Skip to comments.Fed Policy: Another Wealth Transfer to Wall Street
Posted on 11/09/2010 3:18:21 AM PST by markomalley
It was just two years ago, a wealth transfer so brazen as to leave one breathless. The $700-billion Bush bailout met with so much hostility from the public that one congressman said his calls were running 50-50: 50 percent no, and 50 percent Hell no!
Determined not to let it happen again, people across the country began linking arms in activism and tea parties. By last week they had changed Congress. Dozens of bailout supporters from the House and the Senate had been turned out of office. So youd guess that would pretty much put a lid on bailouts and wealth transfers, at least for now, right?
With timing either stunningly inept or provocatively cavalier, on the very day after the election the Federal Reserve announced its latest money-creating, wealth transferring operation, euphemistically called Quantitative Easing II (QEII).
In an operation larger than either Bushs $700-billion bailout or Obamas $787-billion stimulus bill, the Federal Reserve Open Market Committee has decided to buy $900 billion in longer-term U.S. treasury bonds by the middle of next year; $600 billion in new purchases; and $300 billion more by re-investing principal payments from assets it already holds.
That the policy is aimed at inflating stock prices is widely understood on Wall Street. As Art Cashin of UBS Financial Services wrote, its apparent purpose is to lift the stock market and promote a wealth effect. In his Washington Post defense of the move, Federal Reserve Chairman Ben Bernanke admitted as much, saying stock prices got a boost last time and higher stock prices will boost consumer wealth.
There may be some truth in financial analyst Peter Schiffs suggestion that the Feds new policy is an attempt to make a virtue out of necessity: that the government foresees increasing difficulties finding enough lenders for its runaway debt.
In any event, it should be noted that the $900 billion QEII operation is close to the amount of U.S. treasuries held by China, $868 billion. But when the Chinese buy U.S. treasuries, they do so with real money they earned from actually making and selling things.
The Fed buys them with money it created out of nothing.
As the Fed adds $6oo billion in treasuries to the asset side of its balance sheet, at the same time it adds to the liabilities side of its balance sheet by creating reserves in the banking system to the same extent. In other words the act adds to commercial banks deposits with the Fed by the amount of the purchases, $600 billion.
While we use the term money printing as a euphemism for these activities by the Fed, it is a process vastly more efficient than just printing cash and shoving it out helicopter doors. Because of the fractional reserve nature of the U.S. banking system, banks are empowered to lend out multiples of their reserves. When bank lending gets going in earnest, these new enlarged bank reserves created by the Fed become the basis for the expansion of money and credit many times over.
In The Dollar Meltdown: Surviving the Impending Currency Crisis with Gold, Oil, and Other Unconventional Investments, I liken this to a car at the race track. Revving its engines at the starting line, nothing happens, until the clutch is popped. Then it takes off in a cloud of smoke and burning rubber.
Similarly, these bank reserves are a powerful engine of monetary expansion and dollar destruction that will take off in earnest as commercial bank lending gets underway.
In the meantime, the dollar is already plunging and commodity prices are beginning to run in the manner described in the book, even before the massive inflationary effects of QEI $1.7 trillion in Fed securities purchases - have begun to be meaningfully assimilated in consumer prices.
By the first quarter of next year, todays commodity price hikes will be hitting hard at the consumer level. The burden of these higher prices on the household budget will be like any tax, borne at the expense of cutbacks elsewhere. This is how stagflation is created. In a depressed economic environment, higher prices the result of the Feds monetary policy impede savings, slow growth, and depress conditions further, even as prices continue to rise. And now the Fed has decided to double down.
All this for the sake of another wealth transfer to Wall Street from the taxpayers of America who will bear the cost in lower living standards.
Is that what the election last week was supposed to accomplish? If not, then Dr. Ron Paul is right and its high time to put the Fed out of our misery.
Russia and China pissed at their worthless US Bonds now. Last sale before Fed is buying went badly. Obama economic polices are being covered up by the Fed.
The way to stop this FED insanity right now is for the newly elected Republican team to declare that once in office, the doors of the FED are to be opened, and their books are going to be examined.
Since in truth, all they are is a mountain of unsupported debt, exposure alone may be enough to kill them. Their credibility, and thus authority, will be shot.
All Bernanke is doing is shuffling paper around. At the end of the day, what’s changed?
The Fed can’t tell us.
” But when the Chinese buy U.S. treasuries, they do so with real money they earned from actually making and selling things. “
One wonders what these adolescent punks will do during the lame duck session of Congress.
Does this mean my Nokia stock is going to $1000?
Before this is pinned on the republicans, it was announced the day or two before November 2nd that Bernanke was going to do this. What he did was to time it to mentally relate it to the elections so that in 2012 people (with short memories) would think and believe it was a result of the GOP win.
Conservatives needs to be all over this so the public understands without a doubt who is responsible for the devastation that is sure to come.
“How is this supposed to stimulate the economy again?”
Back in the 70’s people were spending money sooner than later as, with time, the dollar was worth less. The problem was our spendable take home dollars was NOT keeping up with Inflation.
This redistribution of wealth is outrageous. In the past, conservatives have railed against transfers like welfare to irresponsible single mothers, and rightly so, but welfare mothers not the ones getting these outrageous payments.
Obama's got Soros and the banksters in control of the US Treasury. Remember that ex-COS Rahm Emanuel---a Wall Street operator---took over the Treasury soon as he got into the WH.
"Professor" Obama surrounded himself with Wall Street shrewdies---Rahmn Emanuel was working for Goldman Sachs AT THE SAME TIME he was in the Clinton admin.
Keep in mind, Wall Street knows how to make money disappear faster than a cream puff at a Weight Watcher weigh-in. Imagine the trillions they salted away...... tick tock, tick tock.....
Americans are awakening to the fact that gangster govt mishandled trillions in tax dollars.
HOW'D DEY DO DAT? The Madoff MO is the only explanation Ponzi Madoff created a supersecret labyrinth of interrelated international funds, institutions and financial entities of almost unparalleled complexity and breadth......with assets and businesses in multiple places overseas that hid thievery, money launderering and tax evasion.
Who has the power to stop this maniac?
Good catch, Mark!
Things are pretty bad when novelist Dean Koontz states in a public forum that at least 70 BILLION has been stolen by the Obama administration.
O-N-L-Y $70 Billion (/snix)?
The Ovomiton gangsters looted the Treasury of trillions---under the pretext of "saving" the economy.
The Ovomitons went to work, looting and pillaging, as soon as they hit Washington.
The phony trillions dollar bailout schemes were perfect vehicles for government fraud, kickbacks, money laundering and tax evasion.
Keep in mind---Wall Street operator Rahm Emanuel took over the Treasury first thing, and he put his brother, Dr Zeke, in charge of Medicare/Aid billions and O/Care trillions. The Emanuels are sitting pretty on piles of US tax dollars stashed offshore.
Ponzi king Madoff must be in awe of the "audacity" of these govt criminals who took a page out of fraudster Bernie's Playbook. Madoff's Ponzi fraud ccentered on a supersecret labyrinth of interrelated international funds, institutions and financial entities of almost unparalleled complexity and breadth......with assets and businesses in multiple places overseas that hid thievery, money launderering, FEC fraud, and tax evasion.
” O-N-L-Y $70 Billion (/snix)?
The Ovomiton gangsters looted the Treasury of trillions-—under the pretext of “saving” the economy. “
I know, but I found it interesting that a novelist believes that the O admin., and his gang “ pocketed” 70 billion offshore. NOW, where will Issa look first? ;-)
Obama and the Forty Thieves make Madoff look like a piker.
Yes. That IS his real middle name.
It's funny though, he doesn't look like a ......Skier.
Oops. wait a sec. That'd be Slalom.
Never mind :-)
Here's what Bernanke and the Fed are really trying to do:
http://www.freerepublic.com/focus/news/2623223/posts?page=139#139 - FR, 2010 November 09
Keynesian / Krugmanian "government stimulus spending is never big enough" fiscal policy and anti-competitive laws (e.g., Sarbox and Dodd-Frank) and regulations that starve U.S. private sector of capital and incentives have been practiced for too long by both parties cannot be fixed by any monetary policy or any central bank. It didn't work in Iceland, Greece, Ireland etc. despite ECB's "stringent" deficit ratios requirements.
On the other hand, the entire $800B+ shovel-ready "Pork-stimulus" should be considered a theft and "shoveled" right back at them where the sun doesn't shine.