QE Infinity: What Is It Really About?

The banks will get off the hook again and bite the taxpayer hand that feeds them. Congress should nationalize the Fed, the banks, or both, if they don’t start sharing the wealth.

QE3, the Federal Reserve’s third round of quantitative easing, is so open-ended that it is being called QE Infinity. Doubts about its effectiveness are surfacing even on Wall Street, as The Financial Times reports: “Among the trading rooms and floors of Connecticut and Mayfair [in London], supposedly sophisticated money managers are raising big questions about QE3 – and whether, this time around, the Fed is not risking more than it can deliver.”

The challenge for Ben Bernanke and the Fed governors since the 2008 bailouts has been how to deal with the backlog of fraud – not just fraudulent mortgages and fraudulent mortgage securities but the derivatives piled on top and the politics of who owns them, such as sovereign nations with nuclear arsenals, and how they feel about taking massive losses on AAA paper purchased in good faith.

On one hand, you could let them all default. The problem is the criminal liabilities would drive the global and national leadership into factionalism that could turn violent, not to mention what such defaults would do to liquidity in the financial system. Then there is the fact that a great deal of the fraudulent paper has been purchased by pension funds. So the mark down would hit the retirement savings of the people who have now also lost their homes or equity in their homes. The politics of this in an election year are terrifying for the Administration to contemplate.

With high-paid lobbyists contesting every proposed regulation, it is increasingly clear that big banks can never be effectively controlled as private businesses. If an enterprise (or five of them) is so large and so concentrated that competition and regulation are impossible, the most market-friendly step is to nationalize its functions….

Nationalization isn’t as difficult as it sounds. We tend to forget that we did, in fact, nationalize General Motors in 2009; the government still owns a controlling share of its stock. We also essentially nationalized the American International Group, one of the largest insurance companies in the world, and the government still owns roughly 60 percent of its stock.

Bailout or Receivership?

Nationalization also isn’t as radical as it sounds. If nationalization is too loaded a word, try “bankruptcy and receivership.” Bankruptcy, receivership and nationalization are what are SUPPOSED to happen when very large banks become insolvent – and if the toxic MBS had been allowed to default, some very large banks would have wound up insolvent.

Nationalization is one of three options the Federal Deposit Insurance Corporation (FDIC) has when a bank fails. The other two are closure and liquidation, or a merger with a healthy bank. Most failures are resolved using the merger option, but for very large banks, nationalization is sometimes considered the best choice for taxpayers. The leading US example was Continental Illinois, the seventh-largest bank in the country when it failed in 1984. The FDIC wiped out existing shareholders, infused capital, took over bad assets, replaced senior management, and owned the bank for about a decade, running it as a commercial enterprise. In 1994, it was sold to a bank that is now part of Bank of America.

Insolvent banks should be put through receivership and bankruptcy before the government takes them over. That would mean making the creditors bear the losses, standing in line and taking whatever money was available, according to seniority. But that would put the losses on the pension funds, the Chinese and other investors who bought supposedly-triple-A securities in good faith – the result the Fed is evidently trying to avoid.

How to resolve this dilemma? How about combining these two solutions? The money supply is still short by $3.9 trillion from where it was in 2008 before the banking crisis hit, so the Fed has plenty of room to expand the money supply. Rather than a neverending windfall for the banks, however, these maneuvers need to be made contingent on some serious quid pro quo for the taxpayers. If either the Fed or the banks won’t comply, Congress could nationalize either or both. The Fed is composed of 12 branches, all of which are 100 percent owned by the banks in their districts, and its programs have consistently been designed to benefit the banks – particularly the large Wall Street banks – rather than Main Street. The Federal Reserve Act that gives the Fed its powers is an act of Congress, and what Congress hath wrought, it can undo.

Only if the banking system is under the control of the people can it be expected to serve the people. As Seumas Milne observed in a July 2012 article in the UK Guardian: “Only if the largest banks are broken up, the part-nationalised outfits turned into genuine public investment banks, and new socially owned and regional banks encouraged can finance be made to work for society, rather than the other way round. Private sector banking has spectacularly failed – and we need a democratic public solution.”