Our financial system is so corrupt you might say there’s a rotting fish smell coming from the Fed.
How else can one describe a regime that punishes savers and rewards borrowers and speculators for years on end? Our central bank is essentially taking billions of dollars a year from average Americans, who are still struggling to get by in a bombed-out economy, and it is giving it — yes, giving it — to the very banks that helped cause the 2008 financial crisis in the first place.
Richard Barrington, an analyst with Moneyrates.com, estimates the Fed’s policies have cost savers $757.9 billion since the crisis, in an analysis released Tuesday . That’s approaching $1 trillion, which used to be considered a lot of money, even to bankers, before the crisis. The Fed, meanwhile, has only given the world a little assurance that its policies will change at some point in the distant future.
“It’s a stealth bailout,” Barrington said. “Low-interest-rate policies have helped bail out banks, the stock market and real estate, but the Fed has not publicly acknowledged the cost of those policies.”
Of course, not. Because the costs are staggering.
Money-market rates have been stuck between 0.08% and 0.10% but the annual inflation rate has been, at least nominally, 1.5%. That’s pretty low for inflation, yet this spread eroded the purchasing power of American deposits by $122.5 billion over the last year alone, Barrington said.
Barrington’s analysis, by the way, is conservative. It only counts what inflation has done to savers. It does not include what savers might have made if interest rates were closer to historic averages. And after five years, these costs are only mounting.
“Unlike the other bailouts we’ve seen, this one has become open-ended,” Barrington said.
He does not attribute this ongoing folly to corruption, as I do. He sees it, more charitably, as the result of “thinking that’s trapped in the past.” Our economic problems are unprecedented, and yet the Fed is still making comparisons to what they think should have been done in the 1930s.
The Fed has been purchasing tens of billions of dollars per month in U.S. Treasuries and mortgage-backed securities from banks. It has been cutting back this program, and many Fed watchers expect it to end by October, but so far these purchases have totaled more than $3.3 trillion.
And what does the Fed have to show for this? Economic growth averaging only about 2% a year. A sluggish labor market. And artificially raised stock and real estate prices that may not hold if the Fed ever stops manipulating interest rates to such historic lows.
Most Americans, by the way, haven’t participated in these lofty stock market gains that continue to widen the gap between rich and poor.
Bankrate.com on Monday released a survey of more than 1,000 households that showed 73% are “not more inclined to invest in stocks.” It was the third year in a row that this survey uncovered negative sentiments regarding the stock market, even as the Standard & Poor’s 500 Index has doubled since hitting bottom in 2009.
After getting burned twice in one decade — the 2001 Internet bust and the 2008 financial crisis — it is easy to see these gains as part of yet another financially engineered scheme. Average Americans either don’t have money to risk or they simply refuse to be herded into a casino, even at a time when money-market rates and bank deposits are delivering negative returns relative to inflation.
It just doesn’t make sense to the average mind. The Fed has responded to a crisis caused by too much borrowing by encouraging even more borrowing. It has allowed too-big-to-fail banks to become even bigger. It has helped inflate the national debt to nearly $18 trillion with its monthly asset purchases. It has created a junkie economy that seems hopelessly addicted to historically low interest rates, ever-increasing borrowings, and a non-stop printing press rolling out dollars.
You’d think banks would show some gratitude for all the dramatic adjustments made in the economy just to save them, but no. They have responded by raising fees and overdraft charges on customers, wrongfully foreclosing on homes, charging usury rates on credit cards and other consumer loans whenever possible, cheapening customer service, suing each other for the shoddy mortgage-backed securities they sold each other, laying off thousands of their own rank-and-file employees, and handing out fat bonuses to their top executives.
“Like any other economic decision, the Fed’s low-interest-rate policies should be looked at in cost-benefit terms,” said Barrington. “So far, the net benefits appear debatable in light of the costs.”
Boisterous cheers for rising asset prices, largely fueled with the Fed’s funny money, have shouted down the debate. Payoffs are how corruption spreads.
Now some might ask, what do I mean by corruption? Janet Yellen, she seems like a nice lady. Ben Bernanke, he seems like a nice guy. Other people at the Fed, they seem all right when you hear them speak. Do you really mean to tell me they’re corrupt? That they’re bad people?
Well, let’s put it this way: Ugly people don’t always know they’re ugly. Fat people don’t always realize that they’re fat. Stupid people truly don’t know that they’re stupid. That’s just part of being stupid. And people who’ve been completely co-opted by the wealth and power of a globalized banking system, do you think they know when they’ve become tainted by the normalized corruption all around them? Do you think they even want to know that they are captured regulators?
They may appear well-intentioned. They may even have good intentions, for all I know. But I’ve noticed they rarely, if ever, use the term “moral hazard” anymore. It’s just not part of their calculus. They have blinded themselves even to the law of gravity with the sheer amount of brain power that they put into everything they say and do. And they’re completely trapped in this thinking that trillions for the banks will solve everything.
You don’t need to take a class in economics, or even history, to suspect that the Fed can’t hold interest rates to zero for more than half a decade without consequences. And that it can’t keep printing money forever.
The Fed argues it’s all part of a necessary evil, without fully conceding that it is evil nonetheless. The Fed will also say that it saved the world from a financial crisis that could have been far worse. But this remains a hypothetical argument.
What if instead of bankers, we gave trillions of dollars to ordinary citizens running small businesses? Wouldn’t that have saved us from a financial crisis, too? Or what if instead we just let the little people earn a little interest on their savings accounts?
“Wouldn’t that three-quarters of a trillion dollars have been better off in people’s hands where they could spend it?” Barrington asks.
The Fed is supposed to intervene in the supposedly free-market economy when there’s a crisis. That’s what the Fed was created to do. But for how long? Barrington said it’s about time to do the math and figure out if the price America paid to bail out its banks and its economy was worth it.
That the Fed has gone this many years without counting it up smells like rotting fish to me.
[by Al Lewis, writing for MARKETWATCH]
As always, posted for your edification and enlightenment by
NORM ‘n’ AL, Minneapolis