The Fed’s announced delay on “tapering” back from loose monetary policy only means the hangover will be that much worse when the party inevitably comes to an end.
For those who watch the markets all day long, the announcements of the U.S. Federal Reserve are read like tea leaves. So much time and effort is usually spent parsing the words of its chairman that one might think financial pundits and analysts alike are engaged in discovering the fabled Philosopher’s Stone rather than interpreting a bureaucratic announcement.
Such is the importance of the Fed’s actions, however, that correctly cracking the central bank’s obtuse, jargon-filled code allows those able to do it to turn lead into gold, or at least Wall Street paper into gold’s electronic equivalent. As a result, very little the Fed actually does surprises the market. With so much money on the line, that’s to be expected.
Which is why, this past Wednesday, it was notable that just such an instance occurred when the U.S. Federal Reserve Chairman, Ben Bernanke, announced that the Fed would not, in fact, begin its program of “tapering off” its program of injecting liquidity into U.S. financial markets via monthly purchase of some $85 billion in bonds and other financial assets in the near future. The U.S. job market, said Bernanke, was “still far from what all of us would like to see.”
Indeed. With the latest data putting U.S. unemployment at 7.3 percent and prospects for new graduates entering the labor market – not to mention those currently in it and actively looking for a job – still relatively grim, the Fed has put the markets on notice that economic growth and job recovery, rather than price stability, will remain its number one focus for some time to come, or at least until the unemployment rate sinks below 6.5 percent and inflation continues to remain low.
So, as per the old joke about three-handed economists, we have on the one hand the good news that the Fed will continue to prop up the U.S. economy through loose monetary policy while, on the other, the bad news that unemployment remains a significant problem. With the U.S. economy still far from recovering all the jobs lost as a result of the Great Recession and with middle-class incomes stagnant and job security non-existent, happy days are definitely not here again.
A one-sided affair
Bernanke’s announcement is also a continued signal, as if we needed one, that the forces that created the last financial collapse remain mostly unfettered and that the power of financial capitalism still reigns supreme. Since the last two recessions were mostly caused by financial bubbles created by historically easy credit conditions set by the Fed, this raises a question – why continue a policy that benefits mostly Wall Street and tends to create unsustainable asset bubbles that must, inevitably, burst?
To answer this, one has only to look at Congress, which, in the midst of the greatest slump in employment since the Great Depression, has done little to alleviate the pain being inflicted upon millions of American families. Indeed, since the Democrats lost control of the House of Representatives as a result of the 2010 elections and been stymied in the Senate due to the GOP’s radical new use of the filibuster, Congress has been unprecedentedly unproductive in the face of sustained, long-term unemployment.
One might simply chalk this up to the usual partisan bickering, but the inability to meaningfully confront economic downturns with legislated fiscal policy – a key part of Keynesian demand management – has made U.S. economic governance an increasingly one-sided affair centered on the U.S. Federal Reserve. Recall, for instance, that in the early years of the Clinton presidency, the administration was not able to do much to alleviate the fallout from the 1992 recession that kicked George H. W. Bush out of the White House for fear of how the markets would react.
It was then that James Carville famously quipped, “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” Warned off by the likes of Alan Greenspan, Robert Rubin and Larry Summers, the Democrats under Clinton effectively abandoned all economic policymaking beyond balancing the budget to the Fed and Wall Street, putting in place the foundation for the catastrophic collapses we all experienced in the following decade.
How did we get here?
The Republicans under George W. Bush continued this hands-off policy, looking the other way as an increasingly corrupted financial system – spurred on, again, by historically loose monetary policy – created a bubble in housing after the tech-bubble collapse in 2000-01. This latter bubble, much bigger and correspondingly more dangerous than tech ever was, was obvious for years, yet once again neither the Congress, the administration nor anyone else did anything about it. The Fed, now responsible for maintaining economic growth, did the only thing it could – keep the party going, through historically low interest rates that only made the problem worse.
Congress, briefly, raised itself from its self-imposed slumber when the Fed needed assistance from the rest of the government to prevent the entire economy from going under in 2008 – thus the 2009 stimulus package and the TARP program, which at the time allowed the U.S. Treasury to buy up troubled financial assets and so create a bottom for the then-collapsing financial industry. After this emergency response and two brief years of lawmaking that saw the enactment of the Affordable Care Act, a Tea Party-controlled House and a shell-shocked Democratic White House and Senate locked horns and so ensured, once again, that nothing more could be done via fiscal policy to lift America out of its greatest economic slump since the 1930s.
In response, the Fed was once again called upon to save the country, this time with a program of “quantitative easing” and ultra-low interest rates that poured trillions into the banking system but did little, in the end, to alleviate unemployment. Wall Street, saved from its own folly and now reinvigorated and made even more powerful by crisis-induced consolidation, took that money and once again engaged in rampant speculation, only this time it was in the developing economies – Brazil, India, Indonesia, South Africa, China and the like – which brought in huge flows of foreign capital.
Inevitably, this has caused many emerging markets to look distinctly bubbly, and even China – the workshop of the world – teetered recently on the brink of a financial crisis that was only just put down by a central government, which has not, unlike ours, given up control of its financial system to market elites. Meanwhile, Bernanke’s earlier announcement that the Fed would begin “tapering” off its quantitative easing program caused an instant near-run on several developing world economies as prospects of higher interest rates in the U.S. began to suck out all the hot cash that had settled in the developing world, where rates were higher, in the process creating concern that the world would see a repeat of the 1997 financial crisis that struck emerging Asia and then spread to Russia and Latin America.
Fear of another financial crisis, this time in the developing world, and ongoing concern over the strength of the U.S. economy, particularly its labor market, thus explains the Fed’s decision to keep its quantitative easing program in place. Easy money from the Fed is the only thing keeping the system afloat and running, and in the absence of any serious attempt by the rest of the U.S. government to begin the process of rebalancing the U.S. economy away from Wall Street and finance and toward Main Street, domestic production and middle-class consumption, Bernanke is the only safety net we — and the rest of the world — have at the moment.
Central banks, however, can only do so much, and as has been made evident since the 1990s, loose monetary policy can keep an economy going only by ‘spiking’ the proverbial punch bowl. When the party ends, as it inevitably must, the resulting hangover is only that much worse. Eventually the adults at the party have to step up and take control before anyone gets hurt, but in today’s Congress responsible adults who have not been bought off by the proverbial liquor industry are getting increasingly difficult to find.