When financial markets stood on the verge of collapse in the summer of 2008, two of the world’s most important central banks, the US Federal Reserve and the Bank of England, began considering unorthodox policy measures. They turned to Quantitative Easing, or QE: injecting money into the economy by purchasing assets from the private sector, in the hope of boosting spending and staving off the threat of deflation. These were desperate measures for desperate times.
With signs of a fragile economic recovery gathering enough momentum to reassure policymakers in the US, the policy was expected to be wound down. But in a move that caught commentators off guard, the Fed instead committed to continue with its existing level of asset purchases. For the foreseeable future, at least, QE is here to stay. What began as a short-term crisis measure has now become a key component of Anglo-American growth strategies. It’s important, then, to take stock of QE and the central role it has played within the Anglo-American response to the financial crisis.
The way the Fed led the policy response to the financial crisis is important in two ways. First, it reflects the extent to which the Anglo-American economies have become financialised: credit-debt relations are pervasive throughout all facets of contemporary economic activity and there has been a deepening, extension and deregulation of financial markets commensurate with this development. In that context, with the increased competitiveness, scale and global integration of financial markets intensifying the risk of financial instability, the crisis management capacities of central banks have become increasingly important.
Second, central bank leadership of the policy response also reflects a key feature of neoliberal political economy in practice. Despite all the rhetoric of free markets, competition and deregulation that has been the mainstay of neoliberalism, there is a central contradiction at its heart: neoliberalism has been extremely reliant upon the active interventions of central banks within supposedly “free” markets.
The crisis has been warehoused on the expanding balance sheets of central banks, demonstrating just how much scope for policy manoeuvre there is when governing elites want it. Government debt and private assets, including toxic mortgage-backed securities, have been indefinitely transferred onto central bank accounts. This strategy highlights the role of arbitrary accounting processes, shaped by state institutions, at the heart of supposedly “free market” economies.
Given this room for manoeuvre, there is no doubt that a much more expansionary fiscal policy and a progressive taxation system could have been implemented in response to the crisis, but that response is foreclosed by the ideological confines of the prevailing neoliberal orthodoxy. Instead, we have monetary expansion and fiscal austerity.
Incubated within the crisis conditions of the 1970s, the neoliberal revolution in the West was birthed during the 1980s with the landmark electoral victories of Margaret Thatcher and Ronald Reagan. The early years of their tenure were marked by proactive central bank policies, fighting inflation through high interest rate regimes that were justified with monetarist dogma. Those policies had mixed results, but, crucially, they signified the strong emphasis upon monetary policy within the new paradigm, which now prioritised price stability, rather than the traditional post-war commitment to full employment.
By 2008, the challenge faced was markedly different. Now it was deflation and a shortage of liquidity, not inflation, which threatened the functioning of financial markets. Yet, in common with the inflationary crisis of the early 1980s, monetary policy has again been emphasised as the proactive component of the policy response. The common element in both crises is this combination of monetary activism, through extreme tightening (in the 1980s) or loosening (from 2008) of the credit flow, plus of course fiscal austerity.
What have the effects of this combination been? In the 1980s, the high interest rate regimes aggravated unemployment, boosted bank profits and accelerated the growth of income inequality. When the Anglo-American economies did return to growth they were markedly different than they had been before.
In the present period, we’ve witnessed a similar form of wealth redistribution. Recent estimates by Berkeley professor Emmanuel Saez, an influential scholar of income inequality, suggest that 95% of wealth gains since 2009 have accrued to the top 1% of the US income distribution pattern. In Britain the experience has been very similar, with the Bank of England’s own report in 2012 suggesting that QE had benefited Britain’s richest 5% the most.
These two major crises – the first inflationary and the second deflationary – have been the defining moments of the neoliberal period within the Anglo-American sphere and it’s remarkable that they have led to a similar pattern of policy response.
They have also both produced “regressively redistributive recoveries”: by this I mean that where and when growth has returned the benefits have been highly skewed towards the upper percentiles of wealth holders. That was the case in the 1980s, when the acceleration of income inequality really got underway. And it has been the case, once again, in the wake of the 2008 crisis.
Today’s “recovery” has largely been confined to rising stock prices and asset values. Meanwhile, average incomes have continued to stagnate or decline and income inequality has intensified. Quantitative easing has been central to this regressively redistributive recovery, boosting balance sheets and stock market values without providing a commensurate recovery throughout the economy as a whole. These measures have disproportionately benefited those who already own financial assets on a large scale.
Quantitative easing is thus exposed. It’s not merely a technical remedy to a malfunctioning financial system, but rather a deeply political policy programme. There are winners and losers just as with any economic policy that affects the overall distribution of wealth and resources within society. The conventional fixation with GDP obscures these dimensions of the recovery and ignores key questions about the distribution of wealth within society.
As the statistics about the uneven benefits of economic activity since the final crisis show, it’s important to remember that recessionary periods are not simply dead-spaces: even while the pie may be shrinking, the slices held by different groups within society can expand and contract in a very uneven manner with serious social consequences. There is no small irony in the fact that the banks, whose indiscretions lay at the heart of the original financial crisis, have been the major winners during the recession.
If we keep on following these same neoliberal policy paths we will only end up with ever more deeply divided and highly unequal societies. These are not firm foundations for healthy democracies.
This article first appeared on SPERI Comment - part of the Sheffield Political Economy Research Insitute’s website.