In conjunction with low interest rates, the cash for trash program, or quantitative easing (QE), has led to inflation in asset prices, including housing. In exchange for toxic assets and treasury bonds, QE was supposed to flood banks with cash in order to encourage lending and thus stimulate growth. In the end, most of the cash was held in bank reserves. Banks were not ready to loan out money because interest rates were low (and still are), compounded with the insecurity of high private debt and stronger credit regulation.
If Fed policymakers are trying to stimulate growth, propping up asset prices at pre-crisis levels seems contrary to basic thinking. Michael Hudson, an economist at the Levy Institute, believes that the politics behind economic decision-making control how and where protection is allocated. For example, Hudson states that the banks, which are the main constituents of our political body, are protected with monetary policies like QE and low interest rates because banks own a significant amount of assets, many of those at one point, distressed. Simultaneously, a mass restructuring of private debt, like consumer debts, mortgages, etc., is out of the question because banks would suffer lower payments on existing loans. It is no wonder, then, that there is nothing serious being done to assuage the lack of aggregate demand.
Since the banks have captured political power, an alternative solution that can fulfill the aspirations of debtors, creditors, and Fed policymakers might be more feasible.
We can try what Steve Keen, a Post-Keynesian economist, calls the people’s QE, where money is injected into people’s bank accounts – accounts held by both debtors and savers. Instead of the cash for trash program, a people’s QE can help debtors repay old debts, effectively destroying the created money given to them, while savers can use their given money for consumption, generating aggregate demand.
Lack of demand is cited to be a major problem and the unequal political treatment of banks with private households even exacerbates income inequality (according to Gerry Epstein, a professor of Economics at UMass-Amherst). Policymakers must pursue a course of action that helps households pay down their debts. Private debt was around 156% of GDP in 2014 and, according to Richard Vague, a managing partner at Gabriel Investments, is the main culprit behind not only the trudging economy, but also economic crises.
Thomas is a 3L at the Law School. He is a liberal. Consciously Liberal appears on Thursdays this semester. He can be reached at email@example.com.