How the RBA stole Christmas

Image credit: CiaoHo (Flickr: Creative Commons

Grinch economists at the Reserve Bank of Australia spent their Christmas in July ingeniously planning a new method of stealing Christmas. Attempts had been made by others to destroy the Christmas spirit of sharing through austerity measures, but these had been too unpopular. Instead of stealing Christmas from all the people, they decided make it great for a few and worse for most. Proud of their plan they announced it for all to see, although few understood it. Quantitative easing would use public money to pay for the debt of the government and big corporations, whilst eroding the value of savings and incomes.

Quantitative easing (QE) is a confusing term created by translating ‘monetary stimulation’ from English to Japanese then back to English. It is also a confusing process, where a central bank purchases assets on a large scale, usually in the form of government bonds, from financial institutions such as banks. This expansionary monetary policy is used when interest rate cuts are ineffective at economic stimulation.

QE is an attempt to convince the banking and finance sector that it should extend cheaper and additional credit to governments, households, and businesses by increasing their reserves. In the process of QE, central banks increase the monetary supply, which causes inflation. Many economists defend this practice as moderate inflation is thought to be safer for an economy than deflation.

QE has been subject to controversy, as the process results in what economists describe as a "dis-equalization" of the distribution of wealth. The Reserve Bank of Australia (RBA) recently announced that it would consider adding QE to its arsenal of monetary policy tools. This could have significant effects on equality in Australia.

QE monetary policy has been employed by many developed nations since the sub-prime mortgage crisis and the ensuing global recession. The US Federal Reserve, Bank of England, European Central Bank, and the Bank of Japan all have implemented the policy. Richard Werner, the creator of QE policy stated that in the “UK QE has singularly failed, as bank credit is still shrinking”. QE was ultimately ineffective at securing better lending criteria for small to medium sized companies and the middle class in the UK. Richard critiqued the UK banking structure as being responsible for this failure stating, “Just 5 banks control 90% of deposits”.

We in Australia face a similar situation with 4 banks controlling over 80% of home mortgages. If QE is a policy designed to bribe banks into acting in a certain manner, you have to ask why regulations cannot have the same effect. UK and US governments have spent trillions bailing out banks and now are spending trillions to indirectly influence their lending criteria.

Rob Thomas, director of research at The Wriglesworth Consultancy and former Bank of England economist stated that QE has had a “reverse Robin Hood” effect. The top 5% of income earners in the UK received a £215’000 increase in income from QE. This is because the banking and financial sector spent their new money on financial investments such as stocks, which top income earners benefit from disproportionately. Inflation meanwhile has had an austerity effect on the poorest of the UK middle class as their purchasing power is reduced.

Remy Davison, Jean Monet Chair in Politics and Economics at Monash University has stated that the “quantitative easing experiment is ending in a global recession”. Yet the chief economist of the Bank of England, Andy Haldane stated this July that they are likely to start QE again, demonstrating that no overwhelming negative consensus is held against QE. This is partly because it is in the interest of central banks to view QE in a positive light. QE makes debt cheaper, but only for the largest debtors. In the US, UK, and Australia this includes our deficit loving governments, as well as our financial institutions. The largest financial institutions benefit disproportionately, which results in oligarchic abuse of their gained market power. QE is an egregious example of crony capitalism, corrupting both markets and governments.

Governments have often assigned central banks with inflation, growth, and unemployment targets however not with equality targets. This is why rather than acknowledging the dis-equalizing effects of QE; central banks often absolve themselves of any responsibility to mitigate them. The transcript of a QE and inequality discussion last year at The Brookings Institute contains an example of this attitude. Andreas Fuster, a research officer at the New York Federal Reserve suggested the radical idea that central banks have a responsibility to ensure equality. This idea was abruptly shouted down by David Wessel, an influential Pulitzer Prize awarded economic journalist. He insisted that economists are independent policy makers who should not have political goals. This is a common attitude of economists who often attempt to resist politicization of issues that are inherently political.

Austerity policies are unpopular and many expansionary fiscal policies have been politicized to the point where they are no longer an option for the Liberal Party. A crisis is unfolding for the average Australian as Chinese driven growth slows down and QE action looks more likely. Cheap debt is not free and the poorest in society will suffer the most from QE policies. The Australian Government and by extension the RBA has a responsibility to defend economic equality. Grinch economists have to be stopped before they steal Christmas.

Harley is a Bachelor of Commerce (Economics) graduate who is currently studying a Masters in International Relations at the University of Western Australia