Fed keeps financial markets on life support

Ever since the 2008 crash, the Federal Reserve Board has had the U.S. financial markets on life support.

The Fed has used its influence on the banking system and bond market to drive interest rates down to near zero.  Taking inflation into account, many interest rates are less than zero.

This drives investors who want a return on their investment into the stock market, and the fact that we’re in the market helps keep prices up.   But the rise in stock prices is not based on profitability of underlying businesses.

The idea is that low interest rates and a rising stock market will encourage new investment and a growth in the real economy.  But when the Fed hints that it may allow interest rates to return to normal levels, investors panic and the market falls.

Another way the Fed has tried to stimulate the economy is by “qualitative easing”—buying up banks’ so-called toxic investments.   This is supposed to empower the bankers to find better investments, which would enable the economy to grow.   But this was never a requirement.

Right now wages are rising and unemployment is falling.   It would be great if this continued for a long period of time.

Artificially low interest rates cannot go on forever and, as Stein’s Law says, if something cannot go on forever, someday it will stop.

LINKS

Donald Trump and the Next Crash: Making the Fed an Instrument for Disaster by Nomi Prins for TomDispatch.

The mini crash and class warfare by Larry Beinart for Al Jazeera.

Tags: , , ,

3 Responses to “Fed keeps financial markets on life support”

  1. Ataraxik Says:

    I’ve heard people talk about this before. Someone recently said to me that the US economic collapse was inevitable.

    Maybe it won’t happen for another ~20-30 years, but it’s going to happen, on account of the fact that the USA is $20 trillion in debt and the system is propped up with voodoo economics – like the things you’ve outlined here.

    Like

  2. whungerford Says:

    I believe the description of “quantitative easing” given in the article is misleading. Here is another definition:

    “Quantitative easing is an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Quantitative easing is considered when short-term interest rates are at or approaching zero, and does not involve the printing of new banknotes.”

    https://www.investopedia.com/terms/q/quantitative-easing.asp

    Like

  3. philebersole Says:

    The definition you give is how quantitative easing is supposed to work.

    The problem is that since the 2008 recession and before, lowering interest rates by flooding financial institutions with capital has failed to promote increased lending or stimulate economic activity.

    Such policies worked in the past. They don’t work now—for reasons we could debate.

    I don’t know what I would do if I were in charge of the Federal Reserve Board. Interest rates cannot remain artificially low forever. Yet each time they are allowed to inch upward, the financial markets panic.

    I was misleading in my remark about toxic assets. The Federal Reserve did buy up unmarketable mortgage-backed securities and other assets in order to save major banks from failure. But this has nothing to do with the overall success or failure of qualitative easing to stimulate the economy.

    https://www.npr.org/templates/story/story.php?storyId=125764118

    https://www.insurancejournal.com/news/national/2010/04/02/108690.htm

    https://www.theguardian.com/business/2017/jul/10/central-banks-qe-unconventional-monetary-policies

    http://fortune.com/2018/02/28/debt-crisis-jerome-powell-federal-reserve-testimony/

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.


%d bloggers like this: