Chairman Bernanke & Trickle Down Monetary Policy
“It’s pretty clear that the stock market is the most important transmission mechanism of monetary policy right now,” said Peter Hooper, chief economist at Deutsche Bank AG in New York.
Bloomberg (10-3-12), Bernanke Seeks Gain for
Stocks in Push for Jobs: Economy
By J.M. Hamilton (10-14-12)
How bad is it when, within the last sixty days, nearly every
central bank in the world has added monetary stimulus to the global economy, or
intimated that they are about to pop the clutch on the printing presses once
again? Answer: Pretty bad.
We are into year four of this crisis, and the politicians
have largely abdicated responsibility, and instead relied upon central bankers
to lead the way. As J.M.H. has written before, monetary policy is a crude
instrument to conduct the affairs of state; and some would argue, myself
included, that central banks have only aggravated the situation, with economic
contagion spreading. Those European governments that are acting to
address fiscal policy and structural reform are doing so under duress, at the
expense of those citizens who can least afford the hardship. Moreover,
these states are addressing these problems at the point of a financial gun;
that is, the threat of having the next ECB or IMF subsidy/bailout
withheld. Even left of center governments, elected because the populace
it tired of choking on bank mandated austerity, find that once they are in
power – they still have to answer to the banks (granted many southern periphery
nations are already under bank management).
Meanwhile the 99% suffer, and the one percent prosper.
Any reasonable leader would suggest that it is in Greece’s
or Spain’s best interest to let the banks go under, and reboot their sovereign
pre-euro currency. Iceland defaulted, let their banks fail, and today
they are economically as right as rain. German politicians, opposed to
bailing out their southern neighbors, are beginning to advocate that the PIIGS
leave the euro. Apparently, not all Germans are enthralled with Ms.
Merkel’s commitment to the banks, I mean Euro, and bailing out their
neighboring states. But its not that simple, and no leader, even left of
center politicians, wants to be responsible for breaking clear of the Euro, or
declaring bankruptcy; because to do so would constitute a credit event, and
more than likely set off economic Armageddon, via a web of credit default swaps
(CDS).
CDS, of course, are insurance products issued by banks that
are used to insure government bonds against default, and are also speculative
instruments used to bet upon sovereign debt and against sovereign
nations. It is these instruments that caused the global crisis in 2008, and
it is these very instruments that prevent the world from clearing the decks,
and breaking free from the economic malaise that binds most Western democracies
to the banking cartel. And as of this date, reform of these CDS
instruments, including clearing houses, putting up collateral to back these
instruments (an impossibility because who has tens of trillion in security to
support a gambling addiction), and transparency, has yet to transpire. It
is these instruments that prohibit governments from restructuring, or rebooting
old or creating new currencies. Why? Because the banks call the
shots and the banks own the governments and the politicians, and again, nobody
wants to responsible for setting off a global doomsday scenario.
The symbiotic relationship between banks and governments
works like this: the banks screw up in another speculative frenzy; tapped
out governments bailout the banks at taxpayer expense; governments borrow to
bailout the banks harming their credit rating; interest rates rise; and central
and national banks invest in what is by now rapidly becoming junk sovereign
debt (witness Spain’s credit rating). Hence, creating another bubble, a
very un-virtuous cycle, indeed. The politicians fail to rein in the
banks, because politicians are owned by them. Meanwhile, the banks and
the right-wingers say the problem is not the bank bailouts, but social policies
and social spending of the various governments – which leads to calls for
austerity. However, in many countries the social spending is but a
fraction of the money and welfare spent on the banking cartel.
The great enabler in all this are the central
banks. The Fed’s stated
mandate of course, is maximum employment and price stability, but their real
master is the banking cartel, who is calling the shots.
Take the U.S. housing market for instance, which has laid
like a dead dog in the street for four to fives years now. The engine of
economic growth, the arbiter of Main Street health, and the storehouse of the
public’s wealth – I write of course of the residential housing market – has
languished, losing in some markets as much as thirty percent of it’s
value. Why? Because nobody has untangled the mess that the bank
created: MBS and CDO products, and the MERS registry system.
The banks, of course, don’t want engage in traditional
lending (preferring instead speculation in securities, commodities, private
equity/hedge funds, and public debt), and so have held the economy and the
nation’s housing market hostage, by insisting that the collateralized mortgage
market – or debt securitization – be reinvigorated, so that they can generate
huge fees, w/out maintaining any underwriting responsibility for their loans or
tying up bank capital.
Whew!
Entre Fed and Chairmen Bernanke, once again: and rather than
announce QE4, QE5, etc, etc, etc… the Fed has said it will continue to purchase
MBS from the banks in perpetuity to the tune of 40 billion per month, at
taxpayer expense.
Gee, do you see another housing bubble on the horizon, with
the taxpayer holding the bag yet again? Instead, however, when this
blows, the banks will be able to point their collective fingers at the Fed, and
blame the public sector once again. Much of the MBS undoubtedly ends up
with the GSEs, Freddie and Fannie, which is a favorite whipping boy of the GOP.
With the Fed buying MBS, this frees the banks to pump up a
stock market that no rational or sane adult will invest in, because the stock
market is now about as safe as a crack den in a very bad part of town.
Mr. Jamie Dimon, on the heals of Chairmen Bernanke’s
announcement of unlimited MBS purchases, states that the housing recovery is
now underway. His bank and the cartel got their way, a reinvigorated
collateralized debt market, and now the taxpayer sponsored lending can begin in
earnest. There’s just two problems: one in five mortgage owners is
underwater, and there are still millions of unsold homes in the inventory, many
of which are kept conveniently on the sidelines so that home prices can begin
to reflate.
Meanwhile, the consumer – the engine of economic growth – is
tapped out, mired in debt, and in many instances upside down or underwater on
their home loan. The banks refuse to write down the home loans, and do
not have to because of the Fed’s easy money policies and interest rate
suppression. The consumers only means of getting out from under their
debt is wage inflation, but wages in this country are suppressed by
unemployment and free trade and globalization -which SURPRISE benefit the one percent
and the banks. As evidenced by Japan, both the banks and the politicians
are willing to wait a generation or more until a real recovery ensues, and home
prices reflate; as they control the Fed and global central banks, and as they
are wrapped in a cocoon of liquidity – the cartel feels little pain.
In short, Keynesian policy is working very well
for the one percent, and has shielded the banks from their responsibility in
this crisis. However, Keynesian policy is doing very little for the rest
of the nation, because the Cartel is not lending the money out, and it is
having little stimulative impact upon the economy.
They say the definition of insanity is doing the same thing
over repeatedly, and getting the same negative outcome; but nobody has the cojones
to call Fed policy insane. The savers in this country are being robbed,
via interest rate suppression, so that the folks who put this nation into the
tank can prosper in the stock market and with alternative speculative
investments, like commodities and fuel (which again, give the 99% the shaft).
Having failed in their endeavor to rescue the American
economy, the Fed’s monetary policy now appears to be trickle down, at best.
That is, the reflation of asset prices, like stocks and commodities, in the
hopes that the rich and the elites will spend more, and the breadcrumbs will
come floating down to the 99%. This is the very policy that Democrats
decry, when Republican reverse engineer taxation in favor of the wealthy.
There’s just two problems with trickle down policies, whether they be tax or
monetary policy: wealth has become increasingly concentrated into too few
hands, and the consumer is tapped out… both of which leads to a decreased
economic demand.
In short, trickle down monetary policy does not work.
And QE3, et al., only prolongs the very painful deleveraging process.
An alternative path? Having failed in its endeavor,
and because Keynesian monetary policy is now facing the roadblock of a very nasty
cartel, the Fed could consider an alternative solution, which is to raise
interest rates, like Mr. Volker did in the late seventies and early
eighties. This will force banks to write down asset prices, and offer to
restructure or forgive debt on home loans. This will allow housing to
bottom and recover. Higher interest rates would stop commodity
inflation. It will put interest income back into the hands of savers and
the consumer who have fled the stock market for good reason, and spread the
wealth of monetary policy throughout all saving classes of society – instead of
into the hands of a few. And it would help get this country on its feet
again, as savers began to spend. This in turn will generate growth and
opportunity, and an expand the tax base and reinvigorate the economy. Higher
interest rates would also force politicians to finally put their fiscal house
in order, as well as reform the stock market, since capital would flow to bonds
and money market funds. Outlawing CDS until this crisis is over, and unwinding
these bets, means that the bank’s financial gun held to our collective head
simply disappears. It’s one thing to ask taxpayers to bailout a nation,
it’s another thing, entirely, for the public support those who bet and gambled
against a nation and her people, in the first place. Telling FHFA
director DeMarco to move forward and compete against the cartel is also the
appropriate thing to do, since lending rates have not fallen as rapidly as the
banks borrowing costs.
Of course, there could be short-term side affects to
increasing interest rates… some banks might fail, some governments might
default, and some of the one percent might get burned betting against nation
states and their economies. In the short run, there would undoubtedly be
economic hardship and dislocation, but for a finite period of time. The
alternative, however, and the path we are presently on, is a stagnant economy,
sub par growth, a more polarized society, higher headline inflation, and a
Federal Reserve/GSEs loaded up with MBS and CDOs. Not to a mention the
ticking time bomb of a disorderly default scenario.
And yet, another housing bubble on the horizon, instigated
by the Fed.
Isn’t it time for the Fed to reconsider its bank-centric
economic policies, and failed trickle down monetary policy?
Copyright JM Hamilton
Publishing 2013
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