QE Has Only Tightened Main Street While Easing Wall Street

By Glen Wallace

With the recent downturn in the stock market and a slowing of the job growth in the US, there have been increasing calls for third round of quantitative easing by the Federal Reserve.  Quantitative easing, or QE as it is commonly known, is the practice of the Fed purchasing US treasury bonds from a select group of banks.  The Fed pays for those bonds by simply printing, or more accurately, computer generating digits on their balance sheets and calling those digits 'dollars.'  Money is often referred to metaphorically as water and in the case of QE, the Fed is manning the money spigots and is easing up on the valve and thereby letting out an increasing quantity of currency into the stream from which the overall economy dips into.  The goal with QE is to stimulate economic growth by reducing the scarcity of the money businesses require to grow and hire more employees.  However, the Fed has to keep in mind that they have a dual mandate of not just increasing employment but also controlling inflation.  If they ease up to much on the money supply there is the danger that dollars could become too plentiful, causing the prices of goods and services to rise excessively.

While QE could work in theory, as it has been practiced with QE1 and QE2, it has largely failed because of its reliance on trickle-down economics.  Trickle-down economics is a theory that whenever the the higher rungs of economic ladder prosper, that prosperity trickles down, like water, to those on the lower rungs, thereby quenching their thirst and boosting their energy to climb higher as well.  But when looking at reality, history has shown that trickle-down economics does not work.  If anything, there tends to be an opposite effect, leading to the adage of 'while the rich get richer, the poor get poorer.'  And yet despite the refutation of trickle-down economics, the Fed has insisted on exclusively showering prosperous banks with the billions in QE cash.  Its not as though the Fed has hired teams of asset purchasing crews to fan across the country and stop by garage sales to buy piles of second-hand clothes, or go to small family businesses on main street ringing their cash registers by buying their wares.  Rather the Fed has merely hoped that its exclusive clientele of large banks, now flush with QE money, would willingly begin providing more loans to businesses across the country.  Once the business got their new loans, they could expand and hire more employees and the trickle-down from the big banks to the little business on main street would be complete.  Only it hasn't exactly worked out that way.  Throughout QE1 and QE2, business loaning has remained tight, wages have been stagnant, and real job growth has been slow to non-existent.

So where has all that increased money supply gone?  Well, from the standpoint of the ordinary citizen observor, it is rather hard to tell.  Even though it is the ordinary citizens that are the most vulnerable and who are the ones that QE is designed to ultimately benefit, all we can do is make a deduction based on the observable market factors.  And those market factors tend to indicate that QE1 and QE2 has boosted the prices in stocks and commodities.  While an increase in stock prices has benefited 401k retirement accounts, the increase in commodity prices has been burdensome on the individuals and small businesses that rely on those commodities for day to day living.  While the cost to fill up the gas tank or fill the grocery basket increases, peoples income from working has not. Likewise, small businesses have seen the cost of the supplies they need to run their business driven up by the inflationary effects QE has on the commodities markets. But since the wages of the consumer have not risen with the costs of doing business, it becomes difficult for businesses to raise prices for the now tapped out consumer.  As a result, the bottom line for the business is hurt and it becomes difficult or impossible to grow and hire more workers.  Consequently, the opposite effect that was intended by quantitative easing has occurred. Instead of flushing main street with cash, a tightening of the money supply on main street America has occurred as more and more dollars go out into the international commodity markets while fewer dollars are returning.  But that should have been expected as the fulfillment of the known failure of the trickle-down economics theory.

What did the Fed think would happen when it threw money at the large banks in this high flying era of market speculation by banks?  Did the Fed think that the banks would forgo the prospect of astronomical returns in the markets and instead provide loans to small businesses with a return of a few percent and a
good chance of default?  Given that they can always count on the government to bail them out, why wouldn't the banks play the market casino with their new-found QE cash?