April 28, 2015

The Financial Markets are Fed-Driven

By In Blogs, C.Jay Engel

The narrative of the financial markets since the downturn in 2008 has been that the Federal Reserve is the great Central Planner on behalf of the rent-seeking speculative class on Wall Street. That is to say, there is a necessary distinction between the fabulous gains made by those riding the asset bubble to its present highs and the impoverishing trends on Main Street. Contrary to what is said throughout the financial news outlets, the never-been-better party on Wall Street— although in recent weeks volatility is creeping back in—is not a sign that the economy is improving. Rather, it is a sign that the Fed is the big driver of “profits” in capital markets, due to its addiction with keeping up the policy of easy money and drastically suppressing interest rates.  Free markets these are not.

Indeed, the Fed is nearly the sole purchaser of all new bond issues from the US Government; not only is it keeping the Government spending patterns alive, but it is also attempting to guarantee that if one buys government debt one week, the Fed will be there to push up prices the next. Further, the Fed simply refuses to let off the “easy button,” allowing massive levels of demand to flow into the capital markets and slosh around Wall Street world, bidding up prices wherever it goes. After all, how can any of this new money make its way out to Main Street in the form of new loans if the massive consumer class is already over indebted and unable to pay down what it has? In our economy, addicted to debt and immediate consumption (due to the Fed’s “free” money), the Fed’s actions have been a wonderful present to those who get to borrow at no cost and be assured that their investments will continue up toward the sky.

The Fed then has no choice but to continue running the digital “printing press.” Allowing rates to normalize would prove to have a disastrous effect on all institutions –-both public and private—who are far too unstable and debt-burdened to take on more liability in the form of higher rates of interest. And yet, refusing to address the overheating economy can be just as dangerous– prompting a collapse in the currency itself. The Fed, as they say, is truly stuck between a rock and a hard place. The choice seems to be between demolishing the currency and making the Fed’s dependents face their losses in the form of a bond and stock market correction –and “correction” is putting it mildly, the Fed has been unrelenting in its monetary expansions since the first great bailouts in 2008.

Needless to say, there is no recovery –there is only a Fed-driven speculation economy. One can easily point out the effects that this has had in driving a wedge between the “1%” and the rest of the citizens. But perhaps more importantly is the fact that the source of this massive division between Wall Street and the real US economy is the Fed’s perpetuating a situation in which productive investments are discouraged, immediate consumption is encouraged, and the allocation of scarce resources in the economy are completely and utterly wrongheaded. In other words, the Federal Reserve is undermining the very foundation of the modern economy that free market Capitalism created; namely, massive levels of production and productive investment.  A policy of a zero rate of interest succeeds in only one thing: shifting preferences for long term growth and savings into immediate consumption; consumption, of course, that consumers can no longer afford.

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Written by C.Jay Engel

Editor and creator of The Reformed Libertarian. Living in Northern California with his wife, he writes on everything from politics to theology and from culture to economic theory. You can send an email to reformedlibertarian@gmail.com