“Privatizing gains and socializing losses” could be the motto for the neoliberal era. Alongside this and “there is no alternative”, few slogans better capture the ideology that has been so successfully diffused throughout the world over the past several decades.
Five years after latest financial crisis, this motto rings true as ever. To say that the losses stemming from the crisis were large is a heroic understatement; indeed, not only were they humongous, their exact size remains a tad fuzzy. Meanwhile, across the world in the aftermath of the crisis, stock markets have rebounded, wealth and income inequalities have grown and corporations and financial institutions have returned to making healthy profits. At the same time, many countries have seen both employment and median incomes either stagnate or fall.
In short, once again, losses were socialized, while gains privatized. Prominent among the means employed by governments to ensure that this be the case were various kinds of asset purchase programs. First, in the immediate aftermath of the crisis, came actions that transferred toxic financial assets into public hands either through direct buybacks (as in the US TARP program) or temporary nationalization/bailout. Since these short-term, more explicit socializations of private loss came to an end, the policy of quantitative easing (QE), through which central banks purchase vast amounts of long-term debt from financial markets, has been their implicit continuation. Unlike the earlier programs, QE is aimed instead at the other end of the equation, privatized gains.
To be sure, all of these programs of asset purchase are presented very differently: they are sold as a crucial tools for economic recovery. Across the world, people were told that the financial markets in which we are all increasingly complicit had to be given a shock therapy cleanse to get them back to health. This was stage one. Toxic assets flushed down the public drain. Stage two has been an expansionary monetary policy whose aim is to slowly nurse the entire economy back to health with large doses of clean cash – necessary to boost investment, jobs and growth at a time when interest rates are effectively zero throughout the developed economies.
As an expansionary policy, QE has been if not lauded, then at least guardedly accepted by many mainstream progressive economists. The ever-prolific Krugman has tacitly endorsed the program as a means of stimulus, though insufficient by itself. Most recently, Brad DeLong provided a list of policy prescriptions that called on the US Federal Reserve t maintain rather than taper its QE program. DeLong’s reason for supporting QE is somewhat complex. He appears to argue that QE actually decreases the amount of private risk in the economy, while more effectively raising the inflation target than so-called “forward guidance”. Together these mechanisms provide incentives for increased investment. Both Krugman and DeLong doubt that a higher inflation target will be more successful than fiscal policy in stimulating investment, but both are willing to accept QE as a monetary tool for economic recovery.
Predictably, some conservative commentators have argued instead for an end to QE. Their opposition is based on the build-up of public debt via QE and the effect larger debt has on growth. These tired arguments have been debunked, as has the most major recent academic study to give them credence.
Yet QE is harmful. This despite support given it by notable progressives, but for very different reasons than those given by its conservative opponents. The problem is not public debt as such, but what this debt is used to fund. In an important sense, QE is a massive welfare program. Unfortunately for the millions of precariously employed, unemployed, discouraged workers and newly-poor feeling the brunt of the crisis, it is a welfare program for the corporations and financial institutions that caused the crisis. Much of the shared economic gain that could be had from the asset purchases carried out via QE ends up being privatized.
In short, the cash the private sector has received from the sale of long-term assets to central banks has not produced much in the way of new stable jobs and rising generalized prosperity. Instead, the increasingly-integrated financial and corporate arms of the private sector have used the period since the acute financial crisis to concentrate wealth and power. QE has given them an large injection of public money with which to continue this project.
The means to effect this transfer are varied. One way has been to buy up assets; for example, financial institutions have been busy purchasing dirt-cheap housing and turning it into rentals, which are now additionally being securitized into instruments reminiscent of those that helped cause the 2007 crisis. The private sector has also used this opportunity to refinance outstanding debts taken on in less friendly times. Just in 2013, corporations in the US issued over $1 trillion of new corporate bonds. In Europe, corporations are even spared the trouble of doing this financial dance as the ECB has been using some of its QE funds to buy corporate bonds directly. Much of the remaining cash is simply being hoarded or used to buyback shares and pay out dividends, boosting stock prices and lining the pockets of investors. Finally, with the QE taps still open wide and the cash bonanza proceeding apace, the next step might be a new wave of mergers and acquisitions. Just this week, Google bought a thermostat company for over 3 billions dollars! This while many in the US are having trouble paying their heating bills, nevermind worrying whether their thermostat is intelligent enough for the 21st century.
QE demonstrates the continuing failure of one other popular neoliberal trope: trickle-down benefits. Government asset purchases via QE have further entrenched the concentration of wealth, through both the direct methods listed above and the generalized increase in the value of all financial assets. This holds regardless of whether one sees QE as equivalent to the government printing money or merely as a reshuffling of assets. Either way, QE sends benefits up, just as the initial post-crisis asset purchases sent losses down.
Like many powerful economic policy tools, the range of asset purchase programs implemented after the latest financial crisis plays a dual role. These programs both affect reality and serve to reinforce an ideology. They further naturalize the idea that the public should absorb the missteps of and heap rewards upon a private sector lauded for its ability to best generate wealth, jobs and generally all manner of economic well-being.
It is a tribute to the role that ideological obfuscation (or perhaps resignation) can play when some progressives support QE on expansionary grounds. While questions about whether and how to continue QE have increased – especially in the US, where the Fed has very slowly begun to taper the program – the extent to which QE is tied up with a powerful ideology that it is simultaneously helping to entrench it as a reality puts efforts to halt the program in question.
Capitalism is a cyclical system; good times beget bad, which again beget good. One of the successes of the neoliberal era has been to ensure that we feel the searing pain of the bad doubly, while getting left out further in the cold during the good. We need to recognize that those who cause crises can be responsible for them, while the amount of wealth that comes from society requires that it be shared much more broadly. As we break the bad habit of privatizing gains and socializing losses, maybe we can also think about finally banishing that other neoliberal motto and start to imagine alternatives…