Guest Post: “The Fed No Longer Even Denies that the Purpose of Its Latest Blast of Bond Purchases … Is To Drive Up Wall Street

Washington’s Blog

The stated purpose of quantitative easing was to drive down interest rates on U.S. treasury bonds.

But as U.S. News and World Reported noted last month:

By now, you’ve probably heard that the Fed is purchasing $600 billion in treasuries in hopes that it will push interest rates even lower, spur lending, and help jump-start the economy. Two years ago, the Fed set the federal funds rate (the interest rate at which banks lend to each other) to virtually zero, and this second round of quantitative easing–commonly referred to as QE2–is one of the few tools it has left to help boost economic growth. In spite of all this, a funny thing has happened. Treasury yields have actually risen since the Fed’s announcement.

The following charts from Doug Short update this trend:

Click to View

Click to View

Click to View

Of course, rather than admit that the Fed is failing at driving down rates, rising rates are now being heralded as a sign of success. As the New York Times reported Monday:

The trouble is [rates] they have risen since it was formally announced in November, leaving many in the markets puzzled about the value of the Fed’s bond-buying program.

***

But the biggest reason for the rise in interest rates was probably that the economy was, at last, growing faster. And that’s good news.

“Rates have risen for the reasons we were hoping for: investors are more optimistic about the recovery,” said Mr. Sack. “It is a good sign.”

Last November, after it started to become apparent that rates were moving in the wrong direction, Bernanke pulled a bait-and-switch, defending quantitative easing on other grounds:

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

As former chief Merrill Lynch economist David Rosenberg writes today:

So the Fed Chairman seems non-plussed that Treasury yields have shot up and that the mortgage rates and car loan rates have done likewise, even though he said this back in early November in his op-ed piece in the Washington Post, regarding the need for lower long-term yields:

“For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment.”

But the Fed Chairman is at least getting what he wants in the equity market. Recall what he said back then — “higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

So now the Fed has added a third mandate to its charter:

1. Full employment
2. Low and stable inflation
3. Higher equity valuation

The real question we should be asking is why Ben didn’t add this third policy objective back in 2007 and save us from a whole lot of pain over the next 18 months?

And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.

Indeed, leading economic consulting firm Trim Tabs (25% of the top 50 hedge funds in the world use TrimTabs’ research for market timing) wrote on Wednesday:

The Federal Reserve’s quantitative easing programs have helped stock market participants, financial institutions, and large companies but have done little to address the structural problems of the economy, according to TrimTabs Investment Research.

“Quantitative easing is supposed to produce stronger economic growth and lower unemployment,” said Madeline Schnapp, Director of Macroeconomic Research at TrimTabs. “While QE1 and QE2 have worked wonders on the stock market, their impact on GDP and jobs has been anemic at best.”

Similarly, Ambrose Evans-Pritchard wrote today:

The Fed no longer even denies that the purpose of its latest blast of bond purchases, or QE2, is to drive up Wall Street, perhaps because it has so signally failed to achieve its other purpose of driving down borrowing costs.

Unfortunately, a rising stock market doesn’t help the average American as much as you might assume.

For example, Robert Shiller noted in 2001:

We have examined the wealth effect with a cross-sectional time-series data sets that are more comprehensive than any applied to the wealth effect before and with a number of different econometric specifications. The statistical results are variable depending on econometric specification, and so any conclusion must be tentative. Nevertheless, the evidence of a stock market wealth effect is weak; the common presumption that there is strong evidence for the wealth effect is not supported in our results. However, we do find strong evidence that variations in housing market wealth have important effects upon consumption. This evidence arises consistently using panels of U.S. states and individual countries and is robust to differences in model specification. The housing market appears to be more important than the stock market in influencing consumption in developed countries.

I pointed out in March:

Even Alan Greenspan recently called the recovery “extremely unbalanced,” driven largely by high earners benefiting from recovering stock markets and large corporations.

***

As economics professor and former Secretary of Labor Robert Reich writes today in an outstanding piece:

Some cheerleaders say rising stock prices make consumers feel wealthier and therefore readier to spend. But to the extent most Americans have any assets at all their net worth is mostly in their homes, and those homes are still worth less than they were in 2007. The “wealth effect” is relevant mainly to the richest 10 percent of Americans, most of whose net worth is in stocks and bonds.

I noted in May:

As of 2007, the bottom 50% of the U.S. population owned only one-half of one percent of all stocks, bonds and mutual funds in the U.S. On the other hand, the top 1% owned owned 50.9%.

***

(Of course, the divergence between the wealthiest and the rest has only increased since 2007.)

And last month Professor G. William Domhoff updated his “Who Rules America” study, showing that the richest 10% own 98.5% of all financial securities, and that:

The top 10% have 80% to 90% of stocks, bonds, trust funds, and business equity, and over 75% of non-home real estate. Since financial wealth is what counts as far as the control of income-producing assets, we can say that just 10% of the people own the United States of America.

The bottom line is that quantitative easing is not really helping the average American very much … and is certainly not worth trillions of dollars.

.

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About George Washington

George Washington is the head writer at Washington’s Blog. A busy professional and former adjunct professor, George’s insatiable curiousity causes him to write on a wide variety of topics, including economics, finance, the environment and politics. For further details, ask Keith Alexander… http://www.washingtonsblog.com

45 comments

  1. jake chase

    Statistics remain a poor substitute for thought. The Fed agenda is quite simple: fuel asset speculation in the hope of provoking a price inflation that will validate outstanding debt. Why can’t this work? Because the debt is owed by wage earners whose incomes are undermined by globalization.

    1. sgt_doom

      Thank you, jake chase.

      And exactly so! Although the greatest debt, resulting from those debt-financed billionaires peddling all their securitized debt, was foisted upon us by them (privatization of profit, socialization of debt).

      Without an actual economy — the fantasy finance sector comprising the bulk of the American GDP — there can be no grand “recovery” — simply arithmetically impossible.

    2. david

      Bingo, we have a winner! You are right, the people who owe the debt are not being benefitted by QE, and state budgets are going to be cut which needs to happen, but will effect the middle class who owes the debt. Its getting worse, not better, but the stock market is being supported by the unlimited creation of “little units of fraud.”

  2. Norman

    Can anything less be expected of “Old People” who run the Federal Reserve? That they use outdated 20th Century methods to mend 21st Century problems? They drink their own brand of koolaid, yet can’t see what they are doing to the majority of citizens. So, isn’t it the Wall Street Denizens who are driving the stock prices, which could be another bubble?

    1. sgt_doom

      Negative, Norman, it isn’t about the kool-aid, it’s about criminal behavior of those front people for the Banksters’ Crime Office, the Federal Reserve.

      1. turth bandit

        Exactly, isn’t just that someone is drinking the wrong kool-aid. They are playing the tried and true Economic Hit Man approach, turning their sights on the Mother Load — the US citizen. Meanwhile, as the US citizen is bled, the emerging markets will grow and thus become a future target for the EHM.

  3. arby

    Is it any wonder why Sperling and Daley went to the White House? The main mission must be to keep the QEs going and to make sure that the Obama is protected from any contrary advice.

  4. tom

    Its important to realize that Sack and Bernanke are using a comparative equilibrium approach when they say the QE2 is working. Whether actual interest rates go up or down is irrelevant. The issue is did they go down relative to a counterfactual in which all else is the same, except there is no QE2. Sacks’s work on QE1 showed that it had modest effects on interest rates. The real issue here is that getting rates lower will not have much effect because investment spending has become resistant to easier credit conditions, as it does in a Minsky liquidity trap. We need fiscal stimulus.

    1. steelhead23

      Tom, I suspect you are far brighter about macroeconomics than I, but isn’t there a risk in further fiscal stimulus? That risk being that there is a limit to sovereign debt, beyond which lies ruin. The specific risk I see is that with 14 trillion in sovereign debt at about 3% annual interest, or about 420 billion in annual interest payment. That is a lot. Yes, with QE much of that interest payment is circular – Treasury gets the money back, but it increases the money supply, encouraging inflation. Further, the creditworthiness of the country is declining. Eventually (I honestly have no idea when), this would logically lead to higher rates, increasing the cost of debt service and either austerity of a death spiral. I admit that I may simply be paralyzed by fear, but I don’t see it as wholly irrational. Would some Keynesian kindly help me get over this fear? I agree, the economy is in need of stimulus, my aversion to the risk I see prevents me from supporting further stimulus.

  5. YLSP

    Bernanke’s plan for the economic recovery is to do so with banks.
    Step 1: Cover over bank losses, make sure they are profitable.
    Step 2: Induce inflation so that “collateral values rise”, this in turn will enable banks to make loans.
    Step 3: Economic recovery here we come!

    I watched half of the CNBC forum with Bernanke and Bair. Beranke was talking about how higher collateral values can cover over the banks balance sheet problems. They’re not really trying to hide the plan.

    I think we should stabilize the banks at “bankrupt”, flush the system, and start over… you know, Wall Street is only 1% of the country, right?

  6. Jim Haygood

    As Washington implies, there’s a cynical element of ‘heads we win, tails you lose’ in QE II: if long rates HAD fallen, the Fed would have taken credit for it. But since they rose, the Fed instead took credit for boosting growth prospects. They can’t lose! But we can.

    As I’ve been saying since mid-2009, this is Bubble III — right here, right now. Blowing sequential bubbles is what the Fed does, in a post-manufacturing, finance-bloated economy. Gold reached a record high; several commodity indexes are at record highs. So is the UN’s food price index; food riots are underway in Asia and Africa. Crude oil is creeping back toward $100 a barrel.

    Meanwhile, as Doug Short has documented, the Q ratio of the stock market is at the same level now that it was just before major secular bear markets began, in 1929 and 1968. Although the recovery allegedly is young, these boiling-over asset and goods prices are distressing late-phase phenomena.

    Let’s review again why Bubbles are bad: the more extreme the malinvestment and overvaluation in the Bubble phase, the longer, deeper and more painful is the Bubble aftermath. Even as we are still being collectively flogged for our manifold sins and wickedness in having created a monster housing bubble (the late Bubble II), the idiot Fed has ginned up a new, toxic Bubble III in stocks and commodities. (They had a nice bond bubble going too, but it already popped.)

    Although I’ve never been summoned for grand jury service, if I am, I will bring with me the particulars of Brian Sack (in charge of QE II purchases at the New York Fed) and seek to indict him for fraud — that is, tendering for securities without possessing the funds to pay for them. The way to shut down QE II is to lead the NY Fed perps out of their Manhattan offices in handcuffs.

    QE II is the largest-scale Ponzi fraud in the history of human civilization. Since government won’t stop it, fully-informed juries will have to shoulder the load of halting this larcenous cartel.

  7. thepigman

    Let’s call a spade a spade. Stocks are now Ben’s bitch…..
    but are a fraudulent respresentation of economic reality.

  8. rd

    I have a fair amount of equities (including a large illiquid ESOP stake), so I appreciate that The Bernank is looking out for me.

    However, his short-term actions are largely irrelevant to me with regards to my equity portfolio. All of my equities are in 401ks, IRAs etc. so I won’t even be thinking of taking money out for 10 more years. Therefore that money is not available for spending.

    With regards to his “wealth effect” type of thinking, I think the bubble and burst experience of the past decade is undermining his psychological warfare on the middle class. Early in 1999, I started using Schiller’s 10-yr real PE for evaluating my portfolio. When I periodicially figure out where I stand in the long-run, I normalize my equity portfolio to the long-term average PE of about 16 and then can assume a 5% real growth, including dividends. I make a similar rough adjustment to my bond component assuming interest rates are about 5%.

    The end result is that today I assume that my total portfolio is only worth about 75% of what my statements say. If he pumps it up to 2007 PE levels, then it will only be worth 50%-60% of my statements in my mind.

    As a result, my family’s spending and credit moves will be completely unaffected by his “wealth effect” maneouvering. Instead, we are managing our finances based on 5-year projections of salary income and expenditures. If he wants to change our spending habits, then he needs to address my perception of how much our salaries will increase over the next 5-years. Right now we are assuming no real growth.

    For the bottom 50% of the population, I think that the rabid Social Security haters are doing a good job of scaring people into thinking that they will be poor in old age, just like pre-FDR times. Personally for budgeting purposes, I assume that our Social Security income will be half of what our annual statements say that they will be due to likely means-testing and cuts when it is time for me to collect from what will have been over 40 years of contributions. That is not helping The Bernank’s goal of encouraging me to spend more today.

    While I think that Americans should be saving more money in general, it is clear that Social Security has achieved a monumental goal of providing a decent floor to old-age poverty. The irresponsibility of politicians castigating the program based on 75-yr estimates has been mind-blowing. I think history has shown that there is no point in projecting these things out past about 30 years which is even a major stretch for modern economic “theory.” The 30-yr projections aren’t too bad which is why they have to go to the 75 yr projections to justify their hate.

    1. Hal Roberts

      QE is a great way to stimulate a bunch of Sovereign Wealth Funds and any stock market investors that receive dividend checks. I have always wondered how much of the stock markets are owned by Sovereign Wealth funds, its a bad way to stimulate America but it a great way to siphon off American tax dollars. They are already talking about QE3 I think they like the results they are getting it serves their Bush Trickle Down mentality well. The Globalist at work. Ha

  9. attempter

    So all of this is further proof:

    1. Trickle-down doesn’t work. (Channeling any policy through corporatism doesn’t work.)

    Therefore a responsive, responsible, legitimate government would jettison what has been proven not to work, in this case channeling monetary policy through the Fed and private banks. It would instead directly issue money according to the capacity underproductivity of the real economy.

    The fact that the government doesn’t do this proves:

    2. Trickle down was never intended to “work”. It was always a Big Lie. This is in fact a predatory, unresponsive, illegitimate government whose conscious goal is to serve as the banksters’ thug.

  10. scraping_by

    The Wealth Effect is also useful as the slogan at the heart of a sales patter. The financialization of the American economy has left us with an infrastructure of brokers, dealers, financial advisers, etc., all of whom are demanding to be fed. An entire industry of experts in all media roil the virtues of the weightless economy, one based on abstractions rather than real goods. Government officials have to say something when their constituents point out the connection between bought policy and economic decline. The run up in the market has been engineered for them to have something to point at.

    With the middle class shrinking and wised up, there are fewer and fewer attracted to stocks as an investment. Even those who have been made whole in their 401(k) after March 2009 feel it’s a thin thing, existing only on paper and liable to disappear in an afternoon, a flash crash where the trades aren’t broken. It’s an interesting academic exercise whether we’re seeing Fed-financed ramping, Fed-financed churning, Fed-financed pump and dump, Fed-financed painting the tape, or what have you. Our central bank is printing dollars to chase equities and that can’t end well. The stock market’s become a bad neighborhood, and we should all be looking for a suburb.

    As to the food riots, the last time that happened a market corner on agricultural products was to blame. But if it’s GS again, this may be a feature of the world from now on.

    A sales patter is designed to keep the mark engaged while preventing them from thinking about the deal. This slogan’s aimed at the media, the politicians, and the chattering classes. It gives them uptalk potential in a realistically down situation. It’s the Lafler Curve of the weightless economy.

  11. XRayD

    The financial industry, with its incestuous relationships with government agencies, runs a close second to the energy
    industry. In the last 10 years or so, their machine, led by the famously failed economic consultant Alan Greenspan
    – one of the few businessmen ever to be laughed out of business – seemed perhaps the most effective. It lacks,
    though, the multi-decadal attitude-changing propaganda of the oil industry. Still, in fi nance they had the “regulators,” deregulating up a storm, to the enormous profi t of their industry. Even with the biggest-ever fi nancial fi asco, entirely brought on by the collective incompetence they produced (“they” being the fi nancial regulators and the financial industry leaders working together in some strange, would-be symbiotic relationship), reform is still diffi cult. Even with everyone hating them, the fi nancial industry comes out smelling like a rose with less competition, profits higher than ever, and not just too big to fail, but bigger still.

    The rest of this piece by Jeremey Grantham is must read too:

    https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IICpAi5iWziVPw3uptdcvg6dozLwvzF55NDLAyMt5kMpgbOzvopWZHc7IfNuYFv3ddkDJ5oeQ5/BTtT4ETfjwFWakZQ9LBWMPX4%3d

  12. Karen Bernier

    Regarding Bernanke’s so-called wealth effect, the following comments by John Hussman and Jeremy Grantham have been noted before on NC, but bear repeating:

    Hussman said that “Bernanke’s case for creating wealth effects via the stock market….are undoubtedly among the most ignorant remarks ever made by a central banker”

    And according to Hussman’s math, which I won’t bother repeating here: “In effect, Ben Bernanke is arguing that investors should value a one-time payout of $904 million dollars at $1.47 trillion….”

    And Jeremy Grantham from Oct 2010 (which might be included in the article by XRayD above, but I haven’t read it yet):

    “In almost every respect, adhering to a policy of low rates, employing quantitative easing, deliberately stimulating asset prices, ignoring the consequences of bubbles breaking, and displaying a complete refusal to learn from experience has left Fed policy as a large net negative to the production of a healthy, stable economy with strong employment.”

    But producing a healthy, stable economy is not Bernanke’s goal. This is the Big Lie, and the attempter has it right when he says above that the “conscious goal is to serve as the banksters’ thug”.

    1. XRayD

      Bernanke is not running monetary policy. He is practicing pop psychology, or performing at a children’s birthday party, pretending to be a magician!

      Consider what has happened to the “wealth effect” of millions of peoples’ IRAs and 401(k)invested in the stock market the Fed is now inflating once more.

      This time, however, it is doing so by putting its own (i.e. the American peoples) Balance Sheet at risk directly – which, of course, will facilitate the next bail out via Congress.

    2. Jim Haygood

      ‘Ben a Vie’ [‘Ben for Life’] Ali has left the building in Tunis.

      But ‘Ben a Vie’ Bernanke remains barricaded in the Eccles Building, despite the unprecedented rumblings of popular discontent over his QE2 ‘torch the proles’ program.

      Meanwhile, the BLS [Bureau of Lying Statisticians] says U.S. food prices rose an imperceptible 0.1% last month, as food riots break out in Asia and Africa.

      http://www.bls.gov/news.release/cpi.nr0.htm

      Who you gonna believe — the government, or your lying eyes at the supermarket?

  13. sotruesotrue

    What rd said.

    Yves, you weren’t really under the impression that Bernanke was ever trying to help the working class were you ? You know better than anyone tha it’s not his goal.

    And we just can’t reiterate too often how the Wall st economy doesn’t help the real economy. My equity exposure is 401ks. The stock market going up makes sure that I don’t starve to death in my retirement, but it sure as hell doesn’t give me any spending money.

    I’m continue to get more depressed how the policy makers just don’t understand how it’s employment that matters and not the stock market.

    1. reslez

      I’m continue to get more depressed how the policy makers just don’t understand how it’s employment that matters

      They understand. They just don’t care. They’re not here to benefit you. Unemployment is a feature not a bug in their eyes since inflicting misery on millions of Americans keeps inflation low for their criminal banker buddies. The wealth effect is all about their wealth, and enduring poverty for the citizens of the world.

    2. Paul Repstock

      LOL So true said, ”
      “My equity exposure is 401ks. The stock market going up makes sure that I don’t starve to death in my retirement,..”

      Are you out of you freakin’ mind? At the whim of these ‘Banksters and politicians, your 401K may be worth nothing. Zip, zero, nada, nothing! over 90% of equity trading is done by banks and corporate institutions. Any day the powers decide to do it the markets can fall 15%. The much vaunted ‘circuit breakers’ don’t mean anything because you cannot sell your stocks. The falling can continue day after day, till you are worth nothing!

      It is not only pension funds which can be gutted.

      1. Paul Repstock

        Do not be deluded into thing that diversification into different stocks is sufficient to avoid the “All your eggs in one basket” risk. When ‘not if’ the Dow reaches it’s ultimate goal, all the apples will be seen as rotten.

        I make no predictions about timing. The Dow may well reach 25,000. I merely suggest that nobody should feel secure about aspects which they have no control of.

  14. r cohn

    The governments( FEDS) policy is very simple,to make everyone in this country ,except for the top 1/10 of 1% completely dependent on the government.He is doing this with seniors,with the ZIRP and stock market crashes which eventually burst.He did this with most of the middle class when the housing bubbles grew and grew and grew and eventually burst.Next the budget deficits and QE’s will create a hyperinflation which will wipe out most of the rest of the wealth of any one but the hugely wealthy.

  15. Sharon

    But Ben says that we recovered and points to rising interest rates on treasuries as proof? Oh, so is that why bond yields are going up like crazy in Europe specifically Ireland, Portugal, etc??? Obvioulsly Bernanke thinks Americans are stupid. The only thing going for the Bernank is that about 70% of the US population is financially illiterate.

  16. Elliot X

    from the Guest post: “Even Alan Greenspan recently called the recovery “extremely unbalanced,” driven largely by high earners benefiting from recovering stock markets and large corporations.”

    Priceless.

    And even Heinrich Himmler used to faint at the sight of blood.

    See, Greenspan really does care. It may be that this “extremely unbalanced recovery” is only benefitting the rich and the banksters but *no way* was that deliberate policy, folks, it’s just unfortunate how lopsided it all seems to be turning out!

  17. Hugh

    There is a certain “We have always been at war with Eastasia” in the Fed’s shifting announcements. As always this is about kleptocracy. Bernanke is not interested in fixing anything. His only mission is to keep the casino open and operating as long as possible.

    That said, QE II is mostly smoke and mirrors with very little substance. Trading Treasuries for cash is a swap so you are not getting any net increase in liquidity for markets. The only increase comes from the premium the Fed is paying for those Treasuries. If you figure it at 1% to 2%, that’s only $6-$12 billion, chump change compared with what is needed to keep the bubbles going.

    Most of what we are seeing is being run on air. Even factoring in the Obama tax cuts, we are only looking at about $100-$120 billion of new money for the kleptocrats to raid and that will be dribbled out over the course of a year. Given Wall Street’s appetite, I don’t see that as much more than a blip.

    Meanwhile this psychology detached from real world fundamentals is creating a lot of speculation in commodities pricing, the upshot of which looks to tank the real economy.

    And that will eventually take down the indices with it. But you have to understand that’s kleptocracy. Keep the cons going as long as possible and hope that it all blows up in someone else’s face, this usually being the taxpayer.

  18. Jackrabbit

    First, USN&WR does not tell the whole story. The Fed is buying *more* than $600b in Treasuries because they are also reinvesting income from QE1.

    Secondly, it wasn’t hard to foresee that the Banks would take advantage of QE2 or that any real benefit to the economy would be so small as to amount to an excuse for the program.

    Yesterday the NYT reported that Banks plan to start paying dividends again.

    I believe that QE2 was meant to raise bank earnings in preparation for capital raises (I wrote this on NC in November when QE2 began). That it benefits other stocks and creates or saves jobs is secondary.

    Yesterday’s NYT report that Banks will start to pay dividends again is confirmation that Banks plan to raise equity and other financing in the not-too-distant future.

    IMO, the theory that QE2 is meant to raise stock prices and thereby benefit the top-10% is wrong-headed. The major beneficiary is TBTF Bank insiders. In fact, in their coming equity raises, banks will seek to exploit the renewed confidence in TBTF Banks (as manufactured by the Fed) of those 10%.

    1. Jackrabbit

      To elaborate: if bank stocks rise, that seems to benefit Bank investors (the top-10%) But to the extent that that rise is based on faux earnings – which are then diluted in an equity raise – investors are left worse off!!!!

      Who is better off? Bank management & other insiders that get bonuses and other compensation based on the increased earnings, and the Bank itself which is now in a financially stronger position (and as such can better guarantee the future employment of management).

      Also: Everyone seems to be assuming that QE2 benefits Wall Street as a whole. But we don’t know the makeup of the Fed purchases. It is entirely possible that the Fed is buying more from some primary dealers than others. This is a key metric as it would reveal what (if anything) the Fed is “really” up to.

  19. Schofield

    Why on earth would anybody expect the Little People to benefit much from any action of government or quasi-government like the Fed when they are owned and corrupted by the Big People?

  20. flow5

    This country needs to channel savings into REAL-investment – not FINANCIAL-investment.

    The potential economic payback is dependent upon how savings/debt is deployed.

    For example, if debts are acquired to finance the acquisition of a (1) (new-security), the proceeds of which are used to finance plant and equipment expansion, or the construction of a new house, rather than the purchase of an
    (2) (existing-security) to finance the purchase of an existing house (read bailout), or to finance (1) (inventory-expansion), rather than refinance (2) (existing-inventories).

    The former types of investment (1) are designated as “real” (new), as contrasted to the latter (2), which constitute “financial” (existing) investment.

    Financial investment (the wealth effect from stock purchases), provides a relatively insignificant demand for labor and materials and in some instances the over-all effects may actually be retarding to the economy.

    Compared to real investment, financial investment is rather inconsequential (as a contributor to employment and production). Only debt growing out of real investment which contributes to (larger output, higher quality, & lower unit costs), or consumption, makes an actual direct demand for labor and materials.

    But even if the monies represented debts are spent on projects which increase productivity, and reduce waste, the debts are beneficial no matter how financed (i.e., even thru the creation of new money & credit).

  21. RueTheDay

    Using QE to boost equity prices and create a wealth effect is at best a short term solution. If GDP and employment do not improve, the stock market gains are unsustainable. Stock valuations are driven by earnings or at least expected earnings. At this point, the inventory adjustment is over and cost cutting to boost earnings has gone as far as it can. There needs to be top line revenue growth to continue earnings growth and that just won’t happen with sluggish GDP growth and a horrible labor market.

    1. thepigman

      Bingo. You can already see from the JPM top line, there
      is no loan growth and we’re still pushing on a string. The growth of private debt that has bailed us for the last forty years is now so ridiculously high, it literally can’t grow
      any higher.

  22. Jojo

    The big mistake that the FED is making is equating a successful economy with a successful Wall Street.

    Good Wall Street ¬= good economy!

  23. Michael H

    This has nothing to do with the Fed’s wealth effect, but it looks like Iceland is way ahead of the US when it comes to dealing with banksters:

    REYKJAVIK, Iceland (AP) — Two former senior executives with Iceland’s failed Landsbanki bank have been arrested over allegations of market manipulation, the special prosecutor’s office said Friday:

    http://www.google.com/hostednews/ap/article/ALeqM5hJc-B2v3xl0vUco7sIdcnIW0v–g?docId=b71e4674febb4c249dea33a0ba79abce

    1. Paul Repstock

      It may or may not have direct connections to the Fed. But rest assured there is some ‘sweat equity’ being shared on this from Atlanta to Berlin… I had forgotten about Iceland. The one place where the ranks weren’t closed..:)

  24. hermanas

    I believe like Jojo says that the fortunes of Wall street and Main street are inversely related.

  25. financial matters

    Interesting words from Bernanke… (in case there were any doubts of the Fed trying to manipulate the stock market)

    “””The market reacted coolly following the FOMC announcement on Wednesday, but burst upward today on the Chairman’s unprecedented column. After all, when the Fed explicitly announces its intentions of jolting the stock market—-a thought previously expressed only by conspiracy theorists—-investors take notice”””

    —-

    http://www.creditwritedowns.com/2010/11/why-bernanke-is-gambling.html

    Why Bernanke Is Gambling

  26. michelle

    Can someone explain this to a simpleton like me? I don’t understand the complete picture, but I know that the Federal Reserve is trying to up the stock market prices. Is that right?

    I have no idea. I need to pay attention to the news more often.

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