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U.S. News and Commentary



Wednesday
Sep182013

Quantitative Easing to wind down, but don’t overlook how we got there and who paid

Most Americans couldn’t answer a question about QE—Quantitative Easing—in a recent Reuters/Ipsos Poll. Choices for answers could overlap—part of an answer was right—but there was only one correct response for the definition.

Only 27 percent of Americans who responded got it right.

Most of us, even if we don’t know all the aspects of the term QE, know what happened when the Federal Reserve implemented it:

The Fed's $2.8 trillion "quantitative easing" program has, among other things, lifted stock prices to record highs, driven interest rates to record lows and put a floor under what had been a reeling housing market.

Depending on your stock portfolio if you have one, or if your retirement plans include stocks, you may have benefited from rising prices in the market. If you’re just an average saver with some money in a Money Market or other fund, you’ve seen interest on your money dive. Most of us have seen the housing market stabilize somewhat, but we have also lost sizable amounts of equity in our own homes.

QE benefited Wall Street. We know that.

Many of us know who Ben Bernanke is. He became chairman of the Federal Reserve System in 2006, presiding over the meltdown largely attributed to President George W. Bush. Bernanke followed Alan Greenspan who served as chair from 1987-2006—four presidents.

If we had to pick one of the most powerful entities in the world, the Federal Reserve would certainly be in the running. Established 2 days before Christmas in 1913, the Fed serves as the central bank for the U.S. and also has other duties:

[The Federal Reserve] Executes federal monetary policy. Transfers funds, handles government deposits and debt issues, supervises and regulates banks, and acts as a lender of last resort.

While most are familiar with the meltdown under the presidency of Bush 43, there was another meltdown before Bush took office. We don’t talk much about it now because it occurred towards the end of the second term of President Bill Clinton. Republicans didn’t take to the stump to assail Clinton and hold him solely responsible for it, and the 2000 Presidential Election didn’t focus on that single issue as Democrats did successfully in the 2008 elections.

There’s a significant writeup of Clinton’s meltdown, however, and it’s worth a read. The article appeared in Time magazine on February 15, 1999. Titled “The Three Marketeers,” Time’s writer presented the narrative of the meltdown in dramatic fashion, and it will be obvious if you read it that the writer was enthralled by the men he was writing about: Clinton, Greenspan, then-Treasury Sec. Robert Rubin, and Larry Summers who was Deputy Sec. of the Treasury. Summers would succeed Rubin as Treasury Sec.

The early Clinton years were heady times. We had a charismatic youthful politico as president and he was right up there with our current president when it came to giving a speech. I told a fellow Republican not long ago that when I’d hear Clinton speak, I almost wanted to vote for him even though he wasn’t running. He was that good.

The problem with Clinton is similar to the problem we have now. He was a purely political president obsessed with social policy. An avid reader and a media appointed intellectual, he was presented in the early part of his first term as a Renaissance sort of man. I’ve often said if it hadn’t been for Republican Speaker of the House Newt Gingrich, Clinton would have had far less legacy than he claims now.

The 1999 Time article relates a story about monetary policy under Clinton amid economic chaos: “In the past 18 months 40 percent of the world’s economies have been tugged from robust growth into recession or depression.” The writer noted that although the U.S. so far hadn’t suffered, “[T]he tiniest perturbation could send the whole economy tumbling…”

George Soros, key Democrat benefactor, had lost $2 billion in Russia in 1998. “A hedge fund blessed with two Nobel prizewinners blew up in an afternoon, nearly taking Wall Street with it.” Brazil’s currency “swooned.”

Clinton had already bailed out Mexico 4 years earlier. In 1998 the president actually bailed out a hedge fund, Long Term Capital Management, technically via the New York Federal Reserve.

Time called Clinton’s three money gurus—Summers, Rubin and Greenspan—the “committee to save the world.”

As for Russia, the Federation of American Scientists summed up Clinton's approach:

"We have a significant opportunity to use the leverage of IMF financing to help the Russian government," Rubin wrote to then-House Speaker Newt Gingrich on July 28, 1998. "The basics are all in the right direction," Stanley Fischer, the IMF's Deputy Managing Director, said the same day.2 The administration successfully forced the $18 billion through Congress."

There’s a key passage in the magazine article, one worth remembering:

“To operate effectively in this new world, Rubin has remade the Treasury into an organization that is more like an investment bank, says Tim Geithner, the 37-year-old Undersecretary for International Affairs.”

If you want to see how government officials worked together to create a financial disaster that basically looted Main Street and enriched the political class and their associated corporate allies, read the Time magazine article. Then read Gretchen Morgenson’s book, Reckless Endangerment.

Quantitative Easing is something that sounds dull as reading your income tax booklet instructions. But for most of us, it had a dramatic impact on our wallets and on the wellbeing of our country.

As for Bush 43, when President Barack Obama or Democrats talk about what they inherited, they should rightfully assign a significant portion of that inheritance to none other than Bill Clinton, at least they should if they want to be honest.

Bottom line: Pay attention to political matters that are boring because dullness is the sharpest weapon in the financial sector and that knife is aimed directly at your wallet. That 27 percent who got the answer right on the Reuters/Ipsos poll paid attention.

(Analysis by Kay B. Day/Sept. 18, 2013)

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