administration. The top 0.01% whose fortunes have recovered includes the very financiers responsible for the loss of wealth of so many others. The right scale is the bottom 90% and the left scale is the top 0.01%. Source: Emmanuel Saez.

When crisis struck in 2008 – 2009 a developed economic mythology was quickly recovered to restate the canned pragmatics of liberal resolution without calling the causes of crisis into question. In this mythology the economic management process, fiscal and monetary policy, serve ‘the economy’ rather than particular interests. National accounts are determined by the relation of tax receipts to government expenditures. And banks lend out ‘savings.’ The political content here is that (sham) fiscal constraints effectively limited social spending. And the myth that banks are mere intermediaries obscures both their political role in economic (mis)allocation and who the real beneficiaries of monetary policy are.

This mythology was used opportunistically by the (Bill) Clinton administration to renege on promises of social spending, to cut the social safety net, to deregulate the banks, to support ‘free’ trade agreements that undermine civil governance and to abandon all pretense of a relationship between liberalism and the left. What modern liberals confuse is a political strategy to preempt a left-revolution in the 1930s with the well-working of capitalism when revolution isn’t threatened. Mr. Clinton made this evident as a liberal who was entirely comfortable serving the interests of the rich and powerful against those of everyone else. President Barack Obama used the ‘liberal’ mythology to sell the policies of the pre-pragmatic right that by freak coincidence always and everywhere serve these same rich and powerful.

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Graph (2) above: the top 0.01% (red line above) were relatively unaffected by loss of wealth from the housing bust because housing represented a smaller proportion of their total wealth. Conversely, the wealth of the bottom 90% was devastated by the combination of debt incurred to buy houses at inflated prices and the subsequent decline in house prices from the housing bust. The narrative of ‘dishonest borrowers’ used by Wall Street to divert attention from its role in the housing boom-bust is definitive nonsense when considered in context. The Wall Street banks are ongoing criminal enterprises in this epic. Measured against the recovery in total wealth for the 0.01% in Graph (1) above, government resources that could have saved the wealth of the bottom 90% were instead diverted to the very rich. Source: Emmanuel Saez.

While the (George W) Bush and Obama administrations put up as much as $24 trillion against the liabilities of Wall Street banks in 2008 – 2009 Mr. Obama was busy conflating the national budget of the U.S. with household budgets to sell austerity to his ‘constituents.’ As the Federal Reserve has demonstrated with QE, the U.S. has a fiat currency— it can create money ‘out of thin air,’ meaning that alleged fiscal constraints are a political device supported by liberal mythology and placed in the service of high capitalist tactics of immiseration. The Obama administration could have used the Wall Street bailout money to save both dispossessed homeowners and Wall Street banks but it chose to save Wall Street alone.

(Banks had housing collateral worth less than loan amounts and borrowers owed more on their loans than their houses were worth. Using the same bailout dollars to buy down negative equity would have made both Wall Street and the newly dispossessed middle class ‘whole.’ The Obama administration chose instead to ‘foam the runway’ with millions of families through scam mortgage assistance programs to benefit Wall Street).

The Federal Reserve’s goal with QE (Quantitative Easing) was (is) to raise asset prices by lowering interest rates and reducing the supply of risk-free assets. Risk-free and risky assets are overwhelmingly owned by the very rich. The destabilizing rise in ‘private’ debt over the last half-century has been driven by a tax code that ‘rewards’ debt and a decline in interest rates driven by Federal Reserve policies. Interest rates are the ‘price’ of debt. Using QE to buy long term bonds lowered long term interest rates. The effects were to raise the value of bonds and to reduce the cost of financial leverage thereby raising the prices of all risky assets.

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Graph (3) above: as the interest rate on corporate bonds (Baa Yield) has fallen the level of corporate borrowing relative to economic production (GDP) has risen. QE lowers the absolute level of interest rates and it also lowers the relative rate of interest by making risky assets more attractive. In recent years corporations have borrowed overwhelmingly to buy back corporate stock. This raises the value of stock by reducing the supply. It also raises corporate earnings and enriches corporate executives whose Boards grant them billions in stock options. But increased leverage also increases systemic risk by lowering the ability of corporations to weather economic downturns. This is to say that executives are burdening ‘their’ companies with debt in order to pay themselves exorbitant bonuses. Left scale is corporate debt / GDP and the right scale is the Baa interest rate. Sources: SIMFA, St. Louis Fed.

Increased leverage raises the level of systemic risk in both finance and the broader economy. The housing bust began when house prices began to decline and heavily indebted households couldn’t make their mortgage payments. Cheap debt that is the result of Federal Reserve policies is driving an equally destructive dynamic today. Thanks to low borrowing costs and the flood of money seeking a return from QE, U.S. corporations have borrowed trillions to ‘cash-out’ corporate stock options that corporate executives and ‘their’ boards have granted themselves. The contention that asset prices will decline proportionately when interest rates rise leaves unaddressed the systemic fragility that will be left behind.

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Graph (4) above: this is Graph (3) with interest rates removed for clarity. U.S. corporations have been gorging themselves on cheap debt provided by the flood of money from QE. Corporate debt is divided by economic production (GDP) to scale it. Under mainstream economic theory companies borrow to finance investment. In contrast, U.S. corporations have used the bulk of the money borrowed since 2009 to buy back stock. Stock buybacks boost the value of the stock options that executives and corporate boards have awarded themselves. The rise in debt leaves behind highly leveraged corporations that are more prone to bankruptcy in the next inevitable economic downturn. Source: SIMFA.

The political content of the myth that banks lend out ‘savings’ lies in part through separating ‘real’ from asset price inflation. Asset prices are assumed to be associated with their underlying ‘fundamentals’ like earnings. Lowering interest rates allows companies to refinance their existing debt at lower interest rates and to buy back stock that reduces the number of shares outstanding. Both of these strategies raise corporate earnings per share. However, left out of this metric is the increase in corporate leverage. Corporate executives put ‘their’ companies at increased risk by increasing leverage. A ‘tipping point’ of leverage started the housing bust and greatly magnified the consequences for Wall Street in 2008 – 2009.

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Graph (5) above: one way of accounting for the increase in corporate earnings coincident with increased corporate leverage is to look at their historical relation over longer periods of time. By this measure, Yale economist Robert Shiller’s CAPE (Cyclically Adjusted Price / Earnings), stocks are extremely overvalued. The green line is the current CAPE and the red line is the median CAPE over the last one-hundred and forty years. Median CAPE is used because the average CAPE misrepresents history— the distribution is skewed. Source: Robert Shiller.

The economic mythology regarding national accounts, bank money and who benefits from monetary policy is designed to sell a program that the economic right fully supports. The myth of a ‘liberal left’ has what George W. Bush dubbed ‘compassionate conservatives’ occupying chairs in national debate to assure that only arguments that serve the status quo are put forward. The economic programs of liberal Presidents Bill Clinton and Barack Obama (and Jimmy Carter) are wholly of this economic right. That they appear as anything else is testament to the power of the mythology.

Rob Urie is an artist and political economist. His book Zen Economics is forthcoming.

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Rob Urie is an artist and political economist. His book Zen Economics is published by CounterPunch Books.

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