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.
Fed Pumps $75 Billion
Into Financial System Again
Harry
Benson/Express/Getty Images
19 Sep 201934
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.
The
Fed’s Secured Funding Overnight Rate
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.
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.
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.
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.
Repo
Madness: Fed Announces a Third Day of Emergency Funding
Spencer Platt/Getty Images
18 Sep 201922
3:08
The Federal Reserve Bank of New
York announced Wednesday afternoon that it
would once again intervene in the repo market on Thursday, its third
consecutive day of supplying tens of billions of dollars to hold down interest
rates in the short term funding market.
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 Wednesday afternoon, the New York Fed announced that it would
once again supply cash to the repo market on Thursday morning.
It’s not clear what has caused the cash crunch. On Monday,
several investors pointed to developments in Saudi Arabia and the due date for
corporate tax payments causing an unusual surge in demand for cash. But the
stress has continued even as those events have receded.
Fed chair Jerome Powell was
asked about the crunch at his press conference Wednesday but offered little by
way of explanation. So the mystery continues alongside the New York Fed’s
emergency funding.
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