quantitative easing and big bank profits

It’s no secret that big banks are turning huge profits these days. They are riding high on a wave of easy money, due to low federal funds rate, low discount rates, and the continuing purchases of government debt from the Treasury by the Federal Reserve (a process called quantitative easing, which uses money printed out of thin air), all under the guise of making credit more available to businesses and consumers (the efficacy of which can be debated). So the banks are getting richer despite their sluggishness in loaning.

But there is another side of this story: the indecisiveness of Congress. Ben Bernanke himself has said publicly that part of the reason that he thinks that QE is necessary is because of the fiscal impasse in Congress over the budget — a problem with no resolution in sight. So we have the Fed trying its hardest, using extraordinary measures that could be creating another bubble in the markets and the help is not “trickling down,” to the average Joe.

Meanwhile, President Obama has recently called for a new jobs bill that could help get more people back to work (accent on the could). The jobs bill would cost around $447 billion, half of which would come in the form of tax cuts. The bill obviously got nowhere in Boehner’s House, and not much has been said about it since.

The problem here is that there is obviously two choices here: the continuation of quantitative easing, enriching the banks despite their refusal to do so, or a jobs bill which actually adds every dollar of stimulus visibly to the deficit, puts money into the pockets of everyman and would probably convince Ben Bernanke that QE could probably be rolled back earlier than his current forecast that he’ll start rolling it back sometime in September.

I would argue that the latter choice is the lesser of two evils: the choice of tax cuts and stimulus spending instead of QE and other Fed tactics that are enriching banks, not helping average people like they could and costing $85 billion a month and keeping Treasury yields artificially low. Not to mention the effect that money is essentially being created out of thin air to buy these T-bills that further endangers inflation (although this is not a problem at the moment) or worse, another bubble in the markets. The jobs bill would be a much more transparent process that would certainly be more efficacious and less dangerous.

I can almost hear my conservative friends balking at the thought: “the best thing we could do is cut taxes for everyone and starve the beast that is the federal government!” I would as always invoke the big picture argument: there is no chance in hell that House Democrats or even some Senate Republicans would accept any further cuts to federal government spending right now. The New York Times ordains from on high that the sequester cuts are deeply affecting the growth of the jobs market. So whether conservatives like it or not, there is a deeply entrenched belief in this. So voters face a choice: continue pushing the conservative wing of the House Republican caucus to stand firm against the administration’s plans for job creation, or co-opt the administration, try to bargain the bill into more tax cuts rather than an increase in spending. Because the administration has no problem continuing its current path of essentially bypassing Congress to stimulate the economy and the winners are banks, the losers are the middle class.

I would also argue to my liberal friends that stimulus spending is not the panacea that they think it is. Sooner or later we are going to have to face the music in the form of a crushing debt load. The extraordinary measures we are using to prop up our economy can only last so long before inflation sets in or another bubble is created. And you’re not going to be able to pass your spend now worry about the debt later policies through the Republican controlled house anyways.

The best outcome is a compromise: end QE, pass a jobs bill, and use the process to build trust on tax reform that will increase revenue so that we can begin paying down our debt. Passing the jobs bill will help put us on the road to growth in a better way than we are heading now and allow us to build trust and end this Congressional impasse.

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