A couple days ago in the Energy Open Thread, our resident progressive clown equated the stock market doubling during Obama’s term (as opposed to “tanking” at the end of Bush’s second term) to be a dynamic he wanted to see more of in a second Obama term. I have no idea how many regulars here follow the markets closely, but I do, so I got a chuckle out of Bozo’s uninformed comment. It also got me to thinking that the damage Obama’s and the Fed’s monetary and fiscal policies have inflicted on the average American had the makings of an interesting discussion.
In the course of my research, I ran across an op-ed from a little over a year ago that spells out in layman’s terms precisely what’s happened.
Does the United States still have a stock market? Not really. In a real market, when there are more sellers than buyers, prices decline. And vice versa of course. That is called “price discovery”; or used to be. Since January of 2010 investors have withdrawn a net total of 81 billion dollars from U.S. stocks and funds, this week marking the 33rd consecutive week of outflows, while stock prices have staged a missile launch upward that started in mid-July. Floyd Norris of the New York Times confirms that outflows have remained at record high levels over the last four years. (as a side note, that outflow trajectory continued through most of 2011 as well) Some of the funds withdrawn resulted from industry insider selling, and much of that was re-invested in commodities and emerging markets. But a substantial amount, according to Charles Biderman, CEO of Trimtabs, was withdrawn by middle-class Americans to pay monthly bills.
In an unprecedented interview on CNBC, Biderman stated that the Federal Reserve is no longer denying the fact that it has been rigging U.S. markets nor is the Fed making any effort to hide it. An unrelenting and counter-intuitive rally has ensued, with stock prices gapping up at 4:00 AM night after night and never looking back. Even before the Fed initiated its POMO (Permanent Open Market Operations) injections of outright treasury buys in a program euphemistically titled “Quantitative Easing 2” (a.k.a printing money out of thin air) the Fed’s daily zero percent loans of taxpayer money to Goldman Sachs and J.P. Morgan were used almost exclusively to buy stocks – and then sell them again within minutes or even seconds. Investment banks use high frequency trading computers (HFTs) programmed to essentially steal money, one penny at a time, from any retail investor foolish enough to believe he could make money by trading or investing in stocks. Their computers, operating at speeds no human with a laptop could match, front-run orders, ensuring a profit on every trade. Wall Street investment banks have the right, unlike everyone else, to trade in increments of 1/1000 of a penny, allowing them to deny order fills by keeping the price 1/1000 of a penny below the bid. It is one of many questionable and even illegal practices engaged in by what the internet bears cartoons refer to as the “the Goldman Sack” and “the JP Morgue”. The web cartoons have gone viral, as they say, and served to educate the uninitiated in the grand-theft-stock-market game being run by the Fed and the Wall Street gangs.
The writer concludes with this:
Where will the U.S. economy be when QE2 ends? It will be where it is now, as the Fed’s money printing, while raising the costs of essential food and energy, has had no notable effect on job numbers or salaries. What it does do, with every uptick in the Dow Jones Industrial Average, is increase the wealth of those who are already wealthy.
To get a mental picture of just what this current crew in power has done to our monetary base, one really has to see it in chart form. In July, 2009, Richard Anderson, Vice President of the St. Louis Fed, had this to say about the mercurial rise in the monetary base (which has continued almost uninterrupted since):
Monetary Policy Implications of Nontraditional Programs
In several speeches, Fed Chairman Ben Bernanke has emphasized that nontraditional policy focuses on reducing stress in specific financial markets, that is, on credit easing. The focus is apparent in the types of securities purchased, including commercial paper, mortgage-backed securities and privately issued asset-backed securities.
Be this as it may, the programs nonetheless have greatly increased the monetary base—and portend, if not promptly reversed when economic activity revises, higher future inflation. When will confidence return to the economy, such that banks feel able to accurately assess the riskiness of loans and borrowers feel confident in their ability to repay? When confidence returns, will financial markets be roiled as the Fed reduces its assets and the monetary base? Finally, the Fed now has an additional policy instrument not previously available: the payment of interest on deposits at the Fed.5 Can it be used to forestall undesired increases in bank lending?
Recent increases in the monetary base are far greater than any previously in American history (even adjusted for the size of the economy), surely a “noble experiment” in policymaking. Will these policies be successful without accelerating inflation? The epitaph to this curious case of monetary base expansion is yet to be written.
The one truly amazing aspect of everything that’s happened in the last 3 years is that they’ve been able to keep the ball in the air as long as they have. How much longer? A functional crystal ball would come in real handy about now.