QUANTITATIVE EASING 3: MONEY CREATION GONE WRONG

September 24th, 2012

On Thursday September 13th, 2012, Federal Reserve Chairman, Ben Bernanke, announced a new round of quantitative easing: pledging to purchase 40 billion dollars a month worth of mortgage backed securities from the struggling banking sector until the economy improves. In order to purchase these securities the Federal Reserve will be creating this money out of thin air or "printing the money". Their rationale for doing so is to seek economic growth and a reduction in unemployment.

However, one has to question the rationale of the Federal Reserve. Many of these assets, the mortgage-backed securities are worthless: a liability to the banks. The idea of the Fed is to recapitalize the banking system by purchasing toxic securities so that banks will have more credit to lend out: stimulating the economy and assisting in job creation. However, there are a few problems with this. First, banks are not lending, choosing to hoard the cash or speculate with it in the financial markets. Second, there is little consumer confidence: people do not want to take out new loans or start businesses in a depressed economy; a sentiment also shared by the bankers. Lastly, Americans are riddled with debt. Growth based on more consumer debt is unsustainable in the long run. According to the US Government Accountability Office, the total bailout of the US banking system has been a whopping 16 trillion dollars so far, while main-street gets scraps in comparison: the result being price inflation and little job creation to show for it.

What the Federal Reserve refuses to acknowledge is that the high jobless rate is the result of a lack of money in the pockets of main-street Americans and the consequent lack of demand for goods and services. As a result of budget deficits, despite QE3, many state and local governments think they have to implement austerity measures: meaning more layoffs that further exacerbate the economic slowdown. When teachers, city workers, police officers, fire fighters etc. get laid off-- which is the case in many American cities--these people will have less money to spend at local businesses. As a result of this, some businesses are forced to lay off workers or declare bankruptcy etc. A person laid off might not be able to pay their bills or their mortgage payments and be forced to declare bankruptcy--adding extra stress to the banking system. In general, when people do not have expendable income there is less demand for goods and services, and when there is less demand for goods and services, the less people are employed to meet these demands. However, when more people are working and getting paid a decent wage, they will have expendable income to spend, which increases demand for goods and services and consequently increases employment. In the end, jobs and demand for goods and services is what drives the economy.

So instead of these bank bailouts, the Federal Reserve should be creating money to purchase government bonds. Instead of implementing job crushing austerity measures, governments can then use this money to spend on jobs creation measures such as: improvements in infrastructure (bridges, road improvements, city rail etc.), education (more teachers), and the expansion of social services.

This was the model that Canada adopted for a period from the beginning of the Second World War and lasting into the 1970’s. The Canadian government, through the Bank of Canada, creating money and making interest free loans to the government was able to finance social services, universal health care, and infrastructure improvements across the country. Debt owed outside the country was virtually non-existent. The mandate of the Bank of Canada encompassed full employment and financial stability. Today, however, monetarism and price stability has been the sole focus of central banks around the world.

Now we have come to a point in history that demands a bigger role from our publicly owned central bank, the Bank of Canada, to intervene in Canada's slumping economy. The Bank of Canada, as advocated by the Canadian Action Party, must take a central role in money creation once again, and a central role in financing the budgetary needs of both the Federal government and provincial governments. Over the last three decades. in lieu of the Bank of Canada, the Federal government has relied increasingly upon foreign residents and private banks as source of funding: increasing federal debt levels and interest payments paid abroad. As of fourth quarter 2011, foreign residents held 26% of federal government debt with private banks holding 10%.

In lieu of these two sectors, the Bank of Canada could step up to the plate with its powers of money creation, and purchase this debt: essentially an interest and or debt free investment to the Canadian people.

The Canadian Action Party emphatically demands that the Harper government reverse its austerity measures and direct the Bank of Canada to once again make interest free/debt free investments to both the Provincial and Federal Government to support job creation: the right way to do quantitative easing.