by Mike Whitney
November 11, 2009 “Information Clearing House”
The Fed’s monetary stimulus is driving the market higher. What started as a trickle has turned into a torrent buoying stocks and commodities on a river of liquidity. Oil has more than doubled in the last 8 months while stock indexes have gained 50 percent or more in the same period. Even the shunned homebuilders and battered financials have staged a comeback. Meanwhile, consumer credit continues to shrivel and the “real” rate of unemployment climbs inexorably towards 20 percent. Overpriced equities with bloated P/E ratios of (average) 19 continue to produce record profits for breathless speculators, while the productive economy languishes in a Depression. The Fed’s zero-rate policy and easing programs have created another bubble, further widening the chasm between the investor class and the working rabble.
Former Fed governor Frederic Mishkin delivered a defense of Bernanke’s stock/commodities bubble in an article in this week’s Financial Times titled “Not all bubbles present a risk to the economy”. Oddly enough, Mishkin makes no attempt to dispute the Fed’s bubblemaking strategy, but only to clarify the difference between good and bad bubbles. This may go-down as the most poorly-considered public relations campaign in history.
“There is increasing concern that we may be experiencing another round of asset-price bubbles that could pose great danger to the economy. Does this danger provide a case for the US Federal Reserve to exit from its zero-interest-rate policy sooner rather than later, as many commentators have suggested? The answer is no.”
Shocking. Mishkin admits that the Fed doesn’t care if its policies distort the market and fuel speculation as long as they achieve their intended objective. But investors place their bets presuming that the market is truly “free” and operates independent of any central planning Politburo that meddles whenever it suits the broader goals of its constituents. Mishkin’s comments simply reinforce the belief that the markets are manipulated and, perhaps, rigged.
“Asset-price bubbles can be separated into two categories. The first and dangerous category is … “a credit boom bubble”, in which exuberant expectations about economic prospects or structural changes in financial markets lead to a credit boom. The resulting increased demand for some assets raises their price and, in turn, encourages further lending against these assets, increasing demand, and hence their prices, even more, creating a positive feedback loop. This feedback loop involves increasing leverage, further easing of credit standards, then even higher leverage, and the cycle continues.”
Blah, blah, blah. So, the end justifies the means?
Once again, we are not concerned with the results of bubble-making, whether they are positive or negative. The point is irrelevant. What matters, is whether or not the market operates independent of a central authority that arbitrarily intervenes when its interests (or that of its constituents) are threatened. This is why the Fed cannot be trusted as the primary steward of the financial system, because of its blatant lack of impartiality. Mishkin’s institutional bias makes it impossible for him to even grasp this point. He is utterly clueless!
“But if bubbles are a possibility now, does it look like they are of the dangerous, credit boom variety? At least in the US and Europe, the answer is clearly no. Our problem is not a credit boom, but that the deleveraging process has not fully ended. Credit markets are still tight and are presenting a serious drag on the economy.
Tightening monetary policy in the US or Europe to restrain a possible bubble makes no sense… At this critical juncture, the Fed must not take its eye off the ball by focusing on possible asset-price bubbles that are not of the dangerous, credit boom variety.”
Considering his earlier remarks, Mishkin makes a strong case for intervention. After all, deleveraging is a serious problem. But what is the Fed’s alternative; banning deflation? Pumping more ether into a burst balloon? Is the Fed planning to pass a law that markets can only go up from this point on? This is lunacy.
And why would the Fed deploy a bumbling apparatchik to defend the policies which have already had a catastrophic effect on the global system resulting in record-high foreclosures and skyrocketing unemployment? Mishkin is like the doctor who kills his patient with toxic medicine and then asks to try a smaller dose on someone else. This may be the most botched PR campaign of all time.
Everyone knows what the Fed is doing. Most people are aware that the stock market is soaring while the homeless shelters and food banks are bulging, and the unemployment lines stretch from one side of town to the other. The economy is in a depression; people know that. Just as they know the Fed is printing money and shoving it into every crack in the financial system to maintain the appearance of “economic recovery”. The Fed’s meddlesome interventions (now in-excess of $11.4 trillion) represent the largest transfer of wealth in history. People know that, too! So, do we really need a shambling goofball like Mishkin to convince us that it’s all for our own good; that the stealth maneuvering of self-aggrandizing bank-vermin is really in the public’s interests?
That’s a bit much, isn’t it?
Berkeley economics professor Emmanuel Saez, recently released a report which just confirms that income inequality in the United States is at an all-time high, surpassing even levels seen during the Great Depression. The report shows that
1–Income inequality is worse than it has been since at least 1917
2–“The top 1 percent incomes captured half of the overall economic growth over the period 1993-2007”
3–“In the economic expansion of 2002-2007, the top 1 percent captured two thirds of income growth.”
Who didn’t know that the “rich are getting richer and the poor are getting poorer”? Who didn’t know that more and more of the nation’s wealth is being transferred (via the Federal Reserve) to shifty speculators from ordinary working people?
Now the Fed has decided to to inflate another bubble to make up for the bubble that just burst. Great.
Bernanke is committed to preventing the market from correcting and reestablishing its equilibrium.
He has thrown the dollar in front of a runaway train hoping to keep prices of worthless mortgage-backed garbage (MBS) artificially high. He’ll do anything to avoid another round of debt-deflation. He’ll do anything to keep the red ink at bay.
But the magnitude of the losses is much greater than the Fed can counter. At some point, the avalanche of asset liquidation, writedowns and defaults will thunder from the mountaintop sending stocks into hibernation while the anemic greenback stages a comeback.
It’s only natural that Mishkin would defend the Fed’s serial bubblemaking. But as the crisis deepens, the public will see through the fabrications and realize the central role the Fed played in the Crash of ’08.