Amid a slowing global economy, the Fed has
manifestly failed in its attempt to “normalize”
monetary policy. Instead, it is once again
opening the money spigot to ensure that the
wealth of America’s financial oligarchy is
protected, while corporations ramp up their
attack on workers’ jobs, pay, and benefits.
"The Federal Reserve is a key mechanism for perpetuating this whole filthy system, in which "Wall Street rules."
Wall Street rules
The Federal Reserve sent a clear message to Wall Street on Friday: It will not allow the longest bull market in American history to end. The message was received loud and clear, and the Dow rose by more than 700 points.
Hundreds of thousands of federal workers remain furloughed or forced to work without pay as the partial government shutdown enters its third week, but the US central bank is making clear that all of the resources of the state are at the disposal of the financial oligarchy.
"Overall, the reaction to the
decision points to the underlying fragility of financial markets, which
have become a house of cards as a result of the massive inflows of money
from the Fed and other central banks, and are now extremely susceptible
to even a small tightening in financial conditions."
Fed Pumps $75 Billion Into Financial System Again
2:27
The Federal Reserve Bank of New York once again stepped into the money market to supply additional liquidity on Thursday morning.
The N.Y. Fed injected $75 billion into the market for overnight repurchase agreements, known as repos. The Fed had intervened in the market on Tuesday and Wednesday after interest rates spiked higher at the start of the week.
The repo market is at the center of the U.S. financial system but it is little understood even by most people working in finance.
Big Wall Street banks borrow cash to finance their securities portfolios by selling securities and promising to buy them back the following day. The cash comes from investors with lots of dollars looking to make a little extra interest, such as money-market funds and government-sponsored housing agencies such as Fannie Mae, Freddie Mac, and the Federal Home Loan bank. Typically, the interest rate on repos falls within the Fed’s target range for the fed funds rate, the rate banks pay to borrow reserves from each other.
Here’s how it works. Traders at the big Wall Street firms put in bids to borrow cash overnight and cash investors accept bids, typically striking deals by 10 a.m. The bids are promises to pay an interest rate and a pledge to post securities as collateral. After the market closes at the end of the day, the securities get allocated to the cash investors. The following day, at 8:30 in the morning, the repos get unwound. The cash investors get their cash back and the Wall Street banks get their securities back. Then it starts all over again.
Why do the big Wall Street banks fund themselves this way? It’s really just a more intense version of the basic model of banking: borrow short-term, lend long-term, and make your profit on the difference between the rates. In this case, however, the big banks are borrowing the cash overnight and using it to buy longer-term bonds paying higher rates of interest. If collateralizing a loan with securities that were purchased with the loan sounds strange just remember that this is not really that much different than how a car loan or a mortgage is collateralized.
Usually, the repo process is nearly seamless. Most of the previous day’s trades just get rolled over into the next day’s repos, with a slight tinkering of the rates and slight shifts in the collateral. But this week has been unusual.
At the start of the week, the repo rate unexpectedly jumped higher, indicating that there was a shortage of dollars compared with demand. On Tuesday, the Fed stepped into the market by supplying $53 billion of cash in exchange for securities. On Wednesday, the Fed supplied $75 billion of cash–and said it had bids for an additional $5 billion of repos. On Thursday, the Fed supplied $75 billion again and said this time the facility was oversubscribed by nearly $9 billion.
As GM tries to cut health benefits for workers on strike, Federal Reserve prepares more handouts to Wall Street
Forty-six thousand US autoworkers went on strike this week to fight efforts by GM to cut their healthcare benefits, based on the claim that workers’ healthcare plans are “unaffordable” for the multi-billion-dollar corporation.
Other US and international companies, together with the banks that control them, are looking to GM to set a benchmark for reducing labour costs to offset the impact of a slowing global economy.
Workers, in other words, will have to pay for a mounting global economic crisis, as they did after the 2008 financial crash, when pay cuts ensured a decade of record profits for corporations and banks.
But the Federal Reserve is taking exactly the opposite attitude to Wall Street, providing billions of dollars in free cash to ensure that the looming global economic downturn does not affect corporate bottom lines.
A striking GM worker (left) A stock market trader (right) [Credit: Associated Press]
On Wednesday, the US central bank cut its benchmark federal funds rate, reducing the borrowing cost for banks and major corporations that are already posting record profits.
Perhaps even more importantly, the Federal Reserve Bank of New York made two emergency injections of $75 billion into financial markets, in the first such actions since the 2008 financial crisis. The Fed is on track to make a third emergency intervention on Thursday.
This week’s events have made clear that the trillions in free money given to the banks after the 2008 financial crisis were only a down payment.
The Financial Times wrote that the move is “a step towards more QE.” This is a reference to the “quantitative easing” programs that, over the decade following the global financial crisis, saw the printing of $4 trillion by the US central bank and its infusion into the financial system.
That was in addition to the nearly $7 trillion of “emergency lending” by the Federal Reserve and treasury to the financial system, which was used to prop up over $30 trillion in financial assets after the 2008 crash.
Commentators drew far-reaching implications from this week’s developments. “How significant is this? Extraordinarily…The Fed [lost] control of monetary policy,” the Financial Times quoted one US banker as saying.
The fact is a decade of massively expansionary monetary policy has distorted elements of the economy in profound ways. It raises the prospect that the next economic crisis will throw into question, not just the survival of the financial system, but the stability of the dollar and solvency of the government.
However, the Fed’s only answer to the mounting crisis is to throw more money at the banks.
The Fed’s actions this week sent a clear message to Wall Street that more money is on tap. “After the New York Fed’s temporary injections of money into the financial system, many in the market think a lasting solution will require the central bank to start expanding its balance sheet once more,” the Financial Times wrote.
The article concluded, “The resumption of quantitative easing… appears closer than many think.”
But even the extraordinary actions of the Federal Reserve this week were too little for US President Donald Trump, who wanted an even bigger rate cut.
In response to this week’s announcement, Trump tweeted, “Jay Powell and the Federal Reserve Fail Again. No ‘guts,’ no sense, no vision! A terrible communicator!”
The real estate conman turned president has repeatedly and consistently demanded that the US central bank explicitly pump up the value of the stock market.
“If the Fed would cut, we would have one of the biggest Stock Market increases in a long time,” Trump tweeted in August. Left unsaid is the fact that rising stock market prices overwhelmingly benefit the super-rich, who hold the vast majority of financial assets.
Amid a slowing global economy, the Fed has
manifestly failed in its attempt to “normalize”
monetary policy. Instead, it is once again
opening the money spigot to ensure that the
wealth of America’s financial oligarchy is
protected, while corporations ramp up their
attack on workers’ jobs, pay, and benefits.
$2,198,468,000,000:
Federal Spending Hit 10-Year High Through March; Taxes Hit 5-Year Low
(Getty Images/Ron Sachs-Pool)
(CNSNews.com) - The federal government spent $2,198,468,000,000
in the first six months of fiscal 2019 (October through March), which is the
most it has spent in the first six months of any fiscal year in the last
decade, according
to the Monthly Treasury Statements.
The last time the government spent more in the
October-through-March period was in fiscal 2009, when it spent
$2,326,360,180,000 in constant March 2019 dollars.
Fiscal 2009 was the fiscal year that began with President George
W. Bush signing a $700-billion law to bailout the banking industry in October
2008 and then saw President Barack Obama sign a $787-billion stimulus law in
February 2009.
At the same time that the Treasury was spending the most it has
spent in ten years, it was also taking in less in tax revenue than it has in
the past five years.
In the October-through-March period, the Treasury collected
$1,507,293,000,000 in total taxes. The last time it collected less than that in
the first six months of any fiscal year was fiscal 2014, when it collected
$1,420,897,880,000 in constant March 2019 dollars.
The difference in the federal taxes taken in and the spending
going out resulted in a federal deficit of $691,174,000,000 for the first six
months of the fiscal year.
During those six months, the Department of Health and Human
Services spent the most money of any federal agency with outlays of $583.491
billion. The Social Security Administration was second, spending $540.426
billion. The Department of Defense was third, spending $325.518 billion.
Interest on Treasury securities was third, coming in at $259.687 for the
six-month period.
Both individual and corporation income taxes were down in the
first six months of this fiscal year compared to last year. In the first six
months of fiscal 2018, the Treasury collected $736,274,000,000 in individual
income taxes (in constant March 2019 dollars). In the first six months of this
fiscal year, it collected $723,828,000,000.
In the first six months of fiscal 2018, the Treasury collected
$80,071,070,000 in corporation income taxes (in constant March 2019 dollars).
In the first six months of this fiscal year, it collected $67,987,000,000.
(Historical budget numbers in this story were adjusted to March
2019 dollars using the Bureau of Labor Statistics inflation calculator.)
(Table 3 from the Monthly
Treasury Statement, seen below,
summarizing federal receipts and outlaws for the past month and for the fiscal
year to date and compares it to the previous fiscal year.)
After Lehman's
Collapse: A Decade of Delay
Now that the 2018
midterms are over, folks can address the elephant in the room. If one tuned
into Fox Business midday on January 7, one heard legendary corporate raider
Carl Icahn dilate on the dimensions of the pachyderm, which he pegged at $250
trillion. That’s the size of worldwide debt. But can that be right -- it’s
more than eleven times the official U.S. federal government’s debt? And in case
you didn’t notice, it is a quarter of one quadrillion bucks. Pretty soon we’ll
be talking real money.
Icahn’s $250T quotation
for worldwide debt came out last year. On September 13, Bloomberg ran “$250 Trillion in Debt: the World’s
Post-Lehman Legacy” by Brian Chappatta, who draws off data from the Institute of International Finance’s July 9 “Global Debt
Monitor,” (to read IIF reports, one must sign up). Chappatta wonders how the
world’s central bankers can “even pretend to know how to reverse what they’ve
done over the past decade”:
[Central banks] kept
interest rates at or below zero for an extended period […] and used bond-buying
programs to further suppress sovereign yields, punishing savers and promoting
consumption and risk-taking. Global debt has ballooned over the past two
decades: from $84 trillion at the turn of the century, to $173 trillion at the
time of the 2008 financial crisis, to $250 trillion a decade after Lehman
Brothers Holdings Inc.’s collapse.
Chappatta breaks global
debt down into four categories: financial corporations, nonfinancial
corporations, households, and governments. In every category, global nominal
debt rose from 2008 to 2018, with the debt of governments hitting $67T. In the
important debt-as-a-percentage-of-gross-domestic-product measurement, three of
the categories rose while only financial corporations fell, “leaving their
debt-to-GDP ratio as low as it has been in recent memory.” Global banks seem to
be “healthier and more resilient to another shock.” After reporting on
worldwide debt, Chappatta then looks at U.S. debt.
What’s interesting about
debt in America is that as a percentage of GDP, households and financial
corporations have sharply reduced their debt. It is only government in America
that has seen a sharp debt-to-GDP uptick, and it was quoted at more than 100
percent of GDP. That’s rather higher than for all government debt worldwide.
Besides the massive
racking up of debt over the last decade there’s something else that should
concern us: the massive creation of new money. One of the ways money is created
is when central banks engage in the “bond-buying programs” that Chappatta
refers to. We call such programs “quantitative easing.” When the Federal
Reserve buys assets, like treasuries and mortgage-backed securities, it needs
money. So the Fed just creates the money ex nihilo.
Since the U.S. isn’t the
only nation that has been busy buying bonds and creating money, one might
wonder just how much money there is in the world. In June of 2017,HowMuch put out
“Putting the World’s Money into
Perspective,” which is a nice little graphic that puts the category “All
Money” at $83.6T.
In November of
2017, MarketWatch ran
“Here’s all the money in the world, in
one chart”
by Sue Chang, who in her short intro to the chart has some interesting things
to say about global money, including cryptocurrencies. She writes of “narrow
money” and “broad money” and pegs the latter at
$90.4T, (or what Sen. Everett Dirksen would call “real money”.) If you want to
examine Chang’s chart more closely, I’ve “excised” it here for your
convenience; don’t miss the notes on the right margin. (Because its depth is
13,895 pixels, you might want to just save the chart to your computer rather
than print it off.)
So, in addition to an
historic run-up in debt, there’s been a monster amount of new money created.
Chappatta calls it the “grandest central-bank experiment in history.” His use
of “experiment” is apropos, as one wonders whether the world’s central bankers
and their economists really know what they’ve been doing.
One ray of hope might
just be President Trump’s choice of Jerome Powell as Chairman of the Federal
Reserve, (Trump has such good instincts about people). One can get a sense of
the man from his January talk with David Rubenstein at the Economic Club of
Washington, D.C. (video and transcript). It’s refreshing that
Mr. Powell disdains the “Fed speak” used by his predecessors.
Chappatta’s article is
quite worth reading, and it’s not very long. The charts are user-friendly,
although animated ones are a bit “creative.” The last section, “China Charges
Forward,” is especially worthwhile.
This is the post-Lehman
legacy. To pull the global economy back from the brink, governments borrowed
heavily from the future. That either portends pain ahead, through austerity
measures or tax increases, or it signals that central-bank meddling will become
a permanent fixture of 21st century financial markets.
Given those
alternatives, let’s try a little austerity. But austerity would entail spending
cuts, and Congress has a poor history in that regard. In fact, since fiscal
2007, the year before the financial crisis, total federal spending has gone
from $2.72T a year to more than $4T. While austere citizens deleverage and get
their fiscal affairs in order, Congress shamefully borrows and spends like
never before.
Congress’ solutions are
to bail out, prop up, and do whatever it takes to avoid reforming what it has
created. So they farm out their responsibilities to the Federal Reserve.
Indeed, in the July 17, 2012 meeting of the Senate Banking Committee (go
to the 53:50 point of this C-SPAN video), Chuck Schumer told
Federal Reserve Chairman Ben Bernanke the following:
So given the political
realities, Mr. Chairman, particularly in this election year, I'm afraid the Fed
is the only game in town. And I would urge you to take whatever actions you
think would be most helpful in supporting a stronger economic recovery… So get
to work, Mr. Chairman. (Chuckles.)
So the Fed is “the only
game in town” because there are only monetary solutions for the economy, right?
There aren’t any fiscal solutions, as they would involve Congress, and Congress
is busy running for re-election, right? Sounds like you’re abdicating your
responsibilities, Chuck.
The
last decade has been an exercise in delay. Congress has avoided doing the
difficult and unpopular things that would help avoid future financial
collapses. If Congress were serious about balancing the budget, then social
programs would be on the chopping block, because that’s where the real money goes.
"The Federal Reserve is a key mechanism for perpetuating this
whole filthy system, in which "Wall Street rules."
Wall Street rules
The Federal Reserve sent a clear message to Wall Street on
Friday: It will not allow the longest bull market in American history to end.
The message was received loud and clear, and the Dow rose by more than 700 points.
Responding to Thursday’s market selloff following a dismal
report from Apple and signs of a manufacturing slowdown in both China and the
US, the Fed declared it was “listening” to the markets and would scrap its
plans to raise interest rates.
Speaking at a conference in Atlanta, where he was flanked by his
predecessors Ben Bernanke and Janet Yellen, both of whom had worked to reflate
the stock market bubble after the 2008 financial crash, Chairman Jerome Powell
signaled that the Fed would back off from its two projected rate increases for
2019.
“We’re listening sensitively to the messages markets are
sending,” he said, adding that the central bank would be “patient” in imposing
further rate increases. To underline the point, he declared, “If we ever came
to the conclusion that any aspect of our plans” was causing a problem, “we
wouldn’t hesitate to change it.”
This extraordinary pledge to Wall Street followed the 660 point
plunge in the Dow Jones Industrial Average on Thursday, capping off the worst
two-day start for a new trading year since the collapse of the dot.com bubble.
William McChesney Martin, the Fed chairman from 1951 to 1970,
famously said that his job was “to take away the punch bowl just as the party
gets going.” Now the task of the Fed chairman is to ply the wealthy revelers
with tequila shots as soon as they start to sober up.
Powell’s remarks were particularly striking given that they
followed the release Friday of the most upbeat jobs report in over a year, with
figures, including the highest year-on-year wage growth since the 2008 crisis,
universally lauded as “stellar.”
While US financial markets have endured the
worst December since the Great
Depression, amid mounting fears of a looming
recession and a new financial crisis, analysts
have been quick to point out that there are no
“hard” signs of a recession in the United
States.
worst December since the Great
Depression, amid mounting fears of a looming
recession and a new financial crisis, analysts
have been quick to point out that there are no
“hard” signs of a recession in the United
States.
Both the Dow and the S&P 500 indexes have fallen more than
15 percent from their recent highs, while the tech-heavy NASDAQ has entered
bear market territory, usually defined as a drop of 20 percent from recent
highs.
The markets, Powell admitted, are “well ahead of the data.” But
it is the markets, not the “data,” that Powell is listening to.
Since World War II, bear markets have occurred, on average,
every five-and-a-half years. But if the present trend continues, the Dow will
reach 10 years without a bear market in March, despite the recent losses.
Now the Fed has stepped in effectively to pledge that it
will
allocate whatever resources are needed to ensure that no
substantial market correction takes place. But this
means only that when the correction does come, as it
inevitably must, it will be all the more severe and the Fed will
have all the less power to stop it.
From the standpoint of the history of the institution, the Fed’s
current more or less explicit role as backstop for the stock market is a
relatively new development. Founded in 1913, the Federal Reserve legally has
had the “dual mandate” of ensuring both maximum employment and price stability
since the late 1970s. Fed officials have traditionally denied being influenced
in policy decisions by a desire to drive up the stock market.
Federal Reserve Chairman Paul Volcker, appointed by Democratic
President Jimmy Carter in 1979, deliberately engineered an economic recession
by driving the benchmark federal funds interest rate above 20 percent. His
highly conscious aim, in the name of combating inflation, was to quash a wages
movement of US workers by triggering plant closures and driving up
unemployment.
The actions of the Fed under Volcker set the stage for a vast
upward redistribution of wealth, facilitated on one hand by the trade unions’
suppression of the class struggle and on the other by a relentless and dizzying
rise on the stock market.
Volcker’s recession, together with the Reagan administration’s
crushing of the 1981 PATCO air traffic controllers’ strike, ushered in decades
of mass layoffs, deindustrialization and wage and benefit concessions, leading
labor’s share of total national income to fall year after year.
These were also decades of financial deregulation, leading to
the savings and loan crisis of the late 1980s, the dot.com bubble of 1999-2000,
and, worst of all, the 2008 financial crisis.
In each of these crises, the Federal Reserve carried out what
became known as the “Greenspan put,” (later the “Bernanke put”)—an implicit
guarantee to backstop the financial markets, prompting investors to take ever
greater risks.
In 2008, this resulted in the most sweeping and
systemic financial crisis since the Great
Depression, prompting Fed Chairman Bernanke,
New York Fed President Tim Geithner and
Treasury Secretary Henry Paulson (the former
CEO of Goldman Sachs) to orchestrate the largest
bank bailout in human history.
systemic financial crisis since the Great
Depression, prompting Fed Chairman Bernanke,
New York Fed President Tim Geithner and
Treasury Secretary Henry Paulson (the former
CEO of Goldman Sachs) to orchestrate the largest
bank bailout in human history.
Since that time, the
Federal Reserve has carried out its most accommodative monetary policy ever,
keeping interest rates at or near zero percent for six years. It supplemented
this boondoggle for the financial elite with its multi-trillion-dollar
“quantitative easing” money-printing program.
The effect can be seen
in the ever more staggering wealth of the financial oligarchy, which has
consistently enjoyed investment returns of between 10 and 20 percent every year
since the financial crisis, even as the incomes of workers have stagnated or
fallen.
American capitalist society is hooked on the toxic growth of
social inequality created by the stock market bubble. This, in turn, fosters
the political framework not just for the decadent lifestyles of the financial
oligarchs, each of whom owns, on average, a half-dozen mansions around the world,
a private jet and a super-yacht, but also for the broader periphery of the
affluent upper-middle class, which provides the oligarchs with political
legitimacy and support. These elite social layers determine American political
life, from which the broad mass of working people is effectively excluded.
In this intensifying crisis, the working class must assert its
independent interests with the same determination and ruthlessness as evinced
by the ruling class. It must answer the bourgeoisie’s social counterrevolution
with the program of socialist revolution.
the depression is already
here for most of us below the super-rich!
Trump and the GOP created a fake economic boom on
our collective credit card: The equivalent of maxing out your credit
cards and saying look how good I'm doing right now.
*
Trump criticized
Dimon in 2013 for supposedly contributing to the
country’s economic downturn. “I’m not Jamie Dimon, who pays $13 billion
to settle a case and then pays $11 billion to settle a case and who I
think is the worst banker in the United States,” he told reporters.
*
"One of the premier institutions of
big business, JP Morgan Chase, issued an internal report on the
eve of the 10th anniversary of the 2008 crash, which warned that
another “great liquidity crisis” was possible, and that a
government bailout on the scale of that effected by Bush and Obama
will produce social unrest, “in light of the potential impact of central
bank actions in driving inequality between asset owners
and labor."
*
"Overall, the reaction to the decision points to the
underlying fragility of financial markets, which have become a house
of cards as a result of the massive inflows of money from the Fed and
other central banks, and are now extremely susceptible to even a small
tightening in financial conditions."
*
"It is significant
that what the Financial
Times described as a “tsunami of money”—estimated to reach $1
trillion for the year—has failed to prevent what could be the worst year for
stock markets since the global financial crisis."
*
"A decade ago, as the financial crisis raged,
America’s banks were in ruins. Lehman Brothers, the storied 158-year-old
investment house, collapsed into bankruptcy in mid-September 2008. Six
months earlier, Bear Stearns, its competitor, had required a
government-engineered rescue to avert the same outcome. By October, two of
the nation’s largest commercial banks, Citigroup and Bank of America,
needed their own government-tailored bailouts to escape failure. Smaller
but still-sizable banks, such as Washington Mutual and IndyMac,
died."
*
The GOP said the "Tax Cuts and
Jobs Act" would reduce deficits and supercharge the economy
(and stocks and wages). The White House says things are working as
planned, but one year on--the numbers mostly suggest otherwise.
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