The Fed Is a One-Trick PonyTags Financial MarketsMonetary PolicyU.S. Economy
In slashing its key interest rate to zero in response to the economic calamities imposed by all levels of government ostensibly to fight the coronavirus, the Federal Reserve System is trying to regenerate the crashing stock market. At opening bell right afterward, however, the market continued to crash, and those results perhaps should be telling us that the Fed’s one-trick solution to economic crises is just that: a trick.
Please understand that the central bank is doing what it always does when it seems there is an emergency: print money. Now, this is not like what we see in Venezuela, with wads of printed money lying in gutters or even what was seen in Weimar Germany in the fall of 1923. In contrast, the Fed wants us to see Very Serious Central Bankers ensuring that an imploding economy has plenty of “liquidity.”
When a proposed congressional bill caused the October 1987 stock market crash, newly appointed Fed chairman Alan Greenspan immediately promised to provide “liquidity” to Wall Street banks. When the Y2K scare loomed, the Fed was there to “provide liquidity.” When the Housing Bubble burst in 2008, something Austrians had predicted more than a year before, Greenspan’s successor, Ben “Helicopter” Bernanke, made good on his promise to backstop the entire financial system with “liquidity” as the Fed went on an unprecedented spree of buying near-worthless securities in order to try to prop up the system (see diagram below).
Despite the attempt by Time to beatify Bernanke by putting him of the cover with the title “The Man Who Saved the World,” he didn’t save anything except for the existence of those very securities that had been the guts of the financial bubble and that the market itself already had declared near worthless. From valueless mortgage securities to long-term US Treasury bonds (part of “Operation Twist”), Bernanke’s Fed supposedly breathed life into the entire economy. (Here is a more current snapshot of the trend of Fed purchases, although the diagram does not break down the various assets.)
In reality, Bernanke was depressing the economy by propping up the economic sectors featuring massive malinvestments and keeping resources from moving from lower-valued to higher-valued uses by tying up about a fifth of GDP with underperforming assets. That most financial journalists and academic economists failed to recognize what Bernanke was actually doing is an indictment upon their various professions and speaks volumes about the willful ignorance in newsrooms and in the halls of academe. (Fed chairs from Bernanke’s successor, Janet Yellen, to current Fed chairman Jerome Powell all have imbibed from the same spiked Kool-Aid and there certainly is no threat of the current crop of financial journalists and economics/finance professors exposing the scam. The beat goes on.)
So, now we have yet another “exit stage right” performance by the central bank that is part of the long line of Fed interventions that do little more than kick the proverbial can down the road. The reasoning goes like this: the huge work stoppage imposed by various governments means that people cannot pay their bills, and ultimately that winds up depressing banking assets, and depressed banking assets threaten the entire financial system and can bring down an economy.
What to do? Just substitute the Fed’s funny money for real payments so that at least on paper, the bank balance sheets are in the black. It is another chapter of the “Perception Over Reality” work of fiction in which virtual printed money carries the same weight and value as money earned through real live economic activity. As economist Joseph T. Salerno recently wrote:
Printing up paper money and giving it or lending it to domestic businesses or to India will not bring about a miraculous replacement of the lost goods and services or repair broken supply chains. However, the “pandemic shock” may, and probably will, have repercussions on the demand side of the economy, likely precipitating a financial crisis. But this is due to the designed fragility of a financial system based on fractional reserve banking and propped up by governmental policies such as deposit insurance and the too-big-to-fail doctrine.
It is both discouraging and encouraging to see the market’s response. Like all of us who have thousands (and, really, hundreds of thousands) of dollars invested, we are taking a financial hit, and I have no idea if when this crisis passes my investment portfolio is going to resemble Berlin in 1945 or not. (I suspect I will be among the walking wounded.)
However, the encouraging part—and this is a bit of a stretch—is that markets may finally—FINALLY—have recognized that a real economy with real production is different than the house of paper that the Fed has been creating the past few decades. Whether or not Americans are willing to take a hard look at our economy is another matter. With socialists claiming that they can create paradise via fiat and higher taxes and Trump supporters saying that the market surge (at least until the coronavirus hit) was “proof” that we had a great economy, there is plenty of delusion out there. It is time to pull back the curtain and expose the Fed for the humbug it truly is.