From “Dividing by Zero” (Global Knowledge, 2016-2017), Ana Nives Radovic
American central financial institution Federal Reserve had a goal to stimulate economic growth after the crisis of 2008 by issuing assets ready to be sold on capital market with Quantitative Easing program. Released in three series, QE programs were far from boosting growth, on the contrary, it made economy weaker and more dependable on artificial measures.
That type of a massive financial formation without having real support in the creation of goods and services has proven to be a disaster and instead of learning an important lesson on what the risks of this type of action look like, European Central Bank decided to do the same few years later.
The only institution that has sincerely opposed this type of program was central German financial institution – Bundesbank. The thing is that the ECB was unable to copy the model, while also something that was taught to be the derivative was not applied properly.
Fed was paying off a record dividend to the US Treasury, which was directly linked to the enormous revenues that the Fed received from its acquisitions of assets under its smallest amount of compliant monetary policy followed in 2015 in order to grant liquidity to capital markets and to ponder on long-term interest rates to encourage economic revival.
It might seem unclear whether the influence of the USA comes from its GDP that is still as high as the real economy is in underprivileged shape, so there should be highlighted that most of the wealth produced in that country this way is, in fact, fabricated and comes from financial or banking yields.
Even after completing three series of QE, economic growth in the US continued to be poor, without any visible improvement. One might say that without it American economy would have collapsed, but the thing is that these measures have a result that is in financial sense equal to the amount of resources invested. Contraction the fiscal conditions of the federal authorities, with a quick turn down in the deficit could not, nor in theory, nor in practice, promote growth.
The upper limit of the debt was rematerialized in order to be renegotiated, which caused the increase in real estate price matching with tightening of credit conditions, so consequently the unemployment rate became higher than the situation with this program was supposed to allow. Though, at the very beginning this type rescue was designed to be something that others __ and would therefore be the supreme irony because, as we know, it is the Fed that has been actively working to set aside the financial institutions in the U.S.
The growth rate since last June is lower than projected, which is certainly the major point, since it might mean that there could be a doubt in the efficiency of the Fed policy, because that institution would become a victim of the prominent law of withdrawing.
Sooner or later the operations being discussed become less valuable and apparently create stubborn effects that will be complicated to manage, so the results are finally rather underprivileged in terms of the means arranged through the amount of money added to boost the liquidity.
In this regard, the Fed is paying to the Treasury the total of its earnings, reduced in particular by the operating costs of its headquarters in Washington and the dividends paid to the twelve regional banks constituting the Federal Reserve system. This status is supposed to ensure the sovereignty of its choices in relation to the government. The Federal Reserve does not receive subsidies from the Congress for its operation.
The advantage of the current position is derived from accrued interest on financial securities obtained by the central bank as part of its monetary policy support to the economy, consisting of treasury bills and mortgage-backed securities.
Yet the exit strategy of quantitative rate is lowering down, which would not only stop buying bonds, but also sell them back step by step, could prove disastrous for the Fed if it were to correspond with a strengthening of interest rates.
There is a fear of the explosion of a bubble which never stopped inflating, especially as the number of jobs is falling and that the number of bankruptcies is continuously increasing. Besides that it should be stated that, unlike the ECB, the Fed has the right to buy public debt securities directly on the primary issues market, so it can consequently directly finance part of the budget deficit of the U.S.