Why QE2 Failed: The Money All Went Offshore

  • (Quantitative easing QE.
  • QE2:  The expression ‘QE2′ has become a “ubiquitous nickname” in 2010, usually used to refer to a second round of quantitative easing by central banks.[42] It was first used,[citation needed] however, by Richard Werner live on CNBC on 22 September 2009. He argued that ‘true quantitative easing’ was needed, namely an expansion in productive credit creation. This required a second attempt by central banks, “a kind of QE2″.[43] Meanwhile, the expression is today mainly used to refer to a second round of what Prof. Werner would consider the ‘wrong type’ of QE).

Published on Global Research.ca, by Ellen Brown, July 9, 2011.

On June 30, QE2 ended with a whimper.  The Fed’s second round of “quantitative easing” involved $600 billion created with a computer keystroke for the purchase of long-term government bonds.  But the government never actually got the money, which went straight into the reserve accounts of banks, where it still sits today.  Worse, it went into the reserve accounts of FOREIGN banks, on which the Federal Reserve is now paying 0.25% interest … // 

… But QE2 has not helped the anemic local credit market, on which smaller businesses rely; and it is these businesses that are largely responsible for creating new jobs.  In a June 30 article in the Wall Street Journal titled “Smaller Businesses Seeking Loans Still Come Up Empty,” Emily Maltby reported that business owners rank access to capital as the most important issue facing them today; and only 17% of smaller businesses said they were able to land needed bank financing.

How QE2 Wound Up in Foreign Banks:

Before the Banking Act of 1935, the government was able to borrow directly from its own central bank.  Other countries followed that policy as well, including Canada, Australia, and New Zealand; and they prospered as a result.  After 1935, however, if the U.S. central bank wanted to buy government securities, it had to purchase them from private banks on the “open market.”  Former Fed Chairman Marinner Eccles wrote in support of an act to remove that requirement that it was intended to keep politicians from spending too much.  But all the law succeeded in doing was to give the bond-dealer banks a cut as middlemen.

Worse, it caused the Fed to lose control of where the money went.  Rather than buying more bonds from the Treasury, the banks that got the cash could just sit on it or use it for their own purposes; and that is apparently what is happening today.

In carrying out its QE2 purchases, the Fed had to follow standard operating procedure for “open market operations”: it took secret bids from the 20 “primary dealers” authorized to sell securities to the Fed and accepted the best offers.  The problem was that 12 of these dealers – or over half — are U.S.-based branches of foreign banks (including BNP Paribas, Barclays, Credit Suisse, Deutsche Bank, HSBC, UBS and others); and they evidently won the bids.

The fact that foreign banks got the money was established in a June 12 post on Zero Hedge by Tyler Durden (a pseudonym), who compared two charts: the total cash holdings of foreign-related banks in the U.S., using weekly Federal Reserve data; and the total reserve balances held at Federal Reserve banks, from the Fed’s statement ending the week of June 1.  The charts showed that after November 3, 2010, when QE2 operations began, total bank reserves increased by $610 billion.  Foreign bank cash reserves increased in lock step, by $630 billion — or more than the entire QE2. (full text).

Links:

Monetary reform;

Web of Dept;

Ellen Hodgson Brown: on fr.wikipedia; on en.wikipedia;

9 Sustainable development definitions;

1987 Brundtland Report: on Brundtland Commission on en.wikipedia; on Swiss Confederation.

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