"We went on a bond-buying spree that was supposed to help Main Street. Instead, it was a feast for Wall Street.
I can only say: I'm sorry, America.
As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed's first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street.
But I've come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.
...Chairman Ben Bernanke made clear that the Fed's central motivation was to "affect credit conditions for households and businesses": to drive down the cost of credit so that more Americans hurting from the tanking economy could use it to weather the downturn. For this reason, he originally called the initiative "credit easing."
...I had left the Fed out of frustration, having witnessed the institution deferring more and more to Wall Street. Independence is at the heart of any central bank's credibility, and I had come to believe that the Fed's independence was eroding. Senior Fed officials, though, were publicly acknowledging mistakes and several of those officials emphasized to me how committed they were to a major Wall Street revamp...
In its almost 100-year history, the Fed had never bought one mortgage bond. Now my program was buying so many each day through active, unscripted trading that we constantly risked driving bond prices too high and crashing global confidence in key financial markets.
...QE may have been driving down the wholesale cost for banks to make loans, but Wall Street was pocketing most of the extra cash.
...several other Fed managers also began voicing the concern that QE wasn't working as planned. Our warnings fell on deaf ears. ...the only obsession seemed to be with the newest survey of financial-market expectations or the latest in-person feedback from Wall Street's leading bankers and hedge-fund managers.
Sorry, U.S. taxpayer.
...the U.S. central bank's bond purchases had been an absolute coup for Wall Street. The banks hadn't just benefited from the lower cost of making loans. They'd also enjoyed huge capital gains on the rising values of their securities holdings and fat commissions from brokering most of the Fed's QE transactions. Wall Street had experienced its most profitable year ever in 2009, and 2010 was starting off in much the same way.
You'd think the Fed would have finally stopped to question the wisdom of QE. Think again. Only a few months later—after a 14% drop in the U.S. stock market and renewed weakening in the banking sector—the Fed announced a new round of bond buying: QE2. Germany's finance minister, Wolfgang Schäuble, immediately called the decision "clueless."
That was when I realized the Fed had lost any remaining ability to think independently from Wall Street.
...The Fed keeps buying roughly $85 billion in bonds a month, chronically delaying so much as a minor QE taper. Over five years, its bond purchases have come to more than $4 trillion. Amazingly, in a supposedly free-market nation, QE has become the largest financial-markets intervention by any government in world history.
...aggressive QE over five years has generated only a few percentage points of U.S. growth.
...QE isn't really working. Unless you're Wall Street.
...Because QE was relentlessly pumping money into the financial markets during the past five years, it killed the urgency for Washington to confront a real crisis: that of a structurally unsound U.S. economy. Yes, those financial markets have rallied spectacularly, breathing much-needed life back into 401(k)s, but for how long? Experts ...are suggesting that conditions are again "bubble-like."
Meanwhile, the country remains overly dependent on Wall Street to drive economic growth.
Even when acknowledging QE's shortcomings, Chairman Bernanke argues that some action by the Fed is better than none (a position that his likely successor, Fed Vice Chairwoman Janet Yellen, also embraces).
The implication is that the Fed is dutifully compensating for the rest of Washington's dysfunction.
But the Fed is at the center of that dysfunction.
Case in point: It has allowed QE to become Wall Street's new "too big to fail" policy."