Today the markets of the world, and particularly those of the United States, are treading water as they correctly reflect the reality that the world's greatest economy, the United States, is stuck in a deep economic malaise. And we are stuck - US production is approximately $16 trillion per year in an economy that has $20 trillion of production capacity. No matter what you call this sad state of affairs, the reality is that our economy, and thus the markets that reflect its producers and their prospects, are “depressed” or “receded” $4 trillion below its potential.
Worse, after four years of malaise the market continues to stagnate and the economic decline continues to worsen. Soon we will be operating $5 trillion below capacity as new technologies come on line and more and more potentially productive people join the labor force than jobs are created for them. As a result, our businesses have profit margins and stock prices far below what they would be if the economy was at full employment.
Similarly, tax collections at all levels of government are in deficit as the taxes that are being collected are swamped by the increased demands for assistance and forced retirements. The cost in human terms is staggering. Millions and millions of Americans are having their lives and families ruined by losing their jobs, their homes, their businesses, and their savings.
What have Congress and White House done to stop this enormous wastage? Relatively nothing. And most of the inadequate effort got channeled to a favored few – despite the $4 trillion (and growing) shortfall in business the Obama administrations has sent a relatively few hundreds of billions of stimulus and bailout dollars to a few very large banks and and industries represented by a handful of powerful companies whose tentacles reach into the administration, including large foreign banks such as Credit Suisse (CS) and Deutsche Bank (DB).
The tragedy of it all is that the “stimulus” packages and and tax cuts and the Fed's highly touted and virtually inconsequential changes in the overnight rate of interest one bank charges another for reserves were never necessary or sufficient in the first place and are certainly not necessary or sufficient now.
All this time there has been in place a fully operational mini-agency within the Federal Reserve System that has many trillions of dollars of financial ability instantly in hand that could be immediately pumped into the economy to end our unemployment, deficits, bank problems, stagnate stock prices, and foreclosure crisis virtually overnight – the Fed's Open Market Desk. No amount of federal spending can offset inadequate levels of money in the hands of our businesses and consumers; and the Desk’s operations are the only way to create that liquidity and get it into the hands of our businesses' customers.
The operations of the Open Market Desk are directed by a committee of 12 bureaucrats, all of whom are employees of the Federal Reserve System and led by the Fed’s chairman. Today the chairman who has failed to provide the necessary leadership is Bush appointee Ben Bernanke, whom President Obama reappointed despite the US economic malaise his policies generated. Six others of the collective failures, mostly adcademics with no real world experience in commercial banking or business, are similarly appointed and Senate-confirmed.
The job of the Open Market Desk is to provide whatever additional money and credit our economy needs without providing so much there is inflation. It does this by literally creating liquidity and then getting it into our economy by buying financial assets in our financial markets where such assets are openly traded and priced. The assets “back” the liquidity the Desk creates. That is exactly how our economy’s supply of money and credit has expanded for almost a century to meet the needs of our growing economy.
Thus the Desk could each day can pump more money and credit into the economy for businesses, consumers, and normal commercial banks than the entire stimulus package has or ever will. And the Desk could keep doing this every day until the depression and credit crisis are ended.
Would its effort to put more liquidity in the hands of businesses' customers either directly or indirectly via the banks cause inflation from too much spending as some non-economist pundits and politicians worry? The answer is an emphatic no. If the Fed overshoots and puts too much liquidity into the economy, such that it might cause inflation from too much spending, the Desk can reverse the process and just as quickly, within minutes, (not days or weeks) take out the excess money.
No new federal regulations, authorizations, or taxes are required for the Desk to increase the amount of loanable money and credit in our banks and in the hands of our businesses customers to adequate levels. The Desk has been doing this for almost 100 years and its staff knows how to do it. The only thing missing is an order to the Desk from its supervising bureaucrats to provide more liquidity now that our economy desperately needs it.
It does not take a rocket scientist to figure out that our financial institutions, with an abundance of liquidity again in hand and knowing they could again make new loans and immediately and profitably sell them in our financial markets, would rush to finance new homes and refinance existing homeowners as well as massively increase their loans to people, businesses, and governments. So prosperity would move quickly towards being restored and the handful of big banks and speculators which got in trouble packaging bad mortgages and loaning money to countries such as Greece would be able to “earn” their way out of trouble instead of requiring more and more government handouts.
Unfortunately, for several years, the presidential appointees directing the Desk have not ordered it to expand our economy’s supply of money and credit to the levels needed to maintain full employment. Instead, the bureaucrats populating the Open Market Committee have periodically lowered the interest rate banks charge each other to borrow reserves overnight – apparently in the incredibly naïve belief our banks will make more long-term loans and credit available to businesses, home buyers, and consumers if they can get money from other banks which they have to repay the next day.
If a majority of the committee members understood macroeconomics, or weren’t too busy giving speeches and being important, they would already have given the Desk the appropriate orders to increase the liquidity available to consumers and businesses. They have not – so our banks are desperately short of reserves and money to lend and their inability to provide normal financing and credit is ruining millions of American families andbusinesses. Don’t blame the banks and don’t blame the Congress or President Obama. Blame 12 bureaucrats who have neither appropriate education nor adequate real-world experience in commercial banking or business.
There is no excuse for letting a handful of unqualified bureaucrats destroy our economy, ruin peoples’ lives, and threaten vital government programs. It’s time for Congress and the press to hold their feet to the fire. President Obama should either accept their resignations and replace them or, as he has already done with one of them, promote them up and out of the way. The American people, political legacies, and the tax revenues needed to eliminate the deficit and fund his health care and other vital programs depend on it.
The only thing encouraging about the situation is that it will turn around quickly when competent decision-makers take charge of the Federal Reserve. Then investors can anticipate a massive bull market comparable to that which occured when we came out of the comparable great depression of the '30s.
The president’s challenge will be to find qualified replacements, and the senate's challenge will be to reject those who aren't. More of the same unqualified organization climbing bureaucrats and unworldly academics won’t cut it. Neither will relatively minor reductions or increases in deficits or taxes or federal spending programs nor fake claims of success such as unemployment as is falling it achieved by desperate workers ceasing to actively looking for work because they know none is available.
Investors would do well to examine the credentials of each new Federal Reserve governor - and begin to consider moving from short positions to buying long when the senate confirms a few people with appropriate educations and experience and a sufficiently strong personalities to get the others to do the right thing. That probably doesn't involve more hacks with Goldman connections or more handwringing academics.
In any event, the big turn in the economy, and thus in its markets and opportunities for investors, will occur when the Fed begins to support the entire economy instead of just a handful of big banks at home and abroad. And since the economy has stagnated for so long, four long years, the Fed's support may well have to involve a creative and broader approach than it has in the past - such as directly sending liquidity to potential spenders such as social security recipients in addition to indirectly getting it into the economy via the commercial banks.
Because the economy and its markets are down far further below what they would be at full employment than most investors realize, the boom in opportunities and profits, and thus the potential gain to investors and traders, when things turn around is going to be unprecedented. Stocks and business opportunities will truly boom - it may well be the biggest bull market in history.
Wise investors should stay ready and jump in with both feet when the turn comes. In the meantime, the best that can be done is to trade advantageously on the volatile ups as each relatively useless "cure" or "sucess" is announced and then on the volatile downs as each proves useless.