QE2 Winners and Losers
How the Fed's stimulus maneuver helped the rich and screwed the poor.
Since the onset of the 2008 financial crisis the Federal Reserve has twice attempted to stimulate economic growth through a somewhat unorthodox maneuver called quantitative easing, wherein the Fed buys back Treasury bonds from big banks. When Fed chairman Ben Bernanke last year announced the $600 billion second round of quantitative easing (which within the finance world goes by the nautical-sounding nickname "QE2"), he warned that it might have some unanticipated consequences. "We do not have very precise knowledge of the quantitative effect of changes in our holdings [of Treasuries] on financial conditions," he said. One of these side effects turns out to be that, at least in the short term, the rich got richer and the poor got poorer.
QE2, which ended last month, began on Aug. 27, 2010, when Bernanke announced it in a speech delivered in Jackson Hole, Wyo. In QE1 the Fed, starting in November 2008, had bought more than $1 trillion of both mortgage-backed securities and Treasuries. That helped loosen credit to both corporations and households. QE1 is generally thought a success. (We had a recession, but we could have had a depression.) QE2, on the other hand, was immediately controversial. It wasn't clear what yet more purchases would accomplish, and many people worried it would send commodity prices into the stratosphere. But the Fed was more worried that the U.S. economy was headed for Japanese-style deflation, and resolved to ward it off.
So here we are, just shy of a year later. If the Fed's major goal was preventing deflation, then QE2 has succeeded (with the caveat that we don't know what would have happened without QE2). One useful way to measure inflation, according to Nomura strategist Paul Sheard, is by the rate that the markets expect in five years. Bernanke said he was worried about any reading below 2 percent. The market-expected rate, which was down to 2.02 percent last August, has risen to 2.6 percent. Mission accomplished. Deflation was averted.
But there are some other things that happened during the past year:
1) Stocks soared. From Bernanke's speech through the end of June 2011, the Dow Jones Industrial Average increased almost 25 percent.
2) Speculative assets ranging from Chinese dotcoms to social networking start-ups went crazy.
3) Just as skeptics feared, commodities ranging from oil to silver to cotton to food have also seen dramatic increases in price. For instance, the Reuters/Jefferies CRB index, which is designed to track global commodities markets, is up more 25 percent since Bernanke announced QE2.
Bethany McLean is a contributing editor at Vanity Fair and the co-author of All the Devils Are Here: The Hidden History of the Financial Crisis.
Bethany McLean writes a weekly business column for Slate and is a contributing editor to Vanity Fair. She is the author (with Joe Nocera) of All the Devils Are Here: The Hidden History of the Financial Crisis and (with Peter Elkind) "The Smartest Guys In The Room."
Photograph of Ben Bernanke by Jim Watson/AFP/Getty Images.