Quantitative Easing

Former Treasury Secretary Larry Summers’ August 26 op-ed in the Washington Post is an excellent commentary of the Federal Reserve’s policy of “quantitative easing.”  Under quantitative easing, the Fed buys bonds, which keeps down interest rates and adds more money to the economy, greasing the wheels of commerce.  Summers says that this was necessary during the financial crisis of 2008 and during the first shock of the Covid crisis in 2020, but not now.  Quantitative easing tends to benefit the wealthy, pushing the stock market and other asset prices, like homes, higher, but not doing much for regular people. 

Furthermore, because of the way Fed borrowing works, quantitative easing tends to shorten the term of the debt.  Summers says that with interest rates so low at present, the Fed and Treasury should be financing long term debt, locking in the current low interest rates.  Summers is not convinced that interest rates will stay low forever.  Inflation is a bigger threat than the Fed currently acknowledges. 

Summers warns that the Fed has followed the course of quantitative easing without examining where it is going.  He fears that following the easy path of the status quo will lead us into a financial quagmire similar to the way our continuation of unexamined policies led eventually to disasters in Vietnam and Afghanistan. 

I think that Summers is right on.  But Wall Street and most people love quantitative easing because it is good for almost everyone in the short term, just better for the rich.  However, the question is whether there is a problem in the longer term.  While inflation is the immediate concern, there might be other disruptions of the market, a stock market crash, or problems in the labor market, or failure of supply chains for food and other daily needs.  It’s also possible that nothing bad will happen.  We are in uncharted territory by letting quantitative easing and “easy money” run so long. 

China is tightening up its financial markets.  Most people think this is political, to reign in the power the Chinese billionaires vis-à-vis the government.  I think the Chinese may also be worried about dislocations in their economy.  They may think that tightening up now may prevent worse consequences in the future.  If so, I share their concerns.  I wish the Fed did, too.  I think Larry Summers does. 

Covid and the Stock Market

Mohamed El-Erian’s opinion piece on Bloomberg says it will take a huge shock to deter risk-taking investors.  He cites five mantras that stock traders have followed over the years:

  • Never fight the Fed.
  • The trend is your friend.
  • There is no alternative.
  • Fear of missing out.
  • Buy the dip.

For me, the first one is the most significant, “Never fight the Fed.” The Fed has become more and more important over the years. When inflation, which had started under Nixon, took off under Jimmy Carter, Fed Chair Paul Volker inflicted painfully high interest rates that got it under control.  Previously at Treasury, Volker had been instrumental in making Nixon’s decision take the US off of the gold standard work without destroying the US or the world economy. 

Fed Chair Greenspan was famous for holding up the stock market with the “Greenspan put,” named for a market option trade that enables an investor to avoid losses on a stock that goes down.  He was tested by the 1987 stock market crash just a few months after he was nominated to succeed Paul Volker.  He presided over a second crash, the dot.com bubble of 2000, and he was Fed Chair during the 9/11/2001 World Trade Center attack, which was a huge blow to Wall Street. 

Ben Bernanke was Fed Chair when the housing crisis hit in 2008, which threatened to bring down many of Wall Street’s most famous banks.  In the end, thanks to Bernanke, Treasury Secretary Paulson, and others at the Fed and Treasury, only one major bank failed, Lehman Brothers. 

When the Covid-19 lockdown crisis hit, Fed Chair Powell reacted even more strongly than Bernanke had.  Although many of the Fed measures to fight the 2008 crisis were still in place, Powell opened the flood gates of liquidity even wider, flooding the financial world with cash. 

The Fed “put” still exists and is more powerful today than it was in Greenspan’s day, justifying the maxim, “Never fight the Fed.”   The “put” has a double sided effect of keeping the US out of recession, but also magnifying inequality by enriching stock market investors.  This is a larger group that it was in previous generations, but still by no means includes everyone, and does not benefit investors equally.  It clearly favors the richest investors.  It subsidizes the rich to prevent the economy from collapsing for everyone. 

El-Erian mentions a phenomenon that has existed mainly since the the 2008 housing crash: low interest rates and bond yields.  People are buying stocks because bonds are such a bad deal.  Bond prices go down when interest rates go up.  There is no way for interest rates to go but up from here, and that means there is nowhere for bond prices to go but down. 

Interest rates are low for several reasons, but the main one is that the Fed buys them all as soon as they are issued by the Treasury.  If there is  no demand for bonds the interest rate goes up.  The Feds “quantitative easing” policy of buying bonds like crazy means that there is no reason for rates to go up because the Fed buys so many bonds quickly, no matter what the interest rate is, thus preventing the normal bond market from operating for normal investors. This is a global phenomenon because almost all central banks, particularly in Europe, have programs similar to the Fed’s “quantitative easing” resulting in negative interest rates in some countries, where banks charge you for holding your money instead of paying you interest. 

The loss of the bond market as an alternative to the stock market has meant that the stock market has risen even faster than in the past because of another of El-Erian’s maxims:  “There is no alternative.”  This is illustrated by the fact that the market has risen so much even as the Covid pandemic has played havoc with the economy.  Most recently the US suffered one if its most embarrassing defeats in Afghanistan in the last few days, but the defeat has almost no effect on market optimism.  The world may see the US as incompetent, weak and vulnerable, but investors see it as strong and vibrant. 

US investors have turned against China in recent days because it has cracked down and restricted many of its most famous high-tech companies.  They see this as a Chinese turn away from innovation toward more repressive government control.  There is an element of this, but I think China may be reacting to what it sees as excesses in the world financial markets, and is trying to limit this excess in China.  If this is the case, then I think it is good thing.  I worry that the excessive optimism in the US markets may be leading to a fall at some point, but I thought we would have seen something crack long before now. 

Finally, I think the US needs to repair its infrastructure, but I am not sure that now is the best time to do it.  We have spent like drunken sailors since the Covid crisis, running up the most debt since World War II.  I think this may be an overreaction.  Covid has killed many, but mainly it has killed older people, while war mostly kills people in their 20s, some of their most productive years; so, there is less of an effect on the economy.  Despite the fact that the damage to the economy was not as great as a war, the US government borrowed as if it were.  The borrowing was encouraged by the new, trendy idea that deficits don’t matter.  For some reason the economists have decided that governments never have to pay off their debts and so it doesn’t matter how much debt they have.  I don’t believe this idea.  I think someday interest rates will go up and it will become very expensive to pay off a gigantic federal debt.  Therefore, I don’t think this is the best time to start a very expensive infrastructure project.  It is as if you had just gotten out of the hospital with big medical bills and when you got home said, “Now is the time to build that new swimming pool we’ve been talking about for years.”  You should spend on big projects when you don’t have extra bills, like we have for the Covid stimulus.  We should get our house in order first.  We can always spend on essentials, like repairing bridges before they fall down, but we shouldn’t take on big, new projects now. 

Anne Applebaum on Mike Lindell

I was disappointed by this Atlantic Magazine article by Anne Applebaum about Mike Lindell, the “My Pillow” guy.  The title says, “The MyPillow Guy Really Could Destroy Democracy,” and the subtitle says, “In the time I spent with Mike Lindell, I came to learn that he is affable, devout, philanthropic – and a clear threat to the nation.” 

After reading the article, I failed to see the threat he presents. Presumably, this is the threat that Democrats see everywhere: Trump’s attempt to undo the last election and reinstate himself as President. I don’t see this a likely to happen and I am thus not alarmed by it.

Apparently, Lindell has something called “packet captures,” which are some kind of computer data proving that the Chinese stole the last election from Trump. But her article never makes clear what these packet captures are, or how the Chinese altered electoral results. I do not believe that there is anything to this. Perhaps, if you thought it would prove that Trump won the election, then it would throw the country into turmoil, but it would not be a threat to democracy. It would mean that Biden’s fake election was a threat to democracy, and that Trump was honestly re-elected and thus democracy would require that he be reinstated.

I do think Trump personally is a threat to democracy. The icing on the cake was the January 6 invasion of the Capitol, but in general Trump was a terrible President who surrounded himself with third-rate people, unable to carry out business of government. I don’t think Lindell is going to reinstate Trump.

The rest of Applebaum’s article supports her characterization of Lindell as a basically nice guy who is wacky on some subjects. I do not think her examples of other wacky businessmen who supported questionable causes are comparable to Lindell. I don’t really know anything about Aschberg, but I doubt that he was responsible for the success of Lenin’s Russian revolution. And Henry Ford is not single-handedly responsible for anti-Semitism, which is probably thousands of years old. Mike Lindell may stir up the waters a little, but he is not going to bring about a sea change in politics.

World Heritage Convention

This Economist article on World Heritage sites in Africa misses a distinction between the US and the European approach to the World Heritage Convention.  When I was on the US delegation to the World Heritage Convention annual committee meeting many years ago, I learned that over the years, the US has favored designating natural sites as additions to the World Heritage List, while the Europeans have favored adding manmade cultural and hi

This preference for natural sites may date back to the US accession to the World Heritage Convention in 1973, when Richard Nixon was President.  I don’t think of Nixon as an environmental President, but he created the Environmental Protection Agency as well as joining the World Heritage Convention.  His supporters included many rich businessmen, whose environmental interests generally run toward preserving nature as it is.  I think of the Nature Conservancy as the kind of environmental organization rich people would support, as opposed to Greenpeace, for example.  Both of these organizations are genuinely interested in preserving the environment, but they go about it in different ways.  A Congressional Research Service report on the Convention was prepared in 2011, giving a lot of background on the US participation. 

There is an additional reason for the lack of African World Heritage sites described in the Economist article.  The Convention requires that countries where sites are located must take care of them.  Many African countries with wonderful natural sites do not have the resources to preserve them.  We are all familiar with the damage done by elephant poaching over the years, for example, even though elephant habitat is in some of the more advanced African countries.  On the protection issue there is a division between the overseers.  I come down on the side of those who support naming a worthwhile site even if there is some doubt about whether the host country can care for it properly.  Others will only support a new site if they are confident the country can care for it.  I think designating a site at least gives the Convention the ability to pressure and cajole the host country to preserve the site.  Otherwise, development or poaching is almost sure to lead to its destruction. 


IA major problem with the infrastructure bill, aside from its cost, is its lack of focus.  The Democrats have tried to include everything but the kitchen sink. The Republicans have tried to exclude non-traditional items from infrastructure bill, such as childcare. Nevertheless, the bill contains a hodge-podge of projects from roads and bridges to broadband internet connection.  The main goal seems to be pushing a lot of money out the door, rather than funding specific projects.  This will lead to a lot of waste, fraud, and mismanagement.  Since there are no priorities, politicians will fund pet projects and projects pushed by favored constituents, rather than projects that are most needed to keep America runniMuch of Biden’s and the Democrats’ agenda seems to be giving blacks reparations payments without calling them that.  The previous stimulus bills and the proposed infrastructure bill will undertake a massive transfer of assets from white people to black and brown people, both in terms of jobs that will employ mainly black and brown people and in terms of the beneficiaries of the projects, e.g., the main beneficiaries of improved broadband internet will be poorer black and brown people.  Better internet is a priority, but we should recognize that there is a second agenda here.  Similarly, the Democrats will try to get more roads and bridges built in poorer parts of town.  That’s not bad, but it may not be what America needs to best improve its transportation system.  Of course, the non-traditional infrastructure proposals err even more in the direction of wasted money.  There will be some short-term benefit to spending money on warm and fuzzy things like childcare, but it will not provide the same benefit to the nation as repairing roads and bridges. 

I would prefer to see narrowly focused bills, e.g., a bill to replace bridges that have fallen into a certain state of disrepair that makes this dangerous to use.  A bill to repair airports that have become unsafe.  A bill specifically targeting broadband internet.  These bills could provide specific benchmarks to decide whether the programs were succeeding or not.  Otherwise, there will be lots of handwaving and celebrating all the money that got spent without evaluating whether we got our money’s worth. 

Finally, I am not sure that this is the time to do infrastructure for infrastructure’s sake, even if it is well planned.  We have just spent trillions on the previous stimulus bills, and we will continue to spend trillions on the theory that debt and deficits no longer matter.  It’s possible that there has been some change in the world financial situation that makes the national debt meaningless.  But it’s also possible that this is a temporary situation and someday interest rates may go back up and future generations will be faced with insurmountable debt, with will limit their future and leave them cursing this “me” generation that spent all its money on itself.

In the last few days, it looks like China has begun to take a more conservative approach to its financial wellbeing, limiting financial IPOs and huge expansions of businesses.  This may be political, protecting the power of the Chinese central government, but it could also be financially based, to make sure that the economy does not spin out of control.  Meanwhile, the US seems totally unconcerned about the red-hot financial situation as it pumps tons of money out the door and looks the other way as more and more “unicorns” go public, fed by trillions of investors’ dollars.  Maybe there is no tomorrow, but what if it rains tomorrow?  Will China be in better shape to deal with the rain?  I am afraid it might be.  There seems to be a consensus that there are not storm clouds on the horizon, but what if we are not looking closely enough.  Maybe those few clouds are not as harmless as they look.