Yves here. I have a small quibble with Wolf’s claim that QE is equivalent to “printing money”. Marshall Gittler walks through the transactions at the Fed and at the banks and in the private sector accounts (you should look at his charts) and concludes:
Bank ABC has only shuffled the composition of its portfolio around. It’s exchanged bonds for reserves in what is no more than an asset swap. There is no increase in the size of its balance sheet.
The central bank’s balance sheet, on the other hand, grows substantially. On the asset side it gains 40 bonds and on the liability side, reserves increase by the same amount. Note though that there is no change in cash in the hands of the public—what we know as money.
The whole operation leaves the Treasury’s balance sheet unchanged. No new bonds are issued, no revenues received.
So we can see that while the central bank’s balance sheet does expand, the only impact in the private sector is to change the composition of the banks’ balance sheets, exchanging bonds for reserves. The total assets of the private sector don’t change. Hence no money is being created any more than, say, if someone sold their stocks and put the money into bonds.
But aside from that wee bit of nails on the chalkboard, Wolf describes accurately how the Fed’s misguided efforts to use the wealth effect (trickle down theory in new clothes) have backfired, literally enriching the rentiers at the expense of a large swathe of low and even ordinary wage earners.
By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Testosterone Pit.
The “wealth effect” was held up by the Bernanke Fed as a pretext for printing money and creating asset bubbles. As prices were ballooning, those who owned the assets would feel wealthier and spend some of their gains, the theory went. This would somehow stimulate the broader economy, not just luxury retailers and Michelin-rated restaurants. But it didn’t work for everyone.
Prices for housing have jumped and rents have jumped too, yet renters – there are 38.7 million of them, 34% of all households, according to the Harvard Joint Center for Housing Studies (PDF) – well, they saw their real wages decline by 7.6% between 2007 and 2012.
An analysis of wage and housing data by the National Low Income Housing Coalition found that for someone earning the federal minimum wage of $7.25 per hour, an “affordable rent” of 30% of income would max out at $377 per month. But the average “zero-bedroom” apartment now goes for $680 per month. For a household to be able to afford that “zero-bedroom” apartment, it would need an annual income of $27,200. And it would need $39,080 a year to upgrade to their dream two-bedroom palace.
At the same time, cheaper, older housing units are torn down to make room for more expensive condos and apartments – 12.8% of the units that had rented out for less than $400 a month met that fate between 2001 and 2011. It’s all part of urban renewal, but where the heck are the low-income renters supposed to go?
“It’s an ongoing problem that is made more important against the backdrop of increasing demand for those units,” Chris Herbert, research director at the Harvard Joint Center, told Bloomberg. “At a time when we have a growing number of low-income renters struggling to find units they can afford, the fact that these low-cost units are the ones most likely to be lost from the stock is a concern.”
The toxic mix of declining real incomes of renters and rising rents has had an impact: In 2011, about 11.3 million households were spending over half of their income on rent, according to the Harvard Joint Center, a 28% jump from 2007. And given what has happened over the last two years to real wages and rents, the ratio must have gotten even worse.
“The private market doesn’t build housing that low-income people can afford anymore,” Sheila Crowley, CEO of the National Low Income Housing Coalition, told Bloomberg.
Hence the idea of subsidized housing as a solution. There are a slew of options. Among them, developers may have to stick a few token “affordable” units into their developments, in return for some kind of benefit from the local government, and ultimately the taxpayer. Other affordable housing units are built outright with taxpayer funds. Then there are the federal programs, such as the Section 8 vouchers that subsidize rent in private housing to bring it down to 30% of income.
Low-income renters who actually received federal support inched up from 4.4 million in 2007 to 4.6 million in 2011, the Harvard Joint Center found. But in a sign of our times, the number of potentially eligible households, such as low-income families, seniors, and the disabled, soared from 15.9 million to 19.3 million.
In high-cost places like in my beloved city of San Francisco, these trends have reached absurd levels: housing is getting too expensive even for people with good incomes. Renters are being evicted in record numbers from more affordable rental units – “affordable” by San Francisco standards – that will then be redeveloped and converted into condos. For developers, it’s a deal: the average price per square foot rose 16.6% year over year to an all-time high of $778, according to Trulia. It’s now almost 20% higher than during the prior bubble in 2007! The average listing price of a one-bedroom apartment rose to $791,884. The average listing price for all homes hit $1.8 million.
The rental market took its cues. In December, rents were up 10.6% from prior year, putting San Francisco in the number one spot of the 25 cities on Trulia’s list. Average rents now exceed $3,000 per month. And they aren’t for gold-plated palaces but for rental apartments.
That’s the wealth effect. The many trillions of dollars, euros, yen, yuan, and pounds that central banks have printed have found their home, so to speak. Real estate in Manhattan, London, San Francisco, and other trophy cities around the world is becoming too expensive for middle-class families to live in. Paris is on that list as well, but the higher end of that market is in turmoil; prices are skidding as rich people, in an effort to escape French taxation, are selling, but suddenly there aren’t a lot of buyers.
Chairman Bernanke padded himself amply on the back. His heroic multi-trillion dollar manipulation of asset prices has been successful; among other consequences, it’s pushing the cost of rental apartments beyond the reach of people with even decent jobs. With households stretching more and more to pay rent, they have to tighten their belts elsewhere. The crummy holiday shopping season was one of the signs. Yup, the wealth effect.
But it seems even the Fed is getting nervous about the wealth effect. Hidden in the middle of the 25-page minutes of the last meeting, under the most wooden and convoluted prose, the Fed issued a doozie of a warning: it fretted about financial stability. Read…. Plagued By QE Indigestion, Fed Issues Asset-Bubble Warning