Monetary Policy Music to the Banks' Ears

The week before last, the Federal Reserve in the United States made public its plans for a new phase of quantitative flexibility, or QE3, as it is known in that country. This is the third phase of a series of programs that have had as their goal economic recuperation through the injection of liquidity at a scale hitherto unknown. The new phase of the program will consist of the purchase of mortgage-backed securities of up to $40 billion monthly, and without time limits. In fact, Ben Bernanke, who is responsible for the Fed, announced that the program will continue until the labor market improves significantly, and even after that recuperation it will maintain a flexible posture. In this way, he insinuated that even if there are inflationary pressures, the Fed will maintain the course toward full recuperation.

What can be hoped from this program?

In a recent interview, Bernanke gave a summary description of the brand-new QE3 program as ultra-flexible monetary policy. When asked if the program would consume fiscal resources, Bernanke responded coldly, “It’s clear that this is not dealing with fiscal resources; the only thing that we are doing is increasing the account of each bank with our computer.”* This confirms what we already know — monetary creation by the central bank responds to the necessities of the banking system’s biggest actors.

Michael Hudson, a former Wall Street financial analyst and now an emeritus professor at the University of Missouri, explains the Federal Reserve’s program: “QE3 was basically a program for the Federal Reserve to give money to the banks until Beethoven writes his 10th Symphony.” And he’s right. This monetary policy has hardly anything to do with the recuperation of the economy or with the generation of new jobs.

In reality, the monetary authorities are more worried about maintaining profitability of the banks, especially the largest. The Federal Reserve has tools for taking the pulse of activity in the U.S. banking and financial system. Bernanke and any member of the Fed can figure out what the banks are doing with the money allotted to them by the monetary flexibility programs. It’s not difficult, therefore, for Bernanke to realize that credit to businesses has reduced at a consistent rate.

He can also observe without a problem that the loans for the well-rooted sector continue to be depressed and that credit for refinancing the mortgage market (epicenter of the crisis) has not recuperated. Even consumer credit (for example, through credit cards) continues contracting. Banks in the United States are simply not lending to the real economy. But, in this scenario, if the U.S. banks are not channeling resources into the real economy, what are they doing with the money lent to them by the Federal Reserve?

The answer is simple: The banks are looking to put this new money into economic spaces where they will receive a real return in exchange. The U.S. economy is not an adequate place for getting the kind of profitability that interests the banks. Those banks have found it in countries that offer real rates of positive interest, for example, Brazil, India, Russia, South Africa or Mexico. It is in these economic spaces that the U.S. beneficiary banks of the former flexibility program (QE2) placed their resources ($800 billion). In the United States, the cost for them is 0.25 percent, while the rates that they can get in India, for example, reach up to 10 percent.

This explains, in large part, the increase of the reserves in that class of country, that even though running a deficit in the regular account they have nonetheless accumulated reserves. In almost all of these countries, those flows of capital have provoked a strong revaluation of the local currency in which the bonds acquired by the banks are counted.

Washington should be realizing everything from before. The former phases of monetary flexibility, QE1 and QE2, did not result in growth and employment. Why does Bernanke insist on introducing QE3? The answer is that the new program is more related to the necessity of keeping the principal U.S. banks afloat than to the recuperation of the economy. These banks have an alarming degree of exposure in the global derivatives market (for each individual bank, in parentheses): Bank of New York Mellon ($1.3 billion), State Street Financial ($1.3 billion), Morgan Stanley ($1.7 billion), Wells Fargo ($3.3 billion), Goldman Sachs ($44 billion), Bank of America ($50 billion), Citibank ($52 billion) and JP Morgan ($70 billion). A small sneeze and the castle of cards comes down. QE3 seeks to avoid the collapse.

*Editor’s Note: This quotation, accurately translated, could not be verified.