How bailing out the banks led to inequality across the globe
The unintended consequences of quantitative easing are the price that others must pay for the way the developed world was saved after the financial crisis, researcher Rodrigo Fernandez told a public meeting in Dublin on Tuesday evening.
Fernandez was speaking at an event held by Financial Justice Ireland (previously the Debt and Development Coalition) on the topic of “Propping up investors and privatising the global south? How the Eurozone crisis dragged down Africa”.
A researcher at SOMO (the Centre for Research on Multinational Corporations, Netherlands), Fernandez presented the findings of his new research paper “The politics of quantitative easing: A critical assessment of the harmful impact of European monetary policy on developing countries“.
He said that recent incidents such as the Turkish debt crisis earlier this year have been portrayed as being about personalities, which hides the structural issues happening behind the scenes.
Quantitative easing is the process whereby central banks use money that has been newly created to purchase bonds and other debt instruments. Often described as printing money, quantitative easing is in essence a swap, explained Fernandez: the assets (such as public debt, corporate bonds, or mortgage-backed securities) held on the financial institutions’ balance sheets are transferred to the central banks’ balance sheets and the money held by the central banks is transferred to the financial institutions.
Used by the US for the first time in 2008, quantitative easing programmes were later undertaken by the Bank of England and European Central Bank, as well as others.
The stated purpose of quantitative easing was to stimulate the economy. However, this clashed with the austerity programmes, which deflate an economy, said panelist Michael Taft, who referred to quantitative easing as “probably one of the most inane contributions to macroeconomics since the eighteenth century”. Taft explained that policies should focus on supporting the productive economy.
As well as laying the seeds of the next crisis by continuing a “debt-led accumulation model” rather than a wage-led one, quantitative easing has unintended consequences for developing countries. The low interest rates led investors (who had just received a cash injection but had nowhere to spend it) to seek out economies with higher returns (or higher interest rates). “This results in ever larger and more aggressive fluctuations of cross-border capital flows. These larger flows have resulted in the build-up of unsustainable debt, both sovereign and private”, according to the report, which argues that QE programmes are in danger of creating a new debt crisis in developing countries.
A number of suggestions, such as using central banks to bail out the planet, halting the privatisation of AIB, listening to economists from the global south who have already experienced QE crises, and looking at the “tax haven family”, were offered in response to the chair, Jean Somers’, request for a target for activism arising from the meeting.