The Federal Reserve has begun its two day Federal Open Market Committee meeting. Stocks rose and have been rising apparently due to expectations that the Fed will announce another round of easing. Investors obviously think a Fed easing means higher stock prices. And that has been what did happen the last three times, at least for a while.
If the Fed does announce another new program Wednesday, so what? Stocks might go up for a bit, and I would not be shocked if investors actually sell on the news. The truth of the matter is the U.S. economy is stuck in the mud and very little good can happen over the near-term.
Conventional wisdom, as I read it, is that if it were not for Europe, the U.S. economy and stocks would roar ahead. What nonsense. While it is fun to sit and watch Europe be the first to start to circle the drain, in reality, the U.S. is not far behind. Except we act as if we don’t stink just as bad as Europe. The truth is that the U.S. economy is not in anything resembling a recovery. More like we are the walking wounded headed in the direction of intensive care.
It all goes back to what history will say was our biggest mistake, which was bailing out the big banks post Lehman in October 2008. Lehman went bust and bankers everywhere freaked out. The Treasury first identified $700 billion in toxic loans on big bank balance sheets and then took over those loans from the banks in exchange for newly printed money. And the U.S. economy has been suffering ever since. What I recommended at the time was letting the losses from those bad mortgages wipe out those banks that made the loans. Then sell off the underlying real estate at auction forthwith. I say if we had allowed that $700 billion in loans to be wiped out and the underlying homes resold at market prices back then, the U.S. economy would be in a real recovery right now.
But no. The bankers said without a bailout, financial panic would have occurred. Of course they would say that. What nonsense. To forestall a panic, all that was necessary was for the central banks to step forward and not only guarantee all bank deposits, but also all money market funds. In addition, the world's central banks would have had to backstop bank trade-related financial instruments, without which global commerce stops.
I think that banks are always saved because bankers provide the most campaign contributions to politicians. Not just here but all around the globe. Bankers and their politician friends protect each other. And screw the rest of us.
Another way of describing what happened; the U.S. government misidentified the problem. The problem was not bad assets, the problem was that most of the U.S. economy’s growth had become based upon ever soaring home prices. When the real estate bubble popped, so did incomes.
Imagine if instead of printing a trillion or two to bail out banks; everyone with a job was given a 10% pay raise each year for the last three via a trillion or two in tax cuts instead of bank bailouts? If we had done that, I think we would be better off then where we are today. And the amount of Treasury debt would be no bigger than it is now. But here we are, both in the U.S. and Europe, where the most we can look forward to is another round of money printing to bail out the banks again.
When will we learn?
