Submitted by Omid Malekan, author of “The Story of the Blockchain, a Beginner’s Guide to the Technology Nobody Understands.”
In November 2010, as the Federal Reserve embarked on its second round of bond buying, Omid Malekan uploaded to YouTube a cartoon called “Quantitative Easing Explained,” which was critical of the central bank’s response to the financial crisis. Within weeks, millions of people had viewed it. Here, nearly eight years later, he says that he got it largely wrong.
It has been 10 years since the collapse of Lehman Brothers marked the unofficial start of the financial crisis. For those of us in finance who lived through that period, and the countless others affected by it, it remains hard to think of it as just a moment in history. A decade removed, the experience feels more like a mass injury that — grateful as we are to have survived — still lingers, and often manifests itself in the ongoing controversy over the government’s response.
I am a small part of that controversy, thanks to a YouTube cartoon I published in 2010 criticizing the Federal Reserve’s bond-buying program, known as quantitative easing. The popularity of that cartoon surprised me. Like most things that go viral, it was more a testament to what was on people’s minds than the quality of the work. Nevertheless, terms used in the cartoon like “The Bernank” entered the economic zeitgeist, resonating with people who knew that they didn’t like what was happening but lacked the technical vocabulary to express why.
Most of the targets of my cartoon, including Ben Bernanke, the former chairman of the Federal Reserve, have defended their actions and maintained that their work was effective in keeping the economic harm from worsening. I’m inclined to agree. Quantitative easing worked, just not in the way it was intended. Before I explain why, I need to admit what I got wrong.
Contrary to what one of my cartoon characters predicted, Q.E. didn’t “blow up the global economy.” Instead, both economic growth and the financial markets have been remarkably steady. If anything, the expansion of central bank balance sheets has dampened volatility. It’s still possible that the reversal of those policies will have a destabilizing effect, but even if that does happen — and I hope it doesn’t — I was still way off the mark.
The current economic expansion is one of the longest in history, and that too has surprised me. If you had asked me to predict the odds of another major recession eight years ago, not only would I have called it likely, I probably would have added that the very policies used to deal with the 2008 financial crisis would cause it. I was wrong about that, too.
So what did I get right? There’s a false belief in some circles that my cartoon was among the chorus of critics that predicted an inevitable debasement of the dollar — a belief possibly spurred by Mr. Bernanke’s reference to my work in his memoir. But my focus, as can still be seen in the cartoon, was on the mechanics of Q.E.
Ironically, those mechanics are something that Mr. Bernanke and I have always agreed on. He has often defended his actions by arguing that Q.E. is not the same as printing money because it only affects reserves in the banking system. Leaving aside the obvious overlap between the two concepts, I believe he’s right. Q.E. was, first and foremost, a policy designed to enrich banks. In that sense, it worked remarkably, and tragically, well.
Thanks to the one-two punch of the bailouts (some of which were also financed by the Fed) and Q.E., our banking system came back from the brink of collapse in just a few years. In 2010, Wall Street managed near-record profitability and paid near-record bonuses. This was no accident. As Mr. Bernanke argued in a Washington Post op-ed in late 2010 (and exactly one week before the publication of my cartoon), the two primary outcomes of Q.E. are lower interest rates and higher asset prices. Nobody benefits from either of those more than Wall Street does.
Left unmentioned in the op-ed were those guaranteed to not benefit, like the substantial portion of the population that doesn’t own any assets, or the countless people that could never get a loan. Lower rates are viewed as desirable in a downturn because they spur borrowing. But that belief — held by the vast majority of economists — leaves out the inconvenient truth of who it is that gets to borrow in the first place, especially in the aftermath of a crisis. The millions of people who lost their homes in foreclosures, for example, don’t. Nor do the millions more who lost their jobs.
Who does benefit? All the parties that have done disproportionately well in the past decade, like investment funds, large corporations and the wealthy. Debt levels have exploded among those groups, as have the valuations of the assets they tend to own: private companies, premium real estate and stocks. For this, I give Mr. Bernanke credit. History turned out almost as he predicted in his op-ed:
“Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”
“Almost” because the only thing missing from his prediction were the words “for some people.” One of the great ironies of monetary debates over the past decade is the consensus that you should not just print money and hand it out to ordinary citizens. That, as Mr. Bernanke argued in a series of essays published by the Brookings Institution a few years ago, should only be considered as a last resort. It is better, he argues, to send money to the banks.
According to government data, almost a fifth of the United States population is either “underbanked” or entirely disconnected from the financial system — a percentage that grew after the 2008 crisis. These are the people who have suffered the most in the past decade. Their existence outside the banking system almost guaranteed that they would not benefit from policies like lower interest rates.
Quantitative easing worked, but not for those who needed it most.
There was one other thing that I got wrong about the government’s response to the financial crisis. I assumed that the effects, and side-effects, would be felt in the economic realm. But today, it’s the political, social and even technological consequences that stand out.
The growing wealth gap, which we now understand to be at least partially caused by such policies, has fueled many political and social movements. In this era of political polarization, the one belief that the far left and the far right increasingly share is that our economic system is somehow rigged. That perception has played a part in everything from the insurgent campaign of Bernie Sanders to Donald Trump’s presidential victory.
Most surprising of all, though, is that there is now a new kind of money — one borne out of the chaos of the financial crisis and the controversial policies enacted thereafter.
Bitcoin and other digital currencies are the technological solution to a legacy monetary system that increasingly looks unfair. The decentralized nature and radical transparency of cryptocurrencies are a response to a banking system where institutions that were “too big to fail” have been enriched by Q.E. The code that underpins the Bitcoin blockchain is designed to treat the poorest citizen exactly the same way as the most powerful banker. After everything that’s happened in the past decade, we can no longer say the same thing about the Fed.
I disagree with some of my colleagues in the so-called cryptosphere on the potential for such coins to ever fully replace fiat money. But I am a proponent for many reasons, including the lifeboat they offer from poorly conceived economic policy. Despite the enduring controversy of the policies enacted in response to the financial crisis, their architects promise to repeat them in the future. But next time, those of us who are adversely impacted by such policies, or just morally opposed to them, won’t have to stand idly by. Next time, we can take our money elsewhere.