Huszar’s last hurrah is hard on easing

Andrew Huszar had such a job. This week in an article in the Wall Street Journal, he told us all about it. "I can only say: I'm sorry, America."

Huszar had been an employee at the United States Federal Reserve for seven years, but was working in Wall Street when he got an unexpected call.

"Would I come back to the Fed's trading floor? The job: managing what was at the heart of quantitative easing's bond-buying spree — a wild attempt to buy $1.25-trillion in mortgage bonds in 12 months.

"Incredibly, the Fed was calling to ask if I wanted to quarterback the largest economic stimulus in US history."

Huszar didn't exactly jump at the job. He had left because he was worried about the Fed's continuing loss of influence to Wall Street, but he could also see that it needed re-inforcements. "I took a leap of faith."

Mortgage bond
He notes that in its almost 100-year history, the Fed had never bought a single mortgage bond.

"Now my programme 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. We were working feverishly to preserve the impression that the Fed knew what it was doing."

But soon Huszar's old doubts resurfaced. The idea was that the cheap money provided by the Fed to the banks would lead them to make loans to Main Street and the economy would get going again. But banks were actually issuing fewer and fewer loans.

"Quantitative easing may have been driving down the wholesale cost for banks to make loans, but Wall Street was pocketing most of the extra cash. Wall Street experienced its most profitable year in 2009, and 2010 was starting off in much the same way."

Demoralised, Huszar quit.

Quantitative easing, which Huszar describes as the greatest backdoor bailout of Wall Street, has amounted to more than $4-trillion and continues at $85-billion a month.

Quantitative easing
The impact, he says, based on the Fed's own calculations, is that over five years, quantitative easing has generated only a few percentage points of US growth.

"By contrast, experts outside of the Fed, such as Mohamed El-Erian at the Pimco investment firm, ­suggest that the Fed may have created and spent more than $4-trillion for a total return of as little as 0.4% of gross domestic product [a mere $40-­billion bump in US economic output]."

El-Erian's concern is that the Fed's easy money has killed the urgency for structural reforms to fix the financial sector, the Fed compensating for Washington's dysfunction.

Some commentators have said that it is folly to live on false money because it can quit on you at any time. But most politicians and voters, given the choice, prefer to live on easy money if it is available.

The thinking is that if you are going to live high on the hog, make sure it is somebody else's hog.

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Kevin Davie

Kevin Davie is M&G's business editor. A journalist for more than 30 years, he has worked in senior positions at most major titles in the country. Davie is a Nieman Fellow (1995-1996) and cyberspace innovator, having co-founded SA's first online-only news portal, Woza, and the first online stockbroking operation. He is a lecturer at Wits Journalism. In his spare time he can be found riding a bicycle, usually somewhere remote.

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