”The Federal Reserve isn't just inflating
markets. It's also shifting a massive amount of wealth from the middle-class
and poor to the rich, according to billionaire hedge fund manager Stanley
Druckenmiller…
"This is fantastic for every rich
person," he said Thursday, a day after the Fed's stunning decision to
delay tightening its monetary policy. "This is the biggest redistribution
of wealth from the middle class and the poor to the rich ever."
"Who owns assets—the rich, the billionaires.
You think Warren Buffett hates this stuff? You think I hate this stuff? I had a
very good day yesterday.”[1]
September
2008 and Lehman Brothers collapse became as a milestone in global history
because of its symbolism that people around the world could recognize and feel
about. A bank became a symbol of a global financial system being in crisis, at
least regarding the “Western part” of the world as USA and EU. And it was all
connected to the US housing market and policies created during the presidency
of George Bush Jr. As the Obama administration took over during the same year.
The US government intervention came among other things to be based on using
public money worth of 50 billion dollars officially in order prevent house
owners from being evicted. The idea was that mortgage loan companies would use
public money in order to reduce and remove debts of house owners who were
fulfilling certain criteria. According to president Obama, this
program would help between 3-4 million house owners. However, the opposite took
place which came to be exemplified in Jeremy Fletcher’s history. Instead of
receiving help Jeremy Fletcher ended up in financial nightmare being exposed to
stress, threats for eviction, lower financial credit and family problems. US
federal government program as Home Affordable Modification Program or HAMP came
to be administrated by the mortgage companies meaning that the US government
came to subsidize mortgage companies’ pending times and administrative costs.
The unofficial intentions by the government was not to help house owners
directly but to “secure soft landings” for the banks. This was done by delaying
house owners´ bankruptcy were individuals as Jeremy had to send 5-6 loan
applications that were “lost” by the companies as City Mortgage. The
results of the HAMP program were less than one million house-owners with
receiving real help while around six million owners were evicted. The winners
were the banks and mortgage companies, thanks to the government, while the
losers were low and middle-income individuals.[2]
In
USA, the economic recovery from 2008 to 2016 was lower comparing to similar
levels after the World War II. Except of using public money for dealing with
certain sectors as the housing and mortgage market, one of the official ideas
of quantitative easing policies is to stimulate the real economy. However, as the cases of USA
and EU are showing this cannot be seen as a good case. Another case is that QE
policies in one country, especially larger economies, lead to similar
behaviors in other ones. Such policies were initially driven by Republican
party during the Bush era. Interesting how a party often proposing free markets
and limited government could do such policies and QE was continued by centrist
politicians as by Obama. Both liberals and socialists can agree on that
socialism for the rich is bad idea and that trickle-down economics do not work,
or at least do not work on the free/ less regulated markets. As Mattias
Svensson writes, criticism of free market politics among left-wing actors have
often been based on perception that free markets are “trickle-down” economics
where there are few rich and some of their money eventually ends up among the
poor. Because in free, open or less regulated markets one becomes rich mostly
thanks to selling stuff that people in general want to buy as clothes, food and
toys. In more regulated and state driven markets it is often easier to become
rich thanks to usage, or better said, misuse or criminal use of government and
public institutions. Basically, QE policies have very limited and a bad impact
on real economy. And what happened in 2008-2106 was mostly a failure of state,
public institutions and politics than comparing to the market and private
sector. Period of can be described as 2008-2016 was period of wealth
distribution from poor and middle-income earners to high income earners and
rich.[3]
Regarding
USA, the problem was not about the deregulation of the US financial sector. The
problem was in regulations and their content. This also occurred due
implementation of Basel rules which provided the large banks with
possibility to purchase more risky financial instruments due lower demands for
capital cover rate. Another case was the spirit of the time of 2001 and 9/11.
During 1980’s and 1990’s American economic policy was mainly based on
deregulation, liberalizations and what can be called as neo-liberal
capitalism. After the terror attacks and in combination with the later
financial crisis, Keynesian economic ideas of spending public and
taxpayer’s money became more popular even among the Republican party.
Patriotism became used in economic references. One case was the General Motors
communication about “Keep America rolling” with references to the importance of
nation and cohesion. In basics it was about buying cars with credit and
interest rate free loans.[4]
Part
of the pre-crisis development was George Bushs Jr reform ideas about making it
easier for ethnic minority groups as African and Latin Americans to own their
homes. The idea was that government intervention on the banking market it would
lead to more people in USA owning their homes and thereby standing for values
as individuality and success. This reform was part of his electoral campaign in
2004. But such willingness and interests to govern, enjoy power and conduct
politics led to wrong results. In 2004, a libertarian journalist James
Bovard warned that easy government sponsored credits to individuals who
had high credit risks and where not in good position to pay back the money on
the long-term could lead to catastrophic results for American taxpayers.
Basically, if Bush did not change the rules that were in place before 2004 the
economic and financial crisis probably would have been much less serious and
devastating. When Bush left power in 2008 there were around 28 million
high-risk loans with low-possibility payback. And the main actors in that
financial theater were half-public companies Fannie Mea and Freddie Mac.[5]
According
to IMF-economist Simon Johnson, during the crisis it was possible to see
how interest of the financial companies were going hand in hand with government
decision-making regardless of parties. This explains how Wall Street companies
are interlinked with government institutions since it was common that
individuals working in finance sectors would change jobs between private and
public. Freddie and Fannie were spending money on lobby, even up to 200 million
dollars. Such money would go to politicians as democrats Barney Frank and
Christopher Dodd. In case of Dodd, who prevented government supervision of
Freddie and Fannie, was chosen by the governing Democratic party
to make new regulations for the financial sector after the Lehman’s
crash. To balance this history, it should be mentioned that the republican
politician Newt Gingrich came to earn around 1,6 million dollars in payments by
being a voice of Freddie and Fannie. To makes things worse, Fannie and Freddie
also sponsored academic research to confirm their agenda were even Joseph
Stiglitz was involved.[6]
Today,
more than 10 years after the crisis started taking place there are still ongoing
discussions in US politics if Fannie and Freddie, that were established during
the 1930’s and era of government interventionism, should be preserved,
abolished or limited. The whole process in which Fannie and Freddie were
involved was based on giving loans to high-risk consumers, turning loans into
obligations and securities, selling them to other private or public
institutions and then making new loans. But the problem was not the market – it
was government regulations. In combination with Basel rules that made insecure
securities and assets to look secure thereby leading to moral hazard behaviour
among banks as Citybank , Bank of America, Lehman Brothers, Goldman Sachss. As
Svensson writes, the banks who were most connected to government programs and
politics were those banks who were the worst ones and made politics worse.[7]
A
similar situation came to take place in Europe, regarding the Eurozone and its
governance. One important thing with Euro as a currency is that historically it
was more of a political idea and project than of an economic one. According to
the EU-treaties, when being a member state of the Eurozone governments must
keep the state deficit under 60% of the total GDP and budget deficit to be
highly 3%. And in 1997, only two years of euros official introduction there
were only three states – Luxembourg, France and Finland who were fulfilling
these requirements. And before Greece could enter the Eurozone it was known
among the leading EU political circles as among the European Council (heads of
states, prime ministers) that the Greek government at that time was not honest
with their financial statistics. Here the following political manifestations
can be seen. German chancellor Helmut Kolh stated that majority of population
was not in favor of abolishing the Deutschmark and that he was ignoring
warnings from economists in order to promote the European project. Romano
Prodi, who except being prime minister of Italy also was the president of
European Commission made statements in an interview for Financial Times that
euro would lead to challenge which would lead to new policy instruments to be
created.[8]
Also,
for the EU there was another case when comparing to USA. In the beginning there
was a feeling of EU dealing with the crisis very fast. Even a more critical
economist Hans-Werner Sinn wrote about the European Central Bank made
a good decision to provide Eurozone banks with more financial liquidity by
lowering security demands for loans. Sinn argues that already in 2009, the
crisis was over but instead of going back to normal the ECB: s temporary policy
became the new normal. This made it possible for Eurozone states to create new
credits via national central banks as in the case of Greece. By being members
of the Eurozone it meant that states had better credit ratings and could create
credits in order to “fill the budget holes” but this was all depending on ECB:
s guarantees plus cover from European taxpayers money. A paradox that the
Euro-crisis came to manifest as Svensson writes “the world’s most imbalanced
system”. Not even federations as USA or Switzerland accept such imbalances
between different states or cantons. Euro-crisis became a period of breaking
and ignoring European constitutionalism such as bailouts between
governments. [9]
Irish
state has until 2041-42 to payback its debts from the Euro-crisis. This is only
one example how serious and deteriorating the situation was during that period.
ECB became as an owner of state obligations with low security in billions of
euros. This took place due ECB: s decision to do what ever it takes to save the
Euro, as its president Mario Draghi stated once. Securities for loans are made
of public obligations in heavily indebted states as Greece and Italy. However,
due the new banking regulations and mechanism such loans came to be transformed
into “solid assets” regardless of market’s judgments. Svensson presents such
behaviour as similar to “financial instrument equivalent to East German
government made car Trabant ”. Therefore, one problem with the proposal for
creation of a EU-banking union is that it would mean higher risks for European
taxpayers since a more institutionalized and integrated Eurozone would mean also
EU-level being more responsible for buying obligations and QE behaviour in
order for governments to make new credits.[10]
The
whole process can be described as a mixture of bad competitiveness, higher
prices and unemployment, lower wages and trust in EU-institutions. It also
leads to banks and hedge-funds as those based in France and Germany to be able
to take even higher risks and moral hazard behaviour since ECB and European
taxpayers’ money is seen as a guarantee. Basically, the ECB applied similar
policies that failed in USA. And in similar ways to USA, the case of
Euro-crisis shows that it was not a failure of market in the first place but a
failure of governance. It was also manifested in “To big to fail” behaviour
where states and public institutions are protecting banks.[11]
Within
academic research, there are some general agreements on how a financial system
should work:[12]
1. Banks need higher
own capital for security and to earlier admit looses
2. Public regulations
on the mortgage/housing market need to be reformed in order to prevent risky
and destabilizing subventions (as with Freddie and Fannie)
3. Large private
financial institutions need to understand that they are not to big to fail and
can end up in bankruptcy.
This
is also shown in empirical evidences that cases of austerity, reducing debt and
accepting lower wages sooner or later lead to new economic growth and dynamic
development. Comparing to the case of for example Japan which is among most
prominent examples of long-term stagnation based on low-interest rates and
long-term debt. In EU, this can be seen where Estonia, Latvia and Lithuania
were better in dealing with the crisis than for example Greece and Italy. And
having over-indebted states in the Euro-zone was shown to have positive impact
for richer individuals in the Euro-zone by having access to valuable assets with
taxpayers’ money and public institutions as a guarantee. Therefore, as in the
case of USA, one can speak about transformation from market driven economy to
central planning, but which ends in in socialization of the credit market that
benefits rich but has negative impact on poorer and youthful segments of
society – socialism for the rich. Basically, QE polices do not lift and
stimulate the whole economy and especially the “real economy” as in terms of
wages and assets among majority of individuals. Even if such policies can
stimulate the financial sector, they also end up misuse of taxpayers money and
to benefit a smaller number of individuals that already are wealthy. It ends up
with taxpayers, young and retired people being exposed to negative economic
impact and debts while politicians and bureaucrats are protecting the private
financial institutions.[13]
Regarding
Sweden’s development things came to look better. Not being a member of the
Eurozone contributed but at the same time Swedish banks as SEB and Swedbank
were exposed to the financial situation in the Baltics. Absence of currency devaluation
of in Baltic states (before the introduction of Euro) and imposition of
austerity measures had an effect in such way that the Swedish state finances
and private banks were not negatively affected. Also, the Swedish government
mobilized around 1500 billion SEK (which was around two budgets) at the
beginning of the crisis for dealing with eventual shocks. One thing with the
Swedish system was that banks abstained from using much money because the
regulations were perceived as strict. When looking on statistics from 2001-2015
the government debt, tax pressure and public spending all went down in
different numbers. [14]
Swedish
state was not in the same position as the USA one as a “TBTF guarantor” and
neither in the same position as the Finnish one who had to bailout indebted
Eurozone states. However, not everything was good in Sweden at that point. The
Swedish central bank (Riksbanken) has a tendency like for example the Norwegian
one to follow the footsteps of ECB. And from a global perspective, if there are
several and more influential central banks as Fed or ECB who are conducting QE,
such process would lead to similar behaviors among other central banks.
Riksbanken did not buy state obligation papers as ECB but has via its negative
interest rate policy made an impact towards a more unstable housing market with
increasing house prices and debts among the owners. As in other parts of
Europe, the financial crisis led to increased government role. Also, globally,
there have been similar trends with increasing public expenditure and
increasing loans equal from 5%-10% of GDP as in BRICS states. As result of
government intervention, capital flows from USA and EU to at that time
“emerging markets” also led to higher prices for accommodation, food and
energy. A similar case is in Sweden, and where prices on stocks and housing are
increasing while they are not included in older models for calculating
inflation.[15]
Today
it is more known that deflation as reduction of consumption prices is not a
“bad thing”. For ECB: s function it is vital to understand that modern studies
show that inflation and price stability around 2% is not necessary. The QE
inflation polices have not led to wished results while deflation has not been
shown as bad for economic growth. And not only that but QE has also influenced
on more global instability in the sense of governments, as between USA and
China, being more intolerant and skeptical to each other. QE is not only equal
to stagnation, poverty and debts but also to global instability, conflicts and
nationalist behaviors. As Svensson puts it, the word extreme is used often in
bad ways to discredit political opponents but not often when it comes to QE policies.
What is known now is that QE leads to financial imbalances, reduction for
future pensions and to redistribution to the richest. QE has not prevented
Japan to improve its economy since 1998. Since the beginning of 2000’s states
and supranational institutions as in EU have become the main consumer and
controller of banks and central-banks. Zero rates and state driven credits
became the new normal. In 2016 IMF reported that the world is most indebted
than ever, meaning that repayments are among us, our children and
grandchildren. As Svensson puts it, the yesterday’s unthinkable policies will
become new the normal tomorrow.[16]
[1] NBC News. Hedge fund billionaire: Fed’s move
“fantastic” for the rich. Publication: 2013-09-13. Downloaded: 2019-05-22.
Website: https://www.nbcnews.com/businessmain/hedge-fund-billionaire-feds-move-fantastic-rich-4B11199524
[2] Mattias Svensson. Den stora statens återkomst (Return of the big state).
(2017, Timbro Förlag, Klaipeda) p.39
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