Tuesday, August 09, 2011
The Fed has been the Problem, not the Answer...
The Federal Reserve System (“The Fed”) is, inarguably, the single most powerful institution in the American economy. Almost completely removed from accountability to democratic processes, the Fed’s manipulation of the nation’s money supply is believed by many to have been a prime cause of the 1929 stock crash and depression…and here we have history repeating itself. Rather than being the economy’s savior, it has painted itself into a corner. It will make soothing announcements this afternoon as to how it is on the job, but the reality is that it is out of options.
The Federal Open Market Committee (or “FOMC”) of the Federal Reserve System is a committee comprised of the 7 Governors of the System, the President of the New York Federal Reserve Bank, and 4 other rotating Regional Fed Bank Presidents. Traditionally, they have authority in three areas:
1) The Discount Rate. This is the interest rate that the Fed charges member banks to borrow money. By lowering the Discount rate, local banks are able to borrow money cheaply, and then lend it out to consumers at fairly reasonable rates. By making loan money available, this stimulates borrowing, and spending, and it is hoped, begins to prop up the economy. However, the Discount Rate has already been lowered to one quarter of one percent...and banks are not lowering the rates they charge consumers, nor are they even making loans to consumers, and few businesses are borrowing in order to expand. The Fed is at the end of their rope with this tool, with nowhere to go.
2. The Reserve Ratio. This is the amount of money that the Fed requires banks to physically have on-hand, in each members vaults, in case of a bank run by the public (This is currently 10%). Lowering the Ratio means that banks have more to lend…but if no one’s borrowing, and banks aren’t willing to lend, it has no effect. And lowering the ratio only puts banks in a more precarious position if the public gets nervous and decided to withdraw cash. This could be an even larger problem in Europe, where the Eurozone Reserve Ratio is a paltry 2%. No option here.
3. And then there’s “Open Market Operations,” routinely paired of late with operations called “Quantitative Easing.” In 2008 the Fed engaged in large-scale purchases of bonds from their member banks, which amounted to printing money to replace the ‘paper’ that their own member banks held. This was the first round, called “QE 1,” which was quickly followed by a second round (“QE2.”) .
Neither effort helped the economy at large. Of course, that was not the point: The Fed was trying to bail out banks that had lost trillions due to their gambling on junk mortgage derivatives. In other words, the Fed created money to replace what the banks lost. None of this had any effect in funding business expansion or employment or consumption.
So what did happen to the money infused into the banks under QE1 and QE2? Businesses that can’t sell products can’t borrow. People who are out of work can’t borrow.
The US government has been cash-strapped as a result of a huge loss in revenues – tax revenues lost because of Republican demands to protect the wealthy from taxes, combined with 20% of the American workforce having no income, or less income, than before the recession began. So the US government decided it would borrow the money back from the banks, and pay them between 3 and 4 percent. Banks made a rational decision to make these loans. For the government and the banks, it was a win-win situation: the government raised the cash it needed, and banks had a profitable investment.
So, the banks received money printed by the Fed, and then used that money to lend it back to the US Government at 4%...paid for by the American taxpayer. In essence, you, my friends, are paying interest on the money you loaned your own government. Quite a racket, eh? How much money are we talking about here? 23 TRILLION dollars. Hence, a problem of having more debt than we can reasonably foresee paying back.
No, the Fed can not dig us out of the hole they dug us into. They will give reassuring comments this afternoon, but the man behind the curtain is a charlatan.
Politicians on the Left and the Right share blame in this mess. From the left, there has been a call to spend even more, while the right screams about cutting spending. And on that note, we are in a catch-22.
The first round of Stimulus Spending was a failure. Government can not pour money into an economy, cross its fingers, and “hope it all works out.” We have heard that the economy has been slowly improving, though some inthe last few days raised the fears of another recession. Well I have news for you: we never exited the first recession.
The amount of ‘growth’ in our nations GDP the last few quarters has been less than what is needed simply to keep up with deferred maintenance; we have not stopped falling behind since the 2008 crash.
Banks and Wall Street may be sighing a bit of relief because they got through the days when Lehman Brothers and Merrill Lynch and Countrywide and AIG were melting down – but their restructuring did little to affect the national employment situation. The glimmer of hope we thought we saw was merely a brief ‘blip’ when the stimulus money hit the banks – and now its gone. Gone to pay debt, gone to overseas markets, gone everywhere except American jobs.
But the right's answer of slashing spending at every turn is just as wreckless. Unwilling to cease spending trillions of dollars on overseas adventures, slashing domestic spending means people here at home get hurt. Unemployed, sick, hungry, homeless, and hurting people do not create a vibrant economy. In my home state of New Hampshire, we are watching as over 500 jobs are being cut from hospitals as a result of budget slashing…this, in an industry (health care) that has the best prospects for job growth in the years ahead as our population ages. In Wisconisin and New Hampshire, we see efforts to end union benefits: not to prop up the economy, but to impoverish and punish and reduce the compensation that workers get. That's not a way to instill consumer confidence and stimulate purchases from hurting businesses.
Has anyone else noticed the explosion of home auctions, homes for sale, and "Business Closed" signs around? I sure have, and here in NH we are told that our unemloyment rate is only half that of the rest of the nation!
There are no easy answers ahead. Unless and until corporate profits are required to be shared with the labor producing them rather than hoarded by 6- and 7-figure paycheck Executives....and unless and until banks are forced to engage in lending to consumers and businesses rather than the government...unless and until the government matches revenues with expenditures…we are in for a long period – perhaps an entire generation – of economic unrest.