We’re setting up an interesting real-life experiment as David Malpass explains in the Wall Street Journal:
The Federal Reserve started tapering its bond purchases at the beginning of the year and is on track to end them by October. That’s good news for small businesses, jobs and living standards.
Rather than creating or printing money, as is often assumed, the Fed borrows heavily from banks to buy bonds, setting arbitrarily low interest rates and diverting credit away from job creators. It’s been sucking oxygen out of the economy, explaining the very weak growth and jobs performance from 2009-13.
As the Fed winds down its bond buying, it will also stop its new bank borrowing, allowing a better allocation of credit in the economy. In 2013 alone, the central bank borrowed nearly $1 trillion from the banking system. It wasn’t created out of thin air. It is recorded as a liability of the Fed and an asset for banks.
It would be even more interesting if we were at a different point in the business cycle or if the Obama Administration’s policy preferences didn’t foster slower growth than might otherwise be the case. In anticipation of the howls of protest I suspect I’ll receive at that statement I’ll give three examples of many:
- failing to approve the Keystone XL pipeline gives environmental policy precedence over economic growth
- the PPACA spends more money on healthcare insurance and, presumably, healthcare than would otherwise be the case and which produces reduced economic growth
- reinstating the payroll tax prioritized putting money into the Social Security Trust Fund over present economic growth
I’m not claiming the administration is anti-growth. I just think they value other things more.
He goes on to explain the results of the Fed’s policy:
The data are clear that credit has been channeled away from growth, in effect rationed to the safest and best-connected creditors (government and big business) at the expense of those more likely to create jobs. In the five years through 2013, credit to the government grew $6.1 trillion in nominal terms, but private credit grew only $1.2 trillion. Credit to corporations (e.g., corporate bonds) increased by $1.9 trillion, forcing an outright shrinkage in credit to noncorporate businesses and households. Loans outstanding to these smaller borrowers fell by $660 billion during the five-year period, a devastating blow to small business investment, while loans surged to the government and corporations, the chosen beneficiaries of Fed policy.
To maintain the long maturity of its assets, the private sector has been replacing the long-term government bonds the Fed buys with similar assets—relatively safe long-term loans such as corporate bonds or real-estate loans. This type of lending generally goes to well-established companies offering good collateral, but it creates fewer jobs than loans to other businesses might create. The Fed’s bond-buying was almost tailor-made to help the haves—those with size, collateral and a long track record. Tapering will allow banks to make different, more job-intensive loans.
In order to put people back to work we’ve got to create more jobs while refraining from importing a workforce to fill the new jobs that have been created. To create more jobs we’ve got to give priority to private sector growth, particularly small businesses. Big Business has been shedding jobs for decades; most government subsidies go to Big Business, a perverse result from the standpoint of job creation.
To will the end you must will the means and fostering small business creation and health needs to be made a higher priority. Credit is one part of that. Lack of business ceased being the greatest concern of small businesses a long time ago. Now their main concerns are healthcare costs, uncertainty about the economy, uncertainty about economic policy, and energy costs.