Sunday, January 5, 2014
If this new experiment of borrowing our way to prosperity turns into a nightmare, don’t blame the “free market.”
In a capitalistic economy, the cost of money (capital) must be determined by the market and not some chummy, hand-picked group of people called the Federal Reserve.
The Fed sets the short-term borrowing costs, not the market. And with quantitative easing (QE) the Fed tries to control the long-term borrowing costs as well.
Basically, QE is the Fed going to its member banks and asking them what “junk” do they have on their balance sheet that they want to get rid of?
Undoubtedly, based on the fact the Fed is buying $40 billion worth of long-term Treasuries every month, the banks want to dump some of their long-term Treasuries
Why would banks accept the risk of holding long-term Treasuries in a rising rate environment if the Fed will buy them and put the risk on taxpayers?
The Fed credits the bank with reserves with a few clicks on a computer and in return the bank gives the Fed Treasuries (The Fed doesn’t print money, the U.S. Treasury does the printing.)
The end result is the Fed’s balance sheet has ballooned to $4 trillion, interest rates are artificially low, and banks have excess reserves.
The Fed asserts the banks will loan the excess reserves to you the people.
The fact is, since this new economy, Obama’s “change,” isn’t creating entrepreneurship and decent-paying, full-time jobs, and increasing participation in the work force, the banks don’t have many qualified borrowers to loan the money to. Some money “trickles” down, but not enough.
However, wealthy individuals have great credit. Unfortunately, the rich already have plenty of stuff like cars and iPhones so they just take the money created by the Fed and buy stocks and other assets. Thirty percent of home purchases are cash.
No wonder the stock market is hitting new highs when 50 percent of Americans feel we’re still in a recession.
The Fed gloats about how it isn’t creating CPI inflation, which is true, but only because the money isn’t flowing to consumers and getting spent (no velocity of money).
Everyone seems to like the financial bubbles contrived by the Fed, but they won’t last. They never do.
When it comes time for the blame game, don’t blame the free market, blame the Federal Reserve.