Congress has oversight of the Federal Reserve, so Federal Reserve mistakes are Congress’s mistakes. Our Federal Reserve has made errors of policy under Congressional oversight that have made the stock market less connected with real world production and real world markets. The process of change from production to investment has been called Financialization.
These Federal Reserve errors have allowed the stock market and our larger economy to develop a reckless independence from market forces and a growing fragility. Easy money, or capital available at very low interest rates, has provided a playing field for large capital holders to recklessly risk large loans in a variety of investments, many that aren’t good investments. If an investment fails, there’s more money to borrow. Zero Interest Rate Policy was supposed to be a temporary measure after 2008 that allowed the Federal Reserve to borrow money and bail out the Too-Big-to-Fail Banks. But we have all noticed that ZIRP has been destructive to our middle class, especially old retired people who saved money that now doesn’t pay any interest income to them. Yet the Federal Reserve has already done ZIRP again, they declared over the weekend.
The Federal Reserve should stop that! The Federal Reserve isn’t helping.
Imbalances in our markets are being caused by reckless investing. Malinvestments hurt the economy because they waste economic resources. The Federal Reserve’s experiments have obscured price discovery and kept unsound companies in business. Congressional tolerance of monopolies has artificially raised the cost of tuition, cars, housing and healthcare. During the Great Depression, The Banking Act of 1933 initiated a separation of commercial and investment banks and the part of the Act that did that is called Glass Steagall. That part of the Act kept people’s savings from being used by risk hungry investors who might destroy people’s savings if their investment failed. Federal Reserve policy mistakes ended the Glass Steagall separation between commercial and investment banks during bank deregulation. Policies to undo the separation between investment and commercial banking started slowly during the Carter Administration and continued to completion during the Clinton Administration. Because Glass Steagall was repealed, banks bet everything on the subprime housing market. When the subprime housing market failed, a lot of banks failed too. If Glass Stegall had been still in force, there would have been a cushion to soften the losses. Instead, bank bail-outs during the Great Recession provided a government subsidy for bad banking practices that have only continued.
Don’t be fooled into believing that our nation’s concerns over a new coronavirus have provided investors a reason to crash the Stock Market. Because of bad Federal Reserve policies, investors knew that our markets have become less resilient and they were obviously waiting to cash out as they are doing now. Derivatives have allowed a casino-like environment in global trading and investing under a regime of cross border capital flows. Derivatives have allowed investors to create dollars out of bets that they now want to trade for dollars built from people’s hard work that have been invested in the stock market to get a retirement fund. After Glass Steagall protections were removed, and after ZIRP policy, retirees were driven to invest in the stock market. I know that people who actively invest in the stock market see money invested there as being all the same. But obviously the money earned over a lifetime is more dear to the earner of that money than money earned by betting derivatives. Glass Steagall protected saver’s money. We need that protection again as can be seen by today’s stock trading. Retirees can’t afford to lose their retirement funds. As money hungry investors cash out, people’s retirement dollars are evaporating. What will older people who cannot work now do when their retirement evaporates?
Global trade has hit a speed bump but that’s not a reason to crash the market. There’s no indication that global trade is ending for all time.
The nCoV 2019 virus shouldn’t become an excuse to crash every part of the U.S. economy. It also isn’t an excuse for Congress to allocate more dollars that aren’t accounted for to fight people’s fears or to raise confidence.
I don’t applaud when our Congress suggests an unlimited budget to fight a new virus. We should all ask Congress where exactly will they put the money that has already been allocated and who will benefit? Why do they need more money? Do they want the whole economy to become nationalized, or what?
If you want to learn more about our nation’s history, the relationship between the economy and politics, ideological change over time, banking problems, government corruption, buy a copy of Political Catsup with Economy Fries available at Amazon.com.