The Federal Reserve's quantitative easing program is "the greatest backdoor Wall Street bailout of all time," according to one former Federal Reserve official.
Writing in the Wall Street Journal's opinion pages, Andrew Huszar says the Fed has made large-scale purchases of Treasury and mortgage-backed securities "Wall Street's new 'too big to fail' policy."
Huszar, who was tasked by the Federal Reserve Bank of New York with carrying out massive purchases of mortgage-backed securities in the first round of quantitative easing in 2009, says the Fed's stimulus programs prop up big banks while postponing needed help for regular Americans. He also writes that he left the Fed after realizing it had "lost any remaining ability to think independently from Wall Street." Huszar is now at Rutgers Business School.
He cites figures from the bond investment firm Pimco to make the case that the $600 billion round of quantitative easing in 2010-2011 and the ongoing purchases that have brought the Fed's balance sheet to nearly $4 trillion have not been effective in doing anything other than boosting bank profits.
Huszar was involved with the initial round of quantitative easing, known as QE1, that began in late 2008. Those purchases were not intended to boost the broader economy, but instead to prevent the collapse of the banking sector. They included large-scale purchases of mortgage-backed securities, which at the time were at the heart of the financial crisis, and a mix of credit programs to allow banks to weather the panic. Fed chairman Ben Bernanke described them at the time as efforts to "stabilize credit markets and to improve the access to credit of businesses and households."
QE2 and the latest round of asset purchases, on the other hand, were explicitly intended to boost the broader economy. Normally, the Fed would manipulate short-term interest rates to affect monetary conditions. With short-term rates at zero since 2008, however, the Fed instead bought Treasury bonds and mortgage-backed securities with the intention of lowering longer-term interest rates and boosting investment and consumption.
Bernanke, who has run the central bank since 2006, has defended the quantitative easing programs as effective. Asked by Republican Sen. Pat Toomey of Pennsylvania in July whether the stimulus purchases have been successful, Bernanke responded that "there's a lot of work on this, and the preponderance of the work suggests that the effects, while not huge, are quite meaningful." Bernanke said that "it's quite difficult to know for sure," but that "we think that QE has provided an important boost at critical times to help the economy continue to move forward."
Research by the Fed's Divisions of Research and Statistics and Monetary Affairs in 2012 found that QE2 reduced longer-term Treasury yields by 45 basis points, more than other estimates. The study's authors suggested that a decline in rates of that size was equivalent "to a cut of about 180 basis points" in the normal short-term rate targeted by the Fed, or 1.8 percentage points. That would be a very significant change in normal conditions.
No estimates of the distributional effects of quantitative easing, however, are available from the Fed.