FacebookTwitterGoogle+RedditEmail

The Fed’s Plan B

by MIKE WHITNEY

“How do you solve a problem when you’re running a 10% fiscal budget deficit? You are not going to get growth without private sector credit demand. The government’s idea right now is that we’re going to export our way out of this, and when I asked a senior member of the Obama administration last week how are we going to grow exports if we will not allow nominal wage deflation? He said, “We’re going to kill the dollar.” Kyle Bass interview.

Last week, amid growing rumors of a global currency war, the Fed’s balance sheet broke the $3 trillion-mark for the first time in history. According to blogger Sober Look: “For the first time since this program was launched (QE) it is starting to have a material impact on bank reserves … which spiked last week. 2013 will look quite different from last year. The monetary base will be expanded dramatically as long as the current securities purchases program is in place. ‘Money printing” is in now full swing.'” (“Fed’s balance sheet grows above $3 trillion, finally impacting the monetary base”, Sober Look)

Take a minute and consider the implications of the Fed’s money printing operations in relation to the above quote by market analyst Kyle Bass. Can you see what’s happening?

The Fed is acting exactly as one would expect it to act given it’s stated intention to increase inflation (currency debasement) while intensifying the class war at the same time.

How is the Fed waging class war, you ask?

Fed chairman Bernanke has been a big supporter of deficit reduction, which is code for slashing public spending. The recent “fiscal cliff” settlement raises taxes immediately on working people by ending the payroll tax holiday. As Bloomberg notes: “Everybody took a two percentage-point pay cut.” This is bound to impact consumer spending and confidence which dropped sharply last week. Here’s more from Bloomberg:

“Payroll taxes went up. As part of its budget agreement on Jan. 1, Congress agreed to let the tax, used to pay for Social Security benefits, return to its 2010 level of 6.2 percent from 4.2 percent. That reduces the paycheck by about $83 a month for someone who earns $50,000.” (Bloomberg)

So all the worker bees (you and me) have less money to spend, which means that there’s going to be less activity, higher unemployment and slower growth. This is what all the liberal economists have been warning about for over 3 years, that is, if the government withdraws its fiscal support for the economy by reducing the budget deficits too soon, the economy will slip back into recession.

So what is the Fed doing to counter this slide and to create the illusion that nutcases who preached “austerity is good” were right?

Well, the Fed is buying mortgage-backed securities, right? So the Fed is actually dabbling in fiscal policy, assuming a role that is supposed to be played by the Congress. Now, I realise that the buying of MBS doesn’t precisely fit the definition of fiscal policy because the Fed doesn’t collect taxes and redistribute the revenue. But it sure doesn’t fit the description of monetary policy either, now does it? The Fed is not setting rates to control the flow of credit into the system. No, the Fed is buying stuff; financial assets that provide credit to loan applicants who are purchasing hard assets. That ain’t monetary policy, my friend. It is fiscal policy writ large.

The Fed is currently purchasing $45 bil per month in US Treasuries to push down long-term interest rates in order to help the banks sell more mortgages so they can reduce their stockpile of distressed homes.

And, the Fed is buying $40 billion of MBS per month to help the banks clear their books of left-over MBS and to provide funding for the banks to generate new mortgages.

Also, 95% of all new mortgages are financed through Fannie and Freddie. In other words, the government is providing all the money and taking all the risk, while all the profits go to Wall Street.

Let’s review:

Fannie and Freddie’s policy is designed to help the banks
The Fed’s MBS purchasing program is designed to help the banks.
The Fed’s QE (UST purchases) policy is designed to help the banks.

Do you see a pattern here? It’s all for the banks, which is why Marx was correct when he referred to “political economy” because the economy doesn’t operate according to free market principals. It is organized in a way that best achieves the objectives of the constituency that controls the levers of political power.

Now guess which constituency controls those levels of political power presently?

If you guessed “the Wall Street banks”, give yourself a pat on the back.

So, what effect is this going to have on policy?

Well, to some extent we already know the answer to that question because–as we pointed out earlier–the policy is shaped to benefit the banks. Even so, an analogy may be helpful to better grasp what’s going on.

Let’s say you have $5 million that you want to put into manufacturing. In fact, you have decided you want to open your own factory and produce widgets of one kind or another to sell to the public. Eventually, you whittle your options down to two choices; you will either produce a modern line of electric cars to reduce emissions and pave the way for new technologies or you will make hula hoops. So, what’s it going to be?

Fortunately, for you, the Fed announces a new program that will provide $45 billion per month “indefinitely” to manufacturers who provide low interest loans to people who want to buy hula hoops.

“Yipee”, you say. “I will abandon my plan to save the planet from poisonous greenhouse gases and make my fortune selling hula hoop bonds to the Fed instead.”

Isn’t this what’s happening? None of this has anything to do with lowering unemployment, strengthening the recovery or increasing growth. It’s all just a way of funneling money to powerful constituents. And one thing is certain, that if the Fed creates the demand for a product (like MBS), then someone is going to fill that demand whether it helps the broader economy or not.

But if the Fed can buy mortgage bonds, then why can’t they buy infrastructure bonds? What’s the difference?

The difference is that mortgage bonds boost profits for bankers, whereas infrastructure bonds merely provide jobs for people who need them. In other words, the difference is not between fiscal and monetary, but between the “haves” and the “have nots”, which is the same as saying that the Fed’s policies are based on class interests. And, that brings back to our original comment by Kyle Bass, who wonders how the US can grow its way out of its present predicament (big budget deficits and weak exports) without more “private sector credit demand”?

Great question. But you can see that Fed chairman Bernanke has already tipped his hand. The Fed is going to keep waving that “$45 billion per month” carrot in front of the banks until they rev-up the credit flywheel and create a new regime of toxic mortgages. (The new Consumer Financial Protection Bureau’s rule on “Qualified Mortgage”, which requires neither a down payment nor credit scores, makes this prospect even more likely.) Bernanke is playing the role that the repo market played before the Crash of ’08, that is, the Fed is promising to buy all the complex bonds (MBS) the banks produce off balance sheet to keep money flowing to the banks. It’s just like the free market, except there’s nothing free about it. It’s all fake and Bernanke doesn’t care if you know it.

$45 billion per month isn’t chump change. It’s enough to inflate housing prices, to employ more out-of-work construction workers, to grow the economy, and to save bank balance sheets that are deep in the red. At the same time, the Fed’s ballooning balance sheet will put downward pressure on the dollar which will increase exports while lowering real-inflation adjusted wages. Like the man said, “We’re going to kill the dollar.”

This is the Fed’s plan: Bail out the banks, transfer the banks bad bets onto its own balance sheet, hammer the greenback, slash wages (via inflation), boost exports, and pump as much money as possible into the unproductive, overbuilt black hole we call the US housing market.

Of course, President Obama could avoid all this nonsense and just launch a government-funded jobs program that would snap the economy out of its coma, increase demand, and turbo-charge GDP, but that would be way too easy. And probably bad for profits, too.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

More articles by:

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

Weekend Edition
December 02, 2016
Friday - Sunday
John Pilger
The Coming War on China
Jeffrey St. Clair
Roaming Charges: The CIA’s Plots to Kill Castro
Paul Street
The Iron Heel at Home: Force Matters
Pam Martens - Russ Martens
Timberg’s Tale: Washington Post Reporter Spreads Blacklist of Independent Journalist Sites
Andrew Levine
Must We Now Rethink the Hillary Question? Absolutely, Not
Joshua Frank
CounterPunch as Russian Propagandists: the Washington Post’s Shallow Smear
David Rosen
The Return of HUAC?
Rob Urie
Race and Class in Trump’s America
Patrick Cockburn
Why Everything You’ve Read About Syria and Iraq Could be Wrong
Caroline Hurley
Anatomy of a Nationalist
Ayesha Khan
A Muslim Woman’s Reflections on Trump’s Misogyny
Michael Hudson – Steve Keen
Rebel Economists on the Historical Path to a Global Recovery
Russell Mokhiber
Sanders Single Payer and Death by Democrat
Roger Harris
The Triumph of Trump and the Specter of Fascism
Steve Horn
Donald Trump’s Swamp: Meet Ten Potential Energy and Climate Cabinet Picks and the Pickers
Louis Proyect
Deepening Contradictions: Identity Politics and Steelworkers
Ralph Nader
Trump and His Betraying Makeover
Stephen Kimber
The Media’s Abysmal Coverage of Castro’s Death
Dan Bacher
WSPA: The West’s Most Powerful Corporate Lobbying Group
Nile Bowie
Will Trump backpedal on the Trans-Pacific Partnership?
Ron Ridenour
Fidel’s Death Brings Forth Great and Sad Memories
Missy Comley Beattie
By Invitation Only
Fred Gardner
Sword of Damocles: Pot Partisans Fear Trump’s DOJ
Renee Parsons
Obama and Propornot
Dean Baker
Cash and Carrier: Trump and Pence Put on a Show
Jack Rasmus
Taming Trump: From Faux Left to Faux Right Populism
Ron Jacobs
Selling Racism—A Lesson From Pretoria
Julian Vigo
The Hijos of Buenos Aires:  When Identity is Political
Subcomandante Insurgente Galeano
By Way of Prologue: On How We Arrived at the Watchtower and What We Saw from There
Dave Lindorff
Is Trump’s Idea To Fix the ‘Rigged System’ by Appointing Crooks Who’ve Played It?
Aidan O'Brien
Fidel and Spain: A Tale of Right and Wrong
Carol Dansereau
Stop Groveling! How to Thwart Trump and Save the World
Kim Nicolini
Moonlight, The Movie
Evan Jones
Behind GE’s Takeover of Alstom Energy
James A Haught
White Evangelicals are Fading, Powerful, Baffling
Barbara Moroncini
Protests and Their Others
Joseph Natoli
The Winds at Their Backs
Cesar Chelala
Poverty is Not Only an Ignored Word
David Swanson
75 Years of Pearl Harbor Lies
Alex Jensen
The Great Deceleration
Nyla Ali Khan
When Faith is the Legacy of One’s Upbringing
Gilbert Mercier
Trump Win: Paradigm Shift or Status Quo?
Stephen Martin
From ‘Too Big to Fail’ to ‘Too Big to Lie’: the End Game of Corporatist Globalization.
Charles R. Larson
Review: Emma Jane Kirby’s “The Optician of Lampedusa”
David Yearsley
Haydn Seek With Hsu
FacebookTwitterGoogle+RedditEmail