Andrew Huszar, who worked at the Federal Reserve for seven years before going into the private sector in 2008, writes in The Wall Street Journal that Quantitative Easing is “the greatest backdoor Wall Street bailout of all time.” The Fed contacted Huszar in 2009 asking him to come back to manage “QE’s bond buying spree.” He reluctantly agreed, and now writes that the program did not have the intended effect of easing credit for “Main Street,” but the Fed has kept it going anyway despite the failure.
In its almost 100-year history, the Fed had never bought one mortgage bond. Now my program was buying so many each day through active, unscripted trading that we constantly risked driving bond prices too high and crashing global confidence in key financial markets. We were working feverishly to preserve the impression that the Fed knew what it was doing.
It wasn’t long before my old doubts resurfaced. Despite the Fed’s rhetoric, my program wasn’t helping to make credit any more accessible for the average American. The banks were only issuing fewer and fewer loans. More insidiously, whatever credit they were extending wasn’t getting much cheaper. QE may have been driving down the wholesale cost for banks to make loans, but Wall Street was pocketing most of the extra cash.
From the trenches, several other Fed managers also began voicing the concern that QE wasn’t working as planned. Our warnings fell on deaf ears. In the past, Fed leaders—even if they ultimately erred—would have worried obsessively about the costs versus the benefits of any major initiative. Now the only obsession seemed to be with the newest survey of financial-market expectations or the latest in-person feedback from Wall Street’s leading bankers and hedge-fund managers. Sorry, U.S. taxpayer.
Trading for the first round of QE ended on March 31, 2010. The final results confirmed that, while there had been only trivial relief for Main Street, the U.S. central bank’s bond purchases had been an absolute coup for Wall Street. The banks hadn’t just benefited from the lower cost of making loans. They’d also enjoyed huge capital gains on the rising values of their securities holdings and fat commissions from brokering most of the Fed’s QE transactions. Wall Street had experienced its most profitable year ever in 2009, and 2010 was starting off in much the same way.
Read the whole thing if you can, even though we all know what came next which is the massive QE2, or what others call “QE Infinity.” Huszar went back to the private sector after that move. In the meantime, the Wall Street bankers and others in the 1% continue to get richer, while the policy is having a negligible positive impact on the overall economy. All it’s doing is masking how “structurally unsound” the US economy has become, and how the Fed is now at the “center of that dysfunction” that the politicians are ignoring.