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Quantitative Easing: Who Wins and Who Loses?


Nobel Prize-winning economist Paul Krugman claims he has unveiled the real motive behind opposition to the Federal Reserve’s policy of minting trillions of dollars to purchase toxic investments and government debt——technically known as quantitative easing or QE.

According to Krugman, criticism of QE is not genuinely rooted in the oft-voiced concern that it may stoke inflation that would make necessities like food, housing, and energy far more expensive. Instead, he asserts that QE is “in the interest of the vast majority of Americans,” but “the right side of the political spectrum” opposes it because it harms the “very wealthy, in particular the top 0.01 percent.”

Going further, Krugman dismisses scholars who oppose QE as intellectually corrupt, declaring that the “wealth and the influence” of the elite buys “plenty of supposed experts eager to find justifications” to do what benefits rich instead of what’s good for America.

As documented below with highly credible, primary sources, Krugman uses a half-truth to weave a narrative that is diametrically opposed to reality. Furthermore, when pressing his case, Krugman critically fails to mention that since QE began in 2009, the wealth of the economic elite has soared, while that of the middle class has fallen. This occurred in spite of the fact that the recession ended more than five years ago and government has been inordinately active in redistributing wealth from prosperous Americans to others.

The what, why, and how of QE

In order to understand the basis for Krugman’s claim, it is essential to understand what QE was supposed to achieve, why it was said to be necessary, and how it was implemented.

In January 2009, the same month that QE began, Ben Bernanke, the chairman of the Federal Reserve from 2006 until early 2014, gave a speech in which he explained that the main purpose of QE was to make it easier and less costly for households and businesses to borrow money. “If the program works as planned,” he said, “it should lead to lower rates and greater availability of consumer and small business credit.”

Why is this important? Per an article published by the Federal Reserve Bank of St. Louis, “As interest rates fall, the cost to businesses for financing capital investments, such as new equipment, decreases. Over time, new business investments should bolster economic activity, create new jobs, and reduce the unemployment rate.” Likewise, Bernanke has said that “bringing down mortgage rates” stimulates “home-buying, construction, and related industries.”

In the same 2009 speech, Bernanke stated that the Fed was “compelled” to implement QE because “many financial institutions” had incurred “substantial losses” in the housing market crash, and these firms still owned a “large quantity” of “troubled” and “illiquid assets of uncertain value.” These are called “toxic assets,” and to a large degree, they consisted of subprime and other high-risk mortgages that had fueled the housing crash.

Given that financial institutions had just suffered huge losses and still owned stockpiles of toxic investments that they could not sell without taking further losses, these firms found themselves in a position where they could not effectively loan, borrow, or trade. As explained by Bernanke, this is problematic because “our economic system is critically dependent on the free flow of credit.”

In order to open the flow of credit, the Fed began purchasing these toxic assets from the major corporations that owned them, effectively giving them cash for their “illiquid assets of uncertain value.” Naturally, this put these institutions in a better position to conduct business and earn profits.

This was a direct bailout of the financial companies that owned these investments. In the words of Bernanke, the public “is understandably concerned by the commitment of substantial government resources to aid the financial industry,” but this action “appears unavoidable” in order to save the economy. He also noted that the “large firms that the government is now compelled to support to preserve financial stability were among the greatest risk-takers during the boom period.”

In sum, Bernanke said it was necessary to bail out the same financial firms that took the greatest risks (and hence made the greatest profits) during the boom that led to the crash. This is the most obvious way in which QE has enriched many wealthy people, who are far more heavily invested in stocks than other Americans. For instance, in 2013, the top 10% of income earners owned an average of $969,00 in stocks, including shares owned directly and indirectly through mutual funds, trusts and retirement plans. In comparison, the top 50-10% of income earners owned an average of $132,000 in stocks.

Beyond this, the Fed and other proponents of QE articulated two other primary ways in which QE would make it easier for Americans to borrow money. First, through buying $1.7 trillion of mortgage-based assets, the Fed planned to increase the demand for them, which for reasons detailed by the Congressional Research Service, would lead “to lower mortgage rates.”

Second, in the initial round of QE and in two subsequent rounds, the Fed purchased nearly two trillion dollars of federal debt. The rationales for this entail many particulars, but as summarized by the Congressional Research Service, the Fed did it to drive down interest rates on government debt “in the hope” that this “will indirectly filter through to reductions in other” interest rates, such as home mortgages and business loans.

So from where did the Fed get the money to purchase trillions of dollars in toxic assets and government debt? In the words of Benn Steil, the Director of International Economics at the Council on Foreign Relations, the Fed did it with “newly conjured dollars.” This is another way of saying that the Fed created the money out of thin air.

Bernanke himself explained how this could cause inflation in a 2002 speech before the National Economists Club in Washington, D.C.:

U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.

Bernanke then assured that the “U.S. government is not going to print money and distribute it willy-nilly,” but he acknowledged that the Fed engages in certain “policies that approximate this behavior.”

These realties spur concern among economists that QE may well lead to inflation levels that would make life substantially harder on many Americans, especially those with the least financial flexibility—namely, the lower and middle classes.

Krugman’s half-truth

Krugman’s assertion that QE harms the rich is based upon the fact that it was designed to drive down interest rates, which he says is “directly detrimental to people who get a lot of their income from bonds and other interest-paying assets — and this mainly means the very wealthy, in particular the top 0.01 percent.” “You’re living in a fantasy world,” he proclaims, “if you don’t think this has something to do with the diatribes against” QE.

To support this narrative, Krugman cites data on interest income from 2007 to 2012, showing that annuals interest income for the top .01% of earners declined by $1.7 million over this period, or by 9% of their total 2007 income. “The wealthy derive an important part of their income from interest on bonds,” he writes, “and low-rate policies have greatly reduced this income.”

Krugman doesn’t bother to document this data except to say that it came from economists Thomas Piketty and Emmanuel Saez. Nevertheless, assuming it is accurate, the conclusion Krugman draws from it ignores three vital aspects of QE’s effects on the economy and wealthy investors.

First, bond investors don’t only make money by purchasing bonds and holding them as they earn interest. They also reap capital gains from selling bonds, and this is a central element of bond investing. During 2013, the U.S. bond market issued $6.4 trillion in new bonds, but investors bought and sold an astounding $202 trillion of bonds, or more than 12 times the size of the entire U.S. economy. These transactions are opportunities for investors to make capital gains, which are not reflected in the figures cited by Krugman.

That is a critical oversight, because although QE pushes down the overall interest rates on bonds, it actually drives up their values. As explained by the U.S. Securities and Exchange Commission, “A fundamental principle of bond investing is that market interest rates and bond prices generally move in opposite directions.” The SEC has detailed the reasons for this counterintuitive fact, but as summarized by the Fed, “the result is an increased demand for those securities, which in turn raises their prices.” Through this, QE has enriched bondholders, especially those who owned bonds just before QE began. Collectively, such bonds were worth $32 trillion at the end 2007, or more than twice the size of the U.S. economy that year.

Second, QE was a direct bailout of the large financial firms that invested heavily in subprime and other high-risk mortgages. Per the Federal Reserve, on the same day that the Fed announced the first round of QE, “profit takers had entered the market and were selling MBS [mortgage-backed securities] in large quantities.” In other words, the Fed’s actions artificially transformed risky, failed investments into profit-makers, thus benefiting many affluent Americans who owned shares of these firms.

Third, and perhaps most importantly, QE has inflated the stock market, a major source of wealth for the richest Americans. Relative to the size of the U.S. economy, at of the end of 2013 the Dow Jones Industrial Average was 25% above its average since 1990. Per Lawrence Summers, Obama’s former chief economist and Clinton’s Treasury Secretary, “low interest rates raise asset values and drive investors to take greater risks,” and per the SEC, stocks have the “greatest risk and highest returns among the three major asset categories.” Likewise, the Wall Street Journal recently reported:

Investors and strategists say that the low interest-rate environment of recent years has helped contribute to gains in U.S. stocks, as it makes competing assets such as bonds less appealing.

Wealthy and well-advised investors often have the expertise and financial flexibility to adapt to changing circumstances. If bonds do not offer them the best available value, they can and have put their money into other investments that do.

In sum, Krugman’s storyline rests upon demonstrably false and absurd assumptions that the wealthy haven’t altered their investment strategies in the wake of QE and that they have not capitalized on the rising bond and stock prices driven by QE.

Real-world outcomes

Economic theory aside, what has occurred under QE lends no comfort to Krugman’s narrative. For example, from 2009 through 2013, the inflation-adjusted mean net worth of Forbes 400 Richest People in America increased from $3.4 to $5.1 billion, or by 50%. In striking contrast, during the same period, the median net worth of America’s households declined from $70,801 to $56,335, or by 20%.

Such outcomes have prompted people like Andrew Huszar, the former Federal Reserve official who implemented the “centerpiece program” of the first round of QE, to publicly apologize for his role in this policy. The Fed “continues to spin QE as a tool for helping Main Street,” wrote Huszar in November 2013, “But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.”

Similarly, inflation-adjusted middle-class income fell during the recession, continued to fall even after the recession ended in 2009, and has scarcely rebounded since then:


Of course, it is impossible to objectively disentangle the effects of a single government policy like QE from countless other factors that impact the income and net worth of wealthy and middle-class Americans. However, it would be quite a stretch to claim that the wealthy would have grown poorer and everyone else would have grown richer had it not been for factors outside of QE. This is because QE has coincided with the advent of numerous government programs designed to redistribute wealth from prosperous Americans to others.

Although the first round of QE was announced in November 2008, the Fed began buying bonds in January 2009. This happened to be the same month as the inauguration of President Obama, who pledged to “spread the wealth around” and implemented numerous polices toward that end. These include but are not limited to the 2009 stimulus, 2010 stimulus, expanding the Children’s Health Insurance Program, Obamacare, successive payroll tax holidays, extended unemployment benefits, capping student loan payments, and raising taxes on the wealthy.

Most of these policies were enacted during Obama’s first two years in office when he enjoyed the largest Congressional majorities in recent history, including a 79-seat Democratic majority in the House and an effective 18- to 20-seat majority in the Senate. From the time when Republicans gained control of the House in 2011, they have sometimes stopped Obama from enacting other such polices, but they have generally failed to undo what he previously passed. In fact, Obama is the first president since Lyndon B. Johnson (1963-1969) who has not yet had a single veto overridden by Congress.

Also, during Obama’s presidency (though not solely of his doing), government social benefits—which are a primary means of redistributing wealth—have consumed more of the U.S. economy than ever recorded in the nation’s history:



In sum, during QE, the finances of most Americans have fallen while that of the upper-class have risen, even though government has been directly transferring wealth from the latter to the former at an unprecedented rate. These facts make it difficult to rationally argue that QE helps “the vast majority of Americans” and makes “big losers” out of “people with very high incomes,” as Krugman proclaims.

In both theory and practical reality, there is ample evidence to suggest that QE has been a boon to the wealthy and possibly hurt most other Americans. Whether or not this will be the case in the future will be addressed in a forthcoming article about the inflationary potential of QE and the dynamics of prolonging or unwinding this policy.

James D. Agresti is the president of Just Facts, a nonprofit institute dedicated to researching and publishing verifiable facts about public policy.

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