QE1,2,3, etc was the Federal Reserve buying bonds from the ________ in exchange for “cash” to stabilize the economy.
Did they buy bonds from the banks in trouble?
QE is a process that moves money from bonds back into reserves by buying down the interest and retiring the bonds early. The Fed used it to vacuum the troubled mortgage assets out of the system to free up reserves and enable increased lending. However, fractional reserve banking is another left over of gold standard economics so it had little impact. Banks no longer lend from reserves. They create “accounts” and stuff them with their own IOUs for the loan amount.
If all the banks in the system are on the same page and recognize each other’s IOUs they spend just like cash so nothing was gained in the effort. This IOU chain was largely responsible for the crash in the first place, so banks were still trying to sort out how it all went bad and weren’t going to go down that road again as quickly as they had before. In a fractional reserve system the banks have a percentage of the loan in hard assets, usually down payment and collateral, so the market can take some value adjustment without going negative.
Bush’s “ownership society” initiative simply dropped the reserve requirement from 20% to 10%, meaning banks were demanding less down payment and that was most likely achieved by inflating evaluations by shady loan mill appraisals. The end result was an inflated market that actually went negative as soon as it stopped inflating as there were no parties with skin in the game.
Did their newly minted cash go on the books of the banks so that they could lend?
The process didn’t change the bottom line balance of the banks, but it did move a lot of risk to the Fed that was threatening the banks. The really lousy mortgages were already mostly picked up by the deal with Bank of America and the bailout, but much of what was left probably wouldn’t qualify as “safe”. The loan frenzy and bundling of mortgages to be sold worldwide left a lot of our mortgages with no paper trail and would present problems with chain of ownership searches when the deed and original mortgage were sitting in banks and lockboxes around the world. It has been estimated that 10% of mortgages in America couldn’t hold up in a court challenge because no original paperwork exists for them now. The Fed now holds that risk.
Did then said banks decide they could not lend and had all this money and didn’t know what to do with it so they bought stocks? YES
Ironically, most of it went back into Treasury securities and bonds because stocks were still shaky. The rest did end up bidding up real estate which was then considered safe, even if loans on the properties weren’t, because real estate had bottomed out and was recovering. Half of the houses on my block have sold in the last 5 years and my property evaluation has increased by 5% per year in that same time, along with my taxes of course. Another bubble?
And as the Fed bought bonds to the tune of $4 trillion our total debt increased from $10 trillion to $20 trillion under Obama. Is this true? YES
That was only the bonds sold. It doesn’t include money created directly into reserve accounts, which some economists I know are estimating to be $29 Trillion just in the bail out. This is money creation “off the books”, much like Bush’s war spending was when Cheney said “deficits don’t matter”. It would appear that most of our leadership understand MMT very well when they want to.
Give our debt (and all of Puerto Rico’s debt) to the Federal Reserve!
Let’s make a bunch of those $Trillion platinum coins and require that spending against them be completely transparent and capped at .25% interest. We have never had a bond sale that didn’t sell all bonds offered at the target rate set by the Fed, so “Show Us The Money”! Lets fix this broken down country and get employment to 100% while guaranteeing the basic necessities of life to everyone. As long as just one child is hungry or not being educated in a country as rich as this one we have failed as a society. We can do big things if we just got over the fear of the “debt” that isn’t even debt that has to be repaid. A federally funded job guarantee and single payer healthcare would unleash the resources we need to transition our society into this century and free higher education would make us competitive in the future. We can afford anything that is for sale in dollars, so affordability is off the table.