Central banks around the world responded to the financial crisis that began in 2007 with quantitative easing—buying securities, such as government bonds, from banks and other institutions in the hope of encouraging them to make more loans and thereby stimulate the economy.
But while QE may have stimulated national economies, in the US it amplified regional inequality, benefiting the economically healthiest parts of the country more than the hardest-hit regions, according to the University of Chicago’s Martin Beraja, Andreas Fuster of the Federal Reserve Bank of New York, and Chicago Booth’s Erik Hurst and Joseph Vavra.
The researchers analyzed home-mortgage activity and new-car purchases by region following “QE1,” the US Federal Reserve’s program to buy $600 billion of housing-related securities starting in 2008.
This lowered interest rates and created a boom in mortgage originations, but the policy did not stimulate economic activity evenly across the country, according to the researchers. Almost all the mortgage activity came from refinancing, rather than people buying and selling homes. These loans sparked consumer spending: new-car sales, a common proxy for consumer spending, rose most in the regions where refinancing rates were highest.
But refinancing, which often lowers monthly payments and allows people to remove equity from their home, was not uniformly available across the US. Conventional home mortgages typically require loan-to-value ratios below 0.8—a ratio many existing mortgages in hard-hit regions exceeded when home prices fell, leaving the most economically damaged regions with the least amount of home equity to tap for refinancing. Those regions also had the largest declines in home prices and the largest increases in unemployment rates between January 2007 and November 2008.
QE1 exacerbated the disparity between the strongest regions economically and the weakest. The economic benefits of the program flowed mainly to cities such as Boston and Dallas, which fared relatively well in the financial crisis; while metropolises such as Los Angeles, Miami, Las Vegas, and Phoenix, which saw housing values plunge and unemployment soar, benefited less.