As we all know the major stock market indexes have staged one of the best rallies for the year after Federal Reserve Bank Chairman Ben Bernanke announced his QE-2 program on August 27th, 2010 in Jackson Hole, Wyoming. On November 3rd, 2010 the Federal Reserve said that they would buy $600 billion in U.S. Treasuries over the next six months as part of the quantitative easing program. However, since the QE-2 began, the stock market has been declining and the U.S. Dollar Index has bounced higher.
This is certainly not what many investors expected when the Federal Reserve Bank announced its huge purchase program of U.S. Treasuries. The Fed has a scheduled POMO operation almost every day this month. We must ask ourselves how much of the recent rally was on the anticipation of QE-2? Obviously most of it.
When the Federal Reserve boss Ben Bernanke announced quantitative easing part two, he essentially halted a stock market decline dead in its tracks. Please realize that on August 9th the Dow Jones Industrial Average turned down and declined nearly 8.0 percent in just two short weeks. Therefore, the Ben Bernanke quantitative easing part two program announcement saved the major banks again as these stocks were leading the decline in late August, making fresh new lows for the year.
It is also important to remember that the major banks such as J.P. Morgan Chase & Co. (NYSE:JPM), Citigroup Inc. (NYSE:C), Wells Fargo & Co. (NYSE:WFC), and Bank Of America Corp. (NYSE:BAC) have all been able to borrow money from the Federal Reserve Bank at zero percent. This free money for the banks has been going on since December 2008. Meanwhile, someone with a savings account or a certificate of deposit cannot even earn 0.25 percent in an account with these banks. These banks take this money and buy U.S. Treasuries which earn them between 2.5 – 4.25 percent. They also operate a credit card business in which they charge an average rate of 16.75% to customers. Not a bad business at this time. Let us not forget the investing that they do on their own with the basically free money that they borrow.
It seems as if the Federal Reserve bankers are here to help the large global bankers. Where does it say that if the banks do well the economy does well? Where does it say that if J.P Morgan Chase and Co. does well the man or woman on main street does well? The answer to that question is that it does not say that anywhere. The free markets must be allowed to operate by supply and demand. The U.S. consumer accounts for 70.0 percent of the gross domestic product in the United States. The U.S. consumer is saving their money and spending less while not receiving any interest in the bank. What is the incentive to have any money in the bank? People are going to keep their money under their mattress and just cut the bank out all together.
However, the Federal Reserve wants people to speculate. Speculation by the average Joe is over. The public does not believe in the market any longer thanks to the actions of the Fed. The 'flash crash' on May 6th, 2010 may have put the nail into the coffin when it comes to public speculation. The only thing that the Federal Reserve is doing is creating another bust cycle down the road. Right now the credibility of the central bank is in the toilet. The last time that the Federal Reserve Bank took this much bashing form the public was in the 1970s. This time it seems that the general public is becoming more aware of the actions of the central bank.
Senior citizens and people on fixed incomes are outraged by the quantitative easing programs as they simply devalue the U.S. Dollar. As for right now we can never underestimate the power of the Federal Reserve. This small group of bankers is very powerful and always seems to have more rabbits that it can pull out of a hat. So it looks as if the Ben Bernanke put has expired for the moment. However, this story has a long way to go before completely playing out.