Stock market recovery rests on thin air

Right now the stock market is like Wile E Coyote in the Road Runner cartoons.  He can run for a while with nothing supporting him—just so long as he doesn’t look down and realizing he is standing on thin air.

Holders of financial assets have enjoyed a good economic recovery.  But what is holding it up is the Federal Reserve System’s policy of keeping interest rates as close to zero as possible.  If savers and investors can’t earn interest on their bank savings accounts or money market funds, and very little in the Treasury bond market, they have no choice but to venture into the stock market if they want income.

The hope of Ben Bernanke and the governors of the Federal Reserve Board is that the recovery will become self-sustaining, but each time they talk about or start tapering off, the stock market drops.  This hope has not been realized.  Without a recovery in the real economy, the employment of people to produce goods and services, stock price averages are bound to fall back.

Standard & Poor’s 500 stock index

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Click on Here’s The Evidence That The Tech Sector Is In A Massive Bubble for analysis of the stock market bubble by Jim Phillips for Business Insider.  Hat tip to Daniel Brandt.

And we have yet to see a recovery in the real economy.  The charts below show the percentage of the American population in the work force (top lines) and the percentage with jobs (bottom lines).   Neither of those lines is back to where it was at the end of the Clinton administration.

President Barack Obama and his economic team, Timothy Geithner, Larry Summers and Ben Bernanke, acted effectively in 2009 to prevent the financial markets from collapsing, and to rescue the big banks and brokerage firms, which now are bigger than ever. But what that means is that, because none of the underlying problems have been fixed, another collapse is almost certain, and will be worse than the previous one.

As Ian Welsh wrote on his web log:

Bailing out banks, brokerages and so on in the way it was done had the following effects:

1) Fewer, larger financial institutions. Too bigger to fail.

2) Rewarding people for outright fraud and insane risk taking. Remember, they kept their bonuses and salaries, they are rich, even if they belong to one of the few companies that went under.

3) A huge overhang of bad debts which has to be worked off.

4) An understanding that financial profits are still the way, you, personally get rich.

5) Making the rich, richer (yes, they are richer now)

The reason the economy has not recovered and will not recover for at least a generation is because of the overhang of bad debt, the glorification of financial “profits” (they aren’t), the failure to de-financialize the economy and the confirmed control of government by the rich.

In other words the bailout caused the sucky “recovery”, or, if we are to be honest, the current long Depression.

The standard argument is “we had to do something”. Yes and no.

1) We could have done something else, like nationalizing the banks, making bondholders and shareholders eat their losses, taking what remains and putting it in bad banks, then breaking the banks up and re-privatizing them.

2) Actually, if we’d just let them go under per the law, with the FDIC taking them over, things would have been worse initially, but there would have been an actual, robust recovery when it occurred. By now you’d be better off. And the shock could have been cushioned with generous EI [unemployment insurance], letting people stay in houses and so on.

TARP, though it actually wasn’t the key bailout (those were done mostly through the Fed), is when Obama said “I am going to keep the same people who caused this mess in power in the financial system, make sure they don’t lose their money, and that’s just too bad for everyone else.” When he confirmed that Bernanke was to stay on, he confirmed that he was, essentially, OK with what had happened.

The bailout decision did not “save the world”. Instead it doomed a good chunk of the world to twenty years of a shitty economy, minimum. Forget the unemployment rate, the percentage of Americans employed hasn’t recovered, and won’t, and that’s before we talk about Europe.

This is the first of Obama’s legacies.

Click on The Bailout Caused the Sucky “Recovery” for the original version of Ian Welsh’s post.

Click on Shorter Federal Reserve: The Economy Breathes Sort-Of Okay As Long As We Keep It on Life Support for more analysis by Ian Welsh.

Click on What Will the “New Normal for America Be? for thoughts of economist Brad DeLong.

Click on QE “heroin” flows on for a view of Fed policy by Australia’s MacroBusiness news site.  Hat tip to naked capitalism.

Click on Dow Jones record close: How hopes about quantitative easing sent stocks soaring for a report by Sean Vitka for Slate’s Moneybox [added 11/7/13]

Click on Chase Isn’t the Only Bank in Trouble for Matt Taibbi’s report for Rolling Stone on why the banksters might not get away with it after all.   One can hope.

Tags: Federal Reserve Board, Quantitative Easing, Stock Market Bubble, Tech Stocks, Wall Street