Berko: Quantitative easing swelled banks, not economy

Dear Mr. Berko: In simple, noneconomics terms, could you tell me why the Federal Reserve’s three rounds of quantitative easing either failed to work or are taking too long to work? Some five or six years ago, you wrote an article about how a town in Arkansas had solved its debt problem. It made such good sense, and I’d like to see it again.

— LD, Jonesboro, Ark.

Dear LD: Give me a couple of weeks and I’ll write it again.

Congress and the Federal Reserve believed that a trickle-down approach — giving money to big banks, which in return would lend the money to consumers — would solve the nation’s economic problems. The Fed believed that consumers with pockets of cash would buy stuff and stimulate demand for goods and services, which would improve economic activity and put millions of Americans to work. Now, that sounds like good economic theory, but the problem is, it’s only theory. The approach didn’t work, because banks that were supposed to trickle down kept most of the “trickle” for themselves.

QE1, QE2 and QE3 failed to adequately stimulate economic activity because quantitative easing was a political solution to an economic problem rather than an economic solution to an economic problem. To effectively goose the economy, the QEs should have provided immediate infrastructure jobs for millions of Americans. Those shovel-ready jobs are needed to rebuild thousands of bridges, clean our rivers, enlarge our deep-water ports, improve our electrical grid, strengthen our dams, rebuild our highways, modernize our airports, etc. In this manner, millions of Americans would receive paychecks for supercharging our economic infrastructure, which is responsible for creating new jobs and maintaining most current ones. In this process, millions of Americans’ paychecks would be deposited in the nation’s 90,000 branch banks every week from coast to coast. Certainly, an improved rail system, modern airports, a more effective highway system, larger deep-water ports, etc., would create a perpetually moving job machine, virtually funneling trillions of “Q-wages” from consumers’ pockets into the banking system.

New Q-wages would quickly generate higher demand for goods and services, quickly creating new jobs and new demand needed to support a healthy, growing gross domestic product.