The Fed's Free Money Fuels New Bubble


Is irrational exuberance making a comeback at the Fed’s invitation? Irwin Kellner thinks so, arguing that the “humongous volume” of Fed injected liquidity invites a speculative fever. The Fed’s bogus money has not produced consumer price inflation because the wealthy beneficiaries of the liquidity are keeping it engaged in speculative pursuits, with little trickling down to consumers. Likewise, the nearly free money for the Wall Street wealthy is not showing up in worker wages since the general public is unable to press for improved wages in the context of high unemployment. In this environment it is of little consequence for workers that productivity measures show significant gains.

Working class Americans do not own much in the way of stocks or ETF commodity funds apart from modest retirement accounts. Thus, while elites profit from the revived speculative mania, most folks subsidize speculators’ gains through higher prices. Frustratingly, the government’s methods of calculating consumer inflation fail to adequately measure the inflation that most middle class consumers see. Indeed, one can argue that some of the recent bounce in consumer spending reflects consumers’ intentions to make proactive purchases before prices climb higher — a possibility acknowledged by Richmond Federal Reserve President Jeffrey Lacker. Furthermore, the flight to stocks alongside the retreat to gold may suggest that people are getting desperate to hedge dollar based assets against expected price inflation in 2010.

Irwin Kellner argues that marketplace fundamentals do not justify the lofty prices of stocks or oil today — some stocks now approaching their 2007 highs. The Kellner argument becomes all the more relevant when one considers the picture for U.S. federal government solvency. Once interest rates start rising, Dow 10,000 will look like optimistic pricing for an unsustainable recovery. However, none of this matters much when there is upward momentum in stock indices. The Fed has been unequivocal of late in its bias for easy money policy. In taking this stance the Fed subtly endorses momentum trading and trend extrapolation techniques for extending speculative gains upward.

The Fed is betting all its chips on the George Soros theory that posits manipulative boosts to financial markets as the best way of enlivening Main Street economies. Market action since July testifies of the Fed’s support of whatever psychology will drive asset prices higher long enough for the Fed and its preferred mega-banks to clean up their balance sheets. This crafty Fed strategy stands in stark contrast to what the Fed would do if it was benevolently disposed toward working Americans.

If the Fed believes it must stimulate aggressively in order to save the economy, it would stimulate more prudently by helping sustainable energy generation than by helping the Wall Street wealthy hold their place in the system. As one option in a multi-faceted approach, the Fed could direct its monetary stimulus toward helping middle class Americans develop and own hundreds of thousands of small, local solar power generating facilities. These facilities, developed through congressional legislation and U.S. Treasury funding, would help us manage our greenhouse gas problem by replacing much of the aging fossil fuel energy system. Unfortunately, our aging system thrusts us dangerously toward international cap-and-trade agreements that stand to benefit Wall Street above all other interests. This is no argument for “big” government. It is an argument to limit the use of economic stimulus by applying whatever stimulus is necessary toward endeavors essential to the lasting common good.

What America needs is grassroots direct investment in productive enterprise — especially locally originated and owned manufacturers. We should not tolerate the Fed’s creation of vast sums to prop up the Wall Street casino. Many reputable financial advisors off Wall Street continue telling Americans to buy stocks because they have not been educated about alternative systems. If these influential people could be shown how to make their living in more constructive ways, some would undoubtedly sign on — even at a considerable hit to their incomes. But for now they unwittingly help Wall Street hold hostage trillions of dollars of capital — investment capital that if deployed properly could reshape America’s manufacturing landscape as well as the dispersion of private enterprise ownership. Thus, one important challenge is to re-educate financial advisors so they can help the middle class transform the real economy.

Behind Wall Street greed stands the Fed. The Fed is guilty of fostering a highly asymmetrical money supply that works to the direct benefit of mega-bankers and their constellations of preferred clientele. Middle class Americans are expected to subsidize Wall Street’s gilded affair through commodity price inflation, growing taxation, and a wage system made dysfunctional by globalization and the off-shoring of key industries.

Now we’re told that elites like Goldman Sachs CEO Lloyd Blankfein proclaim they’re doing “God’s work” What is this divinely appointed work for chosen elites but “tikkun olam” — robbing the poor to empower the rich in the magnificent cause of “repairing the world” (sarcasm intended). New depths of chutzpah are being plumbed: plunder the masses, enlarge bonuses to reward thievery, then “repair” the damage by filching the economic sovereignty of the world’s respective states.

This ‘work of God’ is so meritorious that just eight days after proclaiming it, Blankfein’s sense of public relations moved him to apologize for “things that were clearly wrong.” Indeed, to ‘remedy’ the wrongs, Goldman will loan and provide to small businesses it selects some $500 million over the next five years — a sum equal to about five good trading days for the firm. What justice is this? Rob the world then pay a 2% tithe: This is “justice” worthy of the Federal Reserve as well as Goldman Sachs.

Moneycentral commentator Bill Fleckenstein does not sugar coat the Fed’s actions. His November 13th op-ed piece is entitled, “Arrogant Fed hasn’t learned at thing.” Really? Are America’s most highly educated and crafty bankers unable to understand cause and effect relationships in finance? What if (in reality) they are in league with plutocrats determined to wrest control of the economic system?

Some well-placed observers do sugarcoat the Fed’s actions, including the recently exited Fed Governor, Frederic Mishkin. In a November 9, 2009 op-ed piece, Mishkin advocates the Fed’s maintenance of its easy money policy. He claims that bubbles built upon irrational exuberance are inherently less dangerous than weak economic growth. Ironically, Mishkin urges this argument upon the ground that monetary policy makers should follow the Hippocratic Oath to “do no harm.”

Observers should ask several questions of Mishkin. First, no harm to whom? The easy money policies that Mishkin advocates work primarily to the benefit of mega-banks and multinational corporations — the sector populated by Mishkin’s cronies. Second, Mishkin suggests that low growth and high unemployment is the worst thing possible. Wrong. Mishkin is guiding America into a global bankers’ trap in which the nation will have to sell its economic autonomy to avoid federal insolvency. Mishkin cronies bait the trap with the promise of growth, jobs, short term profits, a recovery of paper losses in retirement accounts, and such.

Frederic Mishkin encourages us to accept irrational exuberance as part of our American experiment. He justifies his position by claiming the economy fared well in the aftermath of the Asian bubble crisis of 1987. But who fared best? Who disproportionately profited? Millions in Asia lost their shirts while the shrewdest and best informed Wall Street speculators cleaned up. Bubbles are mechanisms of siphoning off wealth in a productive society and transferring it from workers to Wall Street tycoons.

Mishkin argues that asset bubbles are unknowable in their developmental stages; otherwise, expert policy makers would use their bubble recognition abilities to become speculatively rich. This is nothing but a central banking sophism. It is not hard to see speculative bubbles developing. Indeed, the news in both 1998 and 2005 brimmed with commentary about the bubbled condition of real estate and securities — well before the bubbles matured and popped. The problem is not seeing the bubbles but knowing how long the central bank will facilitate the bubbles with its policies.

Discerning readers will understand that Mishkin’s real argument is that Wall Street’s current financial architecture does not necessitate a correct price range for paper assets. The right price is whatever sellers and buyers agree upon as ‘consenting adults.’ If market psychology allows asset prices to climb into the atmosphere there is no bubble (per Mishkin), as long as consumer inflation is under control and the Fed has resources to stimulate investors’ expectations of future growth or asset inflation. Indeed, the Fed’s “zero-interest-rate policy” is a powerful resource, spawning a speculative carry trade that inflates stock and commodity prices throughout the world. This is no longer a market of laws but of men’s whims — an inversion of the principles of constitutional republicanism.

Traditional measures of stock market value can be discarded in an age of relativism whenever it suits manipulators. For example, profit-to-earning ratios (P/Es) were discarded for awhile in the late 1990s in favor of “eyeball metrics” — the number of views received by Internet pages. However, once the public had leveraged its chips, Wall Street elites revived the importance of the traditional pricing metrics, thus triggering a stunning sell-off into short positions set up by elites at multiple tops. Consequently, who can say that a temporary return to 14,000 on the DJIA is not possible? (Or, 8,000.) A return to former market highs looked unfeasible in September based upon traditional criteria for pricing securities. But that was before the Fed effectively wiped away the market’s moorings, declaring itself the new Nero — god of human fate and discretionary distributor of wealth.

What a world! But it is not for us to feel overwhelmed. We must arise with determination to defend the common good — the long-term best interests of the people. If we can’t find enlightened statesmen in government we must cultivate them in our own circles. If we can’t trust Wall Street to reform itself we must replace it with institutions of our own making. If we can’t depend upon the U.S. Congress to legislate rightly, we must out-innovate it privately. All of this will take money. The best way to obtain the funds needed to recreate our world is to retrieve our funds from Wall Street and reinvest them locally in technology, manufacturing and advanced infrastructure. These are actions that can do our country and communities some good. The future is ours if we will grasp it wisely.