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The policy that saved the rich and screwed the young

Ten years ago, faced with mass bankruptcies and the very real prospect of a rerun of the Great Depression, the US Federal Reserve took the fateful decision to unveil a new policy called “quantitative easing” or QE.

This anniversary may seem unimportant but it should be commemorated because the policy of QE changed politics more profoundly than almost any other event or policy initiative in the past decade. Ironically, a policy that was supposed to protect the balance sheets of the wealthy has unleashed forces that may lead to the appropriation of those assets in the coming years.

The issue this article wants to address is whether QE, designed to protect the assets of the Baby Boomers that were threatened in the 2008 crash, has caused a lurch to the left in the millennial generation (Generation Y) and their younger siblings, Generation Z.

Will these age groups ultimately vote for much higher wealth taxes, wrestling these now more valuable assets from the Boomers?

But before we look forward, let’s look back a bit.

In March 2009, the Fed abandoned caution and undertook to exchange trillions of dollars of bad, old assets sitting on banks’ balance sheets, for trillions of dollars of good, new money that the banks could then lend out.

This dramatic change in policy was designed to offer a lifeline to the banks. The alternative would have been to allow the widespread default of debts incurred in the worldwide boom. Mass defaults would have bankrupted the banks.

The Fed believed that letting the banks go bust in the 1930s was what turned the post-1929 crash recession into the Great Depression. It didn’t want to risk that again, despite widespread and legitimate concerns about bailing out banks that had largely caused the crash through profligate lending in the boom.

The central idea was that the new lending would avoid defaults by pushing up asset prices, repairing balance sheets that had been broken by the crash. In March 2009, QE started in earnest and so began the largest “cash for trash” scheme the world has ever seen.

From the start of the financial crisis through to the conclusion of the final round of QE in October 2014, the value of assets exchanged from the broken banks to the Fed rose nearly 420 per cent, from $870 billion to $4.5 trillion.

The intended consequence of this policy – copied by all the major central banks – was to drive up asset prices across the world. The supposition was that rising asset prices would make people who owned assets feel better, they would then borrow a bit more and the economy would right itself. Indeed, this is what came to pass, eventually. The US and the world economy did recover but something else happened.

Who do you think benefitted more from a policy that drives up assets? Rich people or poor people? Obviously, rich people because they own the assets, that’s why they are rich!

The political consequences of this are enormous – and to date they have been only partly felt.

Increased inequality

As asset prices rose much faster than wages, the average person fell further behind. Their stake in society weakened. The faster this new, asset-fuelled economy has grown, the further behind the average person has fallen.

This threatens the political status quo because our politics is based on the notion that the faster the economy grows the better, because a rising tide is supposed to lift all boats. The accepted implication is that growth is good for lessening inequality.

But what if this is wrong? If asset prices rise faster than wages, then when the economy grows, inequality increases. What then?

The political ramification is that the people left out of the asset bonanza, which is the majority, vote to claw back their share and vote for people shouting slogans such as “Take Back Control” or “Make America Great Again”.

The message in these slogans is that the countries in question needs to be shaken up and the spoils shared more evenly.

In short, popular revolts against the elites have as much to do with recent economic decisions as with historical nostalgia about former national glory. Furthermore, as the old and the middle-aged own assets, is it any surprise if the young vote left in much bigger numbers?

Housing issue

The battleground for the new politics is the property market, where the reality of QE is most evident. In Ireland, lots of free central bank money sloshing around has driven up house prices, so much so that accommodation is out of reach for the young.

As a result, all over the world the young are moving to the left. In the UK this shift has been most dramatic. Research shows that if only the votes of the under-25s were counted in the last UK general election, not a single Tory would have won a seat.

Housing is the great divider there too. Property ownership amongst the over-65s in Britain has risen over the past two decades or so, from 63 per cent in 1996 to 77 per cent in 2016. Home ownership among the under-35s has declined from 54 per cent to just 34 per cent over the same period.

In the US we see a similar gap emerging between the generations. Just 27 per cent of millennials approve of Trump’s job performance, compared with 44 per cent of Baby Boomers.

Asset-fuelled capitalism

Opinion is not divided on Trump only, but on a range of social issues. For example, 52 per cent of millennials suggest racial discrimination as the main reason many black people cannot get ahead; just 36 per cent of Baby Boomers cite it as the main cause.

Similarly, while 79 per cent of millennials believe immigrants strengthen the country, just 56 per cent of Baby Boomers agree. In terms of foreign policy, millennials are far more likely than Boomers to believe that peace is best ensured by good diplomacy rather than military strength.

Exciting new politicians have emerged in the US, such as New York’s Alexandria Ocasio-Cortez, who is calling for a 70 per cent tax on the wealthy. This would have been unheard of a few years ago.

Time will tell if such a person emerges in Ireland. For now, the parties of the centre can rest easy enough, but if asset-fuelled capitalism continues apace, a big political change will follow.

Ten years ago, QE was unveiled to usher in a new period of trickle-down economics; its unintended consequence was to spark a bottom-up revolt against the elites which is far from over.

It is time for a new deal with the multinationals

The arrest of Meng Wanzhou, the chief finance officer and the daughter of the founder of Huawei, one of China’s richest men, by Canadian authorities on spying charges could be a game-changer for the global multilateral trading system. The Canadians are acting on behalf of the Americans here. Washington is pulling the strings.

Huawei is the world’s largest telecom manufacturer, and the second largest smartphone maker after Apple. America accuses it of stealing American technology; most likely Apple’s technology.

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Sanders is building a new political movement and could run again

Burlington Vermont is cold in late November. Huge mounds of recently cleared snow attest to the coming of winter, which in this part of the world, just below the Canadian border and far from the warming influence of the oceans, is long, dark and absolutely freezing.

The shops of Church Street are doing a brisk business in quilted jackets, boots and woolly hats. With its open log fires, law-abiding citizens and reusable coffee mugs, there’s a touch of a little Denmark in North America about this place. That is until you see the row upon row of F-16 fighter jets in the airport terminal.

This is definitely America; but it’s not the America we have come to expect in the era of Trump. Vermont is a tolerant, wealthy, almost Trudeauesque corner of the US. It was the first state to abolish slavery, is home to the hippy ice cream moguls Ben and Jerry, and has returned Bernie Sanders to the Senate for the past two decades.

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Why stock in Facebook, Apple and Google has fallen

The share prices of Facebook, Apple and Google have slumped. Apple’s is down almost 20 per cent in a few weeks, and the story for the other two isn’t much better.

Over the past few weeks, the so-called Faangs – Facebook, Amazon, Apple, Netflix and Google – have lost $1 trillion in value.

Before examining the situation on Wall Street, let’s step back and examine the process whereby world-beating companies go from rude health to fragility in short order; the process is so much more interesting than the event.

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Brexit provides Ireland with a commercial opportunity

Rosenthaler Platz in Berlin is a busy hub to the northeast of the city centre. The last time I sat on the U-Bahn here, the train slowed down and then passed through a creepy, dimly-lit and empty station with only East German border guards on the platform. It was the summer of 1989, just three months before the wall came down. Rosenthaler Platz was what was called a “ghost station”. The underground was constructed before the wall went up in 1962 and this was one of the stations which was boarded up when the city was divided. The trains from West Berlin passed through East Berlin, weaving right through the middle of the city, only to re-emerge back into the West and literally into the light.

Today it is buzzing with foreign students, start-ups and cafes that have turned themselves into communal workspaces. In fact, the one I am in, Oberholz provides a vision of what much of work life in the future may be like: semi-autonomous, creative teams working together on a project by project basis, hiring space in a cafe for a limited time rather than being full-time employees with full-time tenancy in a fixed office. Right now this is still only a small minority of workers but it could become the norm.

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Want to find the cause of the housing crisis? Look in the mirror

Let’s look at the housing shortage through the lens of planning permission objections. We rarely think about the impact on house prices of individuals or groups of individuals opposing planning permission.

Each objection may be legitimate but, in the aggregate, planning objections have a knock-on effect on the availability and cost of housing. Indeed, the trade-off between individual rights and the collective good, so evident when planning restrictions are sought via objections, goes to the very heart of macroeconomics.

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Dublin generates 56% of Irish tax, but can’t keep a cent of it

Mayer Amschel Rothschild, founder of the Rothschild banking dynasty, is said to have declared: “Permit me to issue and control the money of a nation, and I care not who makes the laws”. The implication is that parliaments can talk about laws or indeed change them, but the real power in a country or a city lies with whoever controls the money. Everything flows from this.

The story of Rothschild’s ascent from the closed, embattled, ghetto – the Judengasse of Frankfurt – to the seats of power in London, Paris and Madrid is one of the most fantastic entrepreneurial odysseys imaginable. His ability, courage and daring were extraordinary and he took advantage of exceptional circumstances and world-shattering events.

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We have witnessed the Dún Laoghaire-isation of Ireland

It’s 9am in the Dominican Convent in Dún Laoghaire, Co Dublin. A patient column of people runs all the way down the street as far as the Chinese-run New Paddy phone repair shop. The only other shop doing business so early on a Friday morning is May’s Occasions, which is busy selling communion dresses, tiaras and parasols to cater for the last-minute panic ahead of the big celebratory weekend.

Irish citizens might be about to repeal the constitutional amendment on abortion, but no one would lay a finger on our divine right to host a full-on, over-the-top communion, replete with bouncy castles, gazebos and Instagram poses.

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Under the bonnet of Trump’s purring economic engine

Mystic, Connecticut is one of those beautiful New England fishing villages, all wooden clapboards and two-storey homes. US flags fly from at least half of them. Cars slow down 10 yards from zebra crossings, as young mothers push outsized strollers to organised playdates.

The Mystic river flows into the Atlantic here, and most riverside homes have their own boats, tied up to family piers. People here are ridiculously helpful. Mystic doesn’t do surly. Pumpkins are everywhere, and the colours are gorgeous, but it’s getting cold.

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David has been writing for almost 20 years and there are plenty of articles covering some of the most turbulent times in the world economy.

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