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.