Evidence Of A Bubble Economy: The 'New Normal' For The American Way

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by: John M. Mason

The dilemma I faced as I sat down to write my blog post was whether I should concentrate my effort on the New York Times article "Behind the Rise in House Prices, Wall Street Buyers" or whether I should focus on the Wall Street Journal article "Weak Signs for U. S. Output."

The reason for concentrating on the first article is that analysts have been applauding the recent rise in home prices because they have taken this as a signal that the housing market is recovering and this will help to spur on overall economic growth.

Yet, the New York Times piece begins with "Large investment firms have spent billions of dollars over the last year buying homes in some of the nation's most depressed markets. The influx has been so great, and the resulting prices gains so big that ordinary buyers are feeling squeezed out. Some are already wondering if prices will slump anew if the big money stops flowing."

The reason for focusing on the second article is that analysts have been seeing faster economic growth in the country because manufacturing output has been showing signs of strength. Yet on Monday the Institute for Supply Management released the result that its index of manufacturing activity fell to 49 from an April level of 50.7. A number below 50 indicates that manufacturing activity is slowing.

And, "the reading, based on a survey of corporate purchasing managers, is the lowest since the recession ended in June 2009." But, then I thought, that the two articles really go together. The two articles really define what is going on in the economy.

The economy is growing. But, the economy is also restructuring as it moves from the manufacturing base that dominated the world in the latter half of the twentieth century to an economy based more on twenty-first century technology … one more dominated by advances in information technology. I have written about this restructuring in two recent posts, "Opportunities in Economic Restructuring" and "Opportunities in Economic Restructuring II."

This economic restructuring is taking place, regardless of what the government does with respect to monetary and fiscal policy. But, this economic restructuring will take time and cannot be hurried along. If anything, government policies to put people back to work in the jobs in which they used to work will only delay the restructuring and cause the economic recovery to be even slower. Robust economic growth does not seem on the horizon in the near term.

But, the Federal Reserve is uncomfortable with the speed at which the economy is currently growing and at the pace that the unemployment rate is dropping. So the Fed continues along with its third effort at quantitative easing, buying large amounts of Treasury bonds and mortgage-backed securities.

Yet, the injection of massive amounts of reserves into the banking system is having little or no impact on bank lending … except at the larger banks. Loan growth at commercial banks with fewer than $1.0 billion in assets is flat … at best. Commercial bank lending is only happening at the largest banks.

And, the New York Times article describes why this is true. In essence, Federal Reserve Chairman Bernanke and the Federal Reserve are basically underwriting the wealthy. And, in underwriting the wealthy they are in the process of creating bubbles here and there as the flow of money into the economy is going through Wall Street and not through Main Street.

The Federal Reserve states its objectives in terms of achieving faster economic growth and reducing unemployment in the United States, but given the extremes to which it has gone one really has to question whether or not the Federal Reserve really knows what it is doing.

If the economy is really restructuring then the economic models the Federal Reserve uses are out-of-date. That is, the historical data used to construct the economic models do not resemble the reality of the world today. As a consequence, pushing the buttons that used to work on the economy does not achieve the same results as they once did. And, just increasing the effort to stimulate the economy, using economic models that are out-of-date will not achieve any greater success.

Furthermore, the Federal Reserve seems adamant that adding liquidity to the banking system will somehow cause commercial banks to lend more. But, if the problem is solvency of the "less-than-large" commercial banks and not liquidity, then pushing more and more liquidity into the banking system will not necessarily result in more bank lending, especially on Main Street.

So, in my mind, the New York Times article and the Wall Street Journal article capture the essence of what is currently going on in the United States economy. The economy is going through a period of restructuring and this restructuring is resulting in a less-than-robust amount of economic growth.

In order to combat this slow growth the Federal Reserve is throwing all the "stuff" it can into the economy in a desperate act to get higher rates of economic growth. This "stuff" is being used by either those that have the wealth to take advantage of the Fed's activity or by those that have the knowledge to exploit the Fed's policy actions. Hence, we get bubbles here and bubbles there that contribute to further wealth building but do little to help the middle class put their lives back together .

We read in the New York Times article: "Now, investment companies like Blackstone Group have swooped in, buying thousands of houses in the same areas where the financial crisis hit hardest."

"Blackstone, which helped define a period of Wall Street hyperwealth, has bought some 26,000 homes in nine states. Colony Capital, a Los Angeles-based investment firm, is spending $250 million each month and already owns 10,000 properties. With little fanfare, these and other financial companies have become significant landlords on Main Street. Most of the firms are renting out the homes, with the possibility of unloading them at a profit when prices rise far enough."

So, the economy creeps along and the Federal Reserve underwrites the wealthy! It seems like this is the "new normal" for the American Way.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.