QE reduction in time for next speculative kickoff

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JESSICA DESVARIEUX, TRNN PRODUCER: It’s been about four years since the financial crash, and the Federal Reserve has been scaling back its program of monthly purchases of government and mortgage bonds. Each month, they’ve tapered off their purchases by $10 billion, and they’re on track for spending $45 billion this year, which is a big dip, considering they spent $85 billion last year.

There are certainly a lot of numbers there and financial terms that we need to break down. And now joining us is our guest to give us that bottom line, Michael Hudson. He’s a distinguished research professor of economics at the University of Missouri-Kansas City.

Thanks for joining us, Michael.


DESVARIEUX: So, Michael, just briefly remind our viewers what is the purpose of quantitative easing and who’s really benefiting.

HUDSON: Well, the purpose of quantitative easing is to help the banks’ balance sheets and to help the banks, give the banks enough money to make up for all of the losses that they made by their toxic waste and their junk mortgages and their bad loans to the real estate market. The Fed has created $4 trillion of bank reserves at about 0.1 percent–that’s one-tenth of 1 percent–interest since 2008, thinking, if you give give the banks enough money, somehow they’ll have enough money to begin lending to the economy again and getting the economy enough deeper into debt that the banks can make a killing and not go broke. The theory is that if you help the banks enough, they’ll help the economy by running the economy further into debt.

DESVARIEUX: But that hasn’t happened.

HUDSON: Well, right. The banks saw, number one, that the mortgage market was already so over-lent with junk mortgages that they stopped lending mortgage money, they began to reduce the credit card debt. The only kind of debt that they’ve been providing to the household sector is student loans, and that’s because the government has guaranteed student loan interest rates at a free premium and a giveaway to the bank.

So what the banks did with this $4 trillion is, largely, speculate. They bought foreign currency bonds that yield much higher than 0.1 percent. They bought foreign currencies. When you buy foreign currency bonds in Brazil or the BRIC countries or Third World countries, this forces up the foreign exchange of these countries against the dollar. So they not only made an interest-rate premium; they also made a foreign-exchange gain. And that helped them earn their way out of debt. They lowered the interest rates a little bit, but they weren’t making many loans at these lower interest rates, except for the really big borrowers and speculators for office buildings.

So the fact is that the real estate prices have continued to drift downward. And what has taken off are bank loans for corporate takeovers, bank loans to the large borrowers, and bank speculations and derivatives. So banks have basically been lending to each other and making a profit.

DESVARIEUX: Make this relatable to everyday citizens. How has this affected household debt, for example, and just debt in general in the U.S.?

HUDSON: Well, it’s harder to borrow from banks, but if you do borrow from a bank, you can get a little bit of a lower interest rate than you could back in 2008.

But the banks are making a huge margin. If they can borrow reserves from the Federal Reserve at 0.1 percent and lend to mortgage borrowers at 4 percent, that’s a arbitrage, a wider arbitrage difference than they’ve been able to make for a long time. So, essentially, the banks are borrowing short-term at a low rate, lending long-term at a high rate, and using the profits to be so high [sic] that at the last report, 40 percent of all corporate profits in the United States are bank profits. The banks have made a killing off quantitative easing.

DESVARIEUX: And how have foreclosures been affected by holding the Fed’s interest rate to basically zero?

HUDSON: They pretty much continued, because the debts have all been left in place. What people expected and what President Obama had promised when he came in, when he was running for election, was he was going to write down household debt, write down mortgage debt to the actual market price and write down mortgage debt to the price that could be paid.

But as soon as he came in, he appointed Tim Geithner and all of the Wall Street nominees to run the things, and they had no intention at all of writing down debt. So they’ve kept the debts in place. Ten million families have indeed lost their homes just as was forecast in 2008. And Wall Street’s made a killing, the hedge funds have made a killing, by coming in and buying homes for all-cash deals, just buying up all the foreclosed homes and all the homes that are being sold under distress by homeowners that have fallen behind.

The Fed has not–had promised to help the homeowners, but that hasn’t really happened. The help for the homeowners never materialized, as there have been whole books written about that, such as Bailout.

DESVARIEUX: Let’s turn the corner a little bit here, Michael. What alternatives could have been pursued instead of quantitative easing?

HUDSON: The alternative that has been for the last few hundred years would have been to let the bad debts go under. In other words, you would have done two things. Either you’d let the banks foreclose as they have–but the banks would have taken a loss. The purpose of quantitative easing was to do something that had never been done before in modern history: to make sure that the banks wouldn’t lose and to make sure that the 1 percent behind them didn’t lose. The money was poured into the economy, and instead of writing down the debts, the debts were all left in place.

What I was advocating and Steve Keen was advocating and most other people in our group were advocating was write down the–let Citibank go under, let the banks that have made the bad loans go under. And Bill Black on your show has been telling you about how bad these loans were. Let them go under. The government would have taken over the banks, and nobody would have lost the money.

The secretary of the Treasury, Tim Geithner, just wrote his autobiography last week, pushing the big lie again that the ATM machines would have been closed down. None of the ATM machines would have been closed down. Sheila Bair wrote in her book that there was plenty of money–and even in Citibank and Bank of America, even in these most rotten banks–to bail out all of the insured depositors. But the Fed came in and said, we don’t want the speculators to lose money; the depositors, the homeowners, the economy can be sacrificed in order to help the speculators. And normally it’s the speculators who would have lost, but in this case it was the taxpayer who lost. That was basically the principle at work.

DESVARIEUX: Michael Hudson, it’s always a pleasure having you on. Thanks so much for joining us.

 HUDSON: Thank you, Jessica.