Who Benefits the Most From Fed Policy?

Washington Post columnist Neil Irwin stopped by to discuss his book, The Alchemists: Three Central Bankers and a World on Fire. It's a great read on the history of central banks, including how they responded to the financial crisis and the challenges they face in the future.

Who benefits from the Fed's easy money policies? Will Japan's extreme financial measures make themselves felt in other economies around the world? In this video segment, Neil fields some questions from the audience. A full transcript follows the video.


Audience Member: When we talk about easy money policies, I think a lot of people would look at that and go, "Oh, so this is only good for banks. This is going to help banks." When you look at the banks' reports lately, I think you'll find that it's (unclear). They don't necessarily want the (unclear) low interest rate loans. There's not a lot of demand for them. It really hasn't been a huge benefit for them, so who has benefited most from the easy money?

Neil Irwin: I think it's holders of any financial assets, particularly equities, even more so corporate debt, especially high-yield corporate debt. It's pretty easy to trace the direct rise.

It's amazing how consistent the pattern is of, any time Bernanke gives a speech that's just, "More QE is likely," you see it in equity markets and corporate debt markets right away. I think that's a very direct relationship.

The reason it hasn't been a boon for banks is for exactly the reason it hasn't been a panacea for the real economy. What banks fundamentally need is an economy where businesses are making investments, they're borrowing money to build a factory, or whatever it may be.

As long as that's happening, no matter how low interest rates are, that's not a great spot for a bank to be in. If there's no loan demand, you don't really have much of a business. I think that's one of the great mysteries of, "Will this easy monetary policy at some point kick in and result in more activity in the real economy?"

Audience Member: You talked about the economists in Japan monitoring what they do here. (unclear) that was based on their financial policies. Is there any risk of what Japan's doing, what Europe's doing, that what they're doing makes its way over to our asset markets, to our stock market (unclear), and even if the Fed has their finger on what they're doing, maybe there's other central banks that are going to have an influence on our market?

Neil: It's funny, that's exactly what the foreigners have been complaining about with QE in the U.S. over the years.

If you remember after QE 2, the Germans were furious. The Chinese were furious. The Brazilians were furious, because they felt like this money printing by the U.S. Fed would ultimately leach into financial imbalances, asset bubbles, and inflation in their own countries, and that they wouldn't have the power to stop it.

This is especially true for Brazil. I think for China it's a little more complicated.

Look, if there's one thing this last few years has taught, it's that it truly is a global economy, especially once you're in the financial system, and you can't analyze -- if you're the Fed trying to think about doing QE or the Bank of Japan, or the ECB -- you can't do that without understanding how that will interact in the global context.

Because of what I was talking about earlier with this sense of common purpose and this sense of mutual confidence among the central bankers, they're talking about it. I guarantee you, Bernanke doesn't do a new round of QE, or the Bank of Japan Governor, or the Bank of England Governor, they don't do it without having some serious talks with their counterparts.

It's not that I have absolute confidence they'll get it right and avoid any kind of inflationary burst or global asset bubbles. It's that I know if they fail, it will not be for lack of airing all the views and all the possibilities that might happen.

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