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.

Qualitative easing and the Obama recovery

The Federal Reserve Board’s policy of qualitative easing has helped the stock market recover.  But Americans who work in the real economy are still struggling.

Qualitative easing is the Federal Reserve Board’s policy of creating new money to buy Treasury bonds in order to keep interest rates low.  The greater the demand for bonds, the lower the interest rates, and the interest rate on Treasury bonds is generally the benchmark on all Treasury bonds.

The Fed’s Operation Twist was a sale  of medium-term Treasury bonds and purchase of 10-year bonds.  The Federal Funds rate is the interest rate for overnight loans among banks so they can meet the Federal Reserve’s requirement for reserves.

The chart above shows how QE correlated with the ups and downs of the stock market.  But, as I indicated in a previous post, American corporations did not advantage of low interest rates to invest in their businesses.  Instead they have transferred the gains to stockholders in the form of stock buybacks.

An economic recovery has taken place.  Most Americans are better off than they were at the depths of the crash.  But as economic recoveries go, this one has been weak.

The chart shows how important is it to always adjust for inflation.  A dollar in the year 2000 is not the same thing as a dollar in the year 2016.

Although corporate executives did not take advantage of Qualitative Easing to invest in America, there was nothing besides politics holding back the federal government from investing in public works.  There is a lot of urgent work that needs to be done in maintaining and upgrading American’s physical infrastructure, such as upgrading public water systems to get the lead out.

With a lot of public work that needs to be done, a lot of people who need work and financing costs at historic lows, why not put the unemployed and under-employed to work doing what needs to be done?  Fiddling with interest rates and the money supply is not enough.

How to give American workers a pay raise

The majority of American workers are getting less and less benefit from the growth of the American economy.

The pro-labor Economic Policy Institute notes that, since 1979, the U.S. economy (gross domestic product) has grown by 149 percent and productivity has grown 64 percent, but actual wages of most American workers, adjusted for inflation, are flat or declining.

Recently the EPI published an 11-point program for boosting American wages.   Here it is, with my comments.

1. Raise the minimum wage.

2. Update overtime pay rules.

3. Strengthen collective bargaining rights.

Stronger labor unions give workers power over their wages and working conditions independently of laws and regulations.  This is the most important change and a key to all the other changes.

4. Regularize undocumented workers.

Hiring unauthorized immigrants and relocating business activities to low-wage countries are two ways of doing the same thing—escaping the requirements of American labor law.   It is almost like competing with slave labor.  Since it is not feasible to deport the millions of unauthorized immigrants now in the United States, the only choice is to bring them under protection of the law.

5. Provide earned sick leave and paid family leave.

Low interest rates haven’t spurred a recovery

It’s a financial axiom that central banks can make money available and set the rates, but they cannot dictate where it goes.

Yet, the IMF just now seems to be figuring that out.

As for central bank sponsored “risk taking,” haven’t we seen enough already?

Where the Money Went

• Junk bond speculation
• Stock market speculation
• Stock market buybacks at ludicrous prices
• Robots in lieu of hiring
• Free profit for banks thanks to interest on “excess reserves”
• Private equity firms buying up houses
• In Europe, banks loaded up on their own allegedly risk-free bonds
• In China, property bubbles and profitless SOEs [state-owned enterprises]
  

Where the Money Didn’t Go

• Higher wages
• Infrastructure
• Investment

via Mish’s Global Economic Trend Analysis.

(Hat tip to Naked Capitalism)

Who’s running this country anyhow?

Carmen Segarra, a bank examiner assigned by the Federal Reserve System to Goldman Sachs, was fired after refusing to withdraw a report criticizing Goldman.

She made tape recordings showing how subservient the other Fed examiners were to a company they were supposed to regulate.

The country is being run by the kind of people that Theodore Roosevelt called “the malefactors of great wealth” and “the criminal rich class.”  The fact that certain people are rich does not, in and of itself, entitle them to respect or deference, let alone immunity from laws and regulations that other people have to obey.

LINKS

The Secret Goldman Sachs Tapes by Michael Lewis for Bloomberg View.

Inside the New York Fed: Secret Recordings and a Culture Clash by Jake Bernstein for ProPublica.

NY Fed Fired Examiner Who Took On Goldman by Jack Bernstein for ProPublica (2013).  This has more details on the problems with Goldman Sachs than just what was on the recordings.  [added later]

Fed Whistleblower Carmen Segarra, Edward Snowden and the Closing of the Journalistic Mind by Yves Smith for naked capitalism.  [added later]

The Secret Recordings of Carmen Segarra, an interview by Ira Glass for This American Life.