One of the rationales for the endless quantitative easing (QE) has been that the extra cash will “help the economy by letting everyone have more cash”. Except that has not really been the case.

Recovery has been weak since the crash of December 2007 and only recently were any signs of an improvement seen (that is a debatable point, a lot of the improvement in the core indexes apparently are due to the way the numbers are measured and not reality).

Economic activity was low nearly 5 years after the recession ended. The banks who were holding the “toxic assets” were pumped with credit so that they would supply credit to businesses. The bank’s business is not to take deposits, the business of a bank is to lend money. A business asks for money and a bank lends money to that business. Why would a business ask for money?

If a business finds that it can expand operations such that the revenue covers all costs (investment, loan interest, inflation) the business would consider growing as there is profit to be made. The conditions since the 2007 recession were not very conducive to business expansion as projected demand may have been found to be weak or the demand growth that the business may have been needing was not projected to be on target. So banks did not lend money as businesses were not looking for loans.

Banks were not lending to consumers as much either, most are underwater having borrowed on home equity and are in the process of deleveraging or are simply not creditworthy enough.

Speaking of deleveraging, most of the finance houses are also deleveraging after the derivatives market went berserk in 2007.

Assets are losing price, that is monetary value, and those who own the assets need to hold on to liquidity to stay solvent, this is a “financial black-hole”. In a financial black-hole, the circulation of money suffers as it gets stopped at some point of the flow (mostly the banks or financial institutions). So how can the financial institutions be made to shed some credit/liquidity when the economy is caught in a financial black-hole?

Let me ask this in reverse: How do banks make people save money with the banks? Answer: By offering a return on the savings.
How will a bank discourage saving with them? Answer: By offering a negative rate of return on savings.

Similarly, make banks shed liquidity (give loans, for cheap even) by enacting a wealth tax. A wealth tax that is structured on the capital held as collateral by a bank will work wonders to discourage hoarding liquidity and also discourage sinking too much liquidity in derivatives vís-a-vís productive capital. It will also prevent the economy from being excessively “financialized” and reduce the need to bail out non-performing debt (held by the banks) in the economy, thereby saving massive amounts of money for the government that could be used for financing actual production in the economy that can support further growth.

Touchy topic, one that has the support of the European classicists though. They did look at returns to “ownership of capital”, rents, as an “overhead” on the economy that creates cost but does not add much in the way of value. That is what the current process of making derivatives is doing (a process referred to as “financialization”), creating an overhead on the economy. One by requiring a return (which creates “asset value”), the other by requiring to be bailed out.

Reducing this overhead will go a long way to returning business confidence and sparking economic growth.