There are lots of news reports and internet musings about Quantitative Easing. I’ve read many with the hope of discovering one comprehensible article that would fairly represent QE for the non-fiscal, non-monetary schooled citizen. Not to be. The explanations are either way over my head or focused on attacking or defending the policy. People seem to use many exotic terms to describe an already abstract subject.
So I’m going to take a swag at explaining what and why.
The Fed chairman, Ben Bernanke has been fearful of the country falling into another depression since the bubble burst in 2008. He’s made plain that the bogeyman we have to fear is deflation, not inflation. Simply put, inflation is too much money chasing scarce goods. Inflation causes prices to rise. Deflation on the other hand is an abundance of goods and not enough money, or at least not enough buyers. Deflation causes prices to fall.
A recession brings a lot economic distress: job losses, company failures, personal bankruptcies….its ugly. But a depression, that’s an event that changes lives, economies and even governments, sometimes permanently.
The clear similarity between 1929 and 2008/2009 is that in both cases, a massive amount of capital disappeared. Money invested in almost anything (except long term treasury bonds) just disappeared. When money in investments and the value of owned assets disappears people won’t or can’t go out and buy things. Then more jobs disappear because employers know people aren’t spending as much money so they reduce expenses by laying off workers. Fewer jobs equal fewer paychecks and there is even less available money around. As you can see this becomes a really ugly self-perpetuating down spiral.
The 1929 depression saw the collapse of the stock market erase the supply of capitol. In 2008/2009 the wealth disappeared from home equity first and then the stock and bond market followed. Again, as in 1929 and the 1930′s, wealth just melted away. Homes purchased in 2000 for $300,000 escalated to $500,000 in 2005 then fell to $200,000 by 2010. This happened millions of times. Almost all the homes had mortgages, many owners had refinanced and taken money out for home improvements and vacations. By 2010 the inflated value was gone. Owners owed more than the possible selling price of the house. A vast amount of capital was taken out of the American economy. Whatever the details, 80 years ago or today, a huge amount of wealth ceased to exist.
Bernanke is using QE to replace the private capital that had been lost in the recession. To do this the Fed is using new money to buy mortgage backed securities (MBS) from banks so that the banks, in turn, make more loans. In other words replacing money which had disappeared and getting it back into the economy.
You might say that this is nice for the banks that are getting premium prices for otherwise unwanted securities, but has this worked to help the little guy? The answer is no, not directly. However, good things have happened to reverse some of the losses from the recession, For example: (1) The stock market is within hailing distance of its 2007 high, thus replacing a fair measure of the capital that was lost in the recession. (2) Unemployment has improved slightly. Not that much, but its better than it was two years ago. (3) New housing is showing some signs of life. Again its not a great recovery, but there is improvement. Along with that will come housing prices which will rise and replace a lot of lost wealth.
The arguments against QE mostly have to do with it reducing interest rates for savers and opening the door to inflation. The inflation argument is pretty weak right now since its very unusual to see high unemployment and high inflation at the same time. Later, when employment improves we hope the Fed stays ahead of the curve. Low interest rates for savers also means low interest rates for home buyers, so that’s a mixed blessing. Savers must take on more risk since bank interest rates won’t even keep pace with low inflation numbers.
SRBAC
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Public employee unions, the bargaining problem.
A collective bargaining agreement is a contract between employees and employers. The former referred to as labor and the latter as management. Some of the first of these accords were hammered out between employees and employers in the 1920′s and 1930′s. These are important and hard won agreements, giving labor equality in negotiating with for-profit companies about wages, benefits and working conditions. Collective bargaining was an important step that led to American industrial leadership and prosperity for the rest of the twentieth century.
In private industry there is a clear cut distinction between labor and management. In public employment situations…not so much. For example:
Question: who is the employer?
Answer: Elected government officials – (federal, state and local), and indirectly, the people who voted for the elected government officials and of course the bureaucracy (composed of public union members) that manages the vast government landscape.
Question: Who is the employee?
FDR
Answer: Elected government officials – (federal, state or local), and the bureaucracy (composed of public union members) that administers the the various governments agencies.
Question: Who negotiates terms of the collective bargaining agreement?
Answer: The public union members who also vote to elect the government officials negotiate with the elected government officials or administrative representatives of the government officials.
So what we have here is public sector employees bargaining for wages, benefits and working conditions with…wait, wait for it…other public sector employees! Yes! What a deal!
Okay, last question: who said the following (don’t worry it’s a multiple choice question):
“All Government employees should realize that the process of collective bargaining, as usually understood, cannot be transplanted into the public service. It has its distinct and insurmountable limitations when applied to public personnel management. The very nature and purposes of Government make it impossible for administrative officials to represent fully or to bind the employer in mutual discussions with Government employee organizations. The employer is the whole people, who speak by means of laws enacted by their representatives in Congress.”
a. Donald Duck
b. Genghis Khan
c. Scott Walker
d. Franklin Delano Roosevelt
Okay times up. Pencils down. If you don’t know who said that, look it up.
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