The sum total of Fed actions over the past 3 years can probably be summed up as the central bank attempting to create its own reality. They have committed to the following:
- Keeping deflation at bay and raising the inflation rate
- Keeping the Fed Funds rate low for an indefinite period (forever?)
- QE1 and Q2 (and Q3)? (Quantitative Easing - the purchase of US government securities in the open market)
- Supposedly working toward full employment while stating that it will take 4 to 5 years for employment to recover?
All of these actions are the result of a single fact: They are compensating for failing to do the job they were tasked with from 2000 to 2008. They failed and we pay and pay.
I think we have to first explore why inflation is so important to the Fed to make sense of this mess.
The banks are still in a big hole (of their own digging) and need housing prices to stay elevated to keep their losses in check. These same banks need to recapitalize at low interest rates (via bond issuance) and to profit from the rate spread to keep their salary game intact. The wealthiest individuals in America stand to lose the most from deflation, even though housing price devaluation would enable an entire new generation of hard working Americans to participate in the housing market.
The influence of the wealthy on Fed policy is not hard to understand. Keep the status quo and you are safe from congressional inquiry as a Fed governor; do what's in the long-term best interest of the American citizenry at large and you are not. Congress by and large will continue to go along with this charade for as long as we let them. It should be "one man, one vote", but these days it’s how many dollars you can pony up that determines how many "votes" you can muster.
Why does inflation serve the largest banks and corporations disproportionately while hurting the average working citizen?
Greater inflation is desired because the largest banks still hold massive amounts of "bad" loans on their books that simply cannot be justified under any scenario except elevated housing prices. Greater inflation is desired by large multinational businesses so that they may increase current pricing levels and continue to grow profitability for shareholders. Greater inflation is sought so that the Fed can regain credibility and maintain the illusion of being in control of the markets. Inflation in basic necessities such as food, energy, health care and educational expenses have the potential to drain the resources of anyone below the upper strata of society. Making life harder for those on the margin to protect those at the top is not only bad economic policy, it's immoral.
What might the potential long-term effects of a near zero Fed funds rate be?
The longer the Fed keeps rates at zero, the longer the banks have to develop strategies for operating in a "risk" free capital environment. Given past history, it's only a matter of time (when, not if) until the banks blow the economy up yet again. Low rates directly benefit the banks and large corporate sectors of the economy. They can borrow at historic low rates whereas the average citizen has no capability of obtaining such funding. While mortgage rates have moved to levels we have not seen in a decades, the corresponding tightening in loan qualification standards means that many cannot take advantage of them. Profits to the largest businesses and no tangible benefit to the American citizen - can you see a pattern developing?
The Fed will eventually be faced with a quandary of enormous proportions. Either raise rates and suffer the wrath of a capital allocation system that has spent the better part of 5 years devising the most profitable ways to game that system, or keep rates at or near zero and continue favoring the largest and wealthiest businesses in America over the working class. I fear the Fed may be secretly planning to permanently lower rates because I cannot frankly see any other way out of their dilemma.
Let's talk about employment in America, or more correctly, the problem with employment in America.
The latest government report shows a 9.4% rate of unemployment. While that statistic is down from 9.8% the previous month, it probably reflects people actually dropping out of the labor force and not gains in employment. They drop out when their discouragement level becomes so high it is unbearable for them to keep trying. Unbearable for them to keep trying to seek gainful employment. Is this the America we really want?
The latest report shows that 103,000 jobs were created. This is not even near enough to take up the new workers entering the work force, let alone put back to work the tens of millions (yes that's right....tens of millions) of people who have lost their jobs and are seeking work. I can't believe this is happening in America. It's sickening. Record profits and cash balances for America's biggest businesses and no employment opportunities for the working class.
Unemployment compensation was extended to 99 weeks for those seeking work. But what was missing was any sort of connection between these benefits and actually re-training these folks for careers that may be in demand. If a worker is laid off due to economic circumstances, chances are his line of work or skillset is not in demand anymore. Why in the world are we not getting these folks into new careers? I know for some it is a stretch to think that an educated IT worker may now have to re-train as a health care worker or a nursing home assistant, but at some point in this vicious cycle you have to let the free market work.
We currently 'import' people from all over the world to staff our hospitals and nursing homes and I sometimes wonder why we are not putting able bodied Americans to work instead of just sending them 99 weeks of unemployment checks while they go through the futile exercise of trying to re-live their past glories. The reason, of course, is that these jobs pay much less than their former occupations and then they wouldn't be able to afford that damn McMansion anymore. You do see it all goes back to the banks and their bad loans. When does it all end? The Fed believes that more inflation is the answer to unemployment in America. How about you?
To be constructive in my final analysis, I recommend we do the following things NOW to get this country back on the path to economic opportunity for all, and not just those who already have it:
- Stop trying to keep housing prices inflated. Houses are overpriced now and the market laws of supply and demand should be allowed to set the price level.
- Force the banks to clean up the bad loans. I frankly don't care how much it would hurt profitability. Enough is enough. If we force them to take losses on their bad loans and clear their balance sheets, we can finally get back to the business of growing America for all citizens. The one benefit is the huge Wall Street salary and bonus scam will have to come to an end. Someone in government has got to have enough backbone to take them on - I just don't know who that is.
- Instead of spending taxpayer resources on efforts to keep housing price levels inflated, we should use that money to create a “What's needed now” job clearance engine that will be a government/private industry partnership. When someone loses their job, they would be required to utilize the services of this job clearing facility and be prepared to be re-trained, if necessary. If they don't want to, fine, but the unemployment checks would soon stop. Incentive enough, I would hope. We have become a society of pampered “I want it now” consumers and it's time we realized that our economic competitors in the global scheme are working harder at jobs we would not consider "worthy". We need to wise up before they overtake us and become the ones who determine our economic destiny instead of the other way around. Any work is good work, period.
- We need to get interest rates to a level 3.5 to 5%, where seniors and other people who cannot afford risk taking in any form can still provide for themselves after a lifetime of hard work and savings. What we are doing to these people is surely a crime, and for what? To keep the banks in the salary and bonus business?
- Finally, we absolutely need to question the way we have allowed the largest banks to get bigger during the crisis without regard to solving the "too big to fail" problem. I know that nobody in Congress wants to take them on, but the banks need to be broken up. It's the only way America can get back on sound footing and prevent future disasters.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.