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The Chart That Explains Everything

By       Message Mike Whitney       (Page 1 of 2 pages)     Permalink    (# of views)   10 comments

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Reprinted from Counterpunch


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Why is the economy barely growing after seven years of zero rates and easy money? Why are wages and incomes sagging when stock and bond prices have gone through the roof? Why are stocks experiencing such extreme volatility when the Fed increased rates by a mere quarter of a percent?

It's the policy, stupid. And here's the chart that explains exactly what the policy is.


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What the chart shows is that the vast increase in the monetary base didn't impact lending or trigger the credit expansion the Fed had predicted. In other words, the Fed's madcap pump-priming experiment (aka-- QE) failed to stimulate growth or put the economy back on the path to recovery. For all practical purposes, the policy was a flop.

QE did, however, touch off an unprecedented 6-year bull market rally that pushed stocks into the stratosphere while the real economy continued to languish in a long-term slump. And the numbers are pretty impressive too. For example, the Dow Jones Industrial Average, which bottomed at 6,507 on March 9, 2009, soared to an eye-popping 18,312 points by May 19, 2015, an 11,805 point-surge in just five years. And the S&P did even better. From its March 9, 2009 bottom of 676 points, the index skyrocketed to a record-high 2,130 points on May 21, 2015, tripling its value at the fastest pace in history.

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What the chart shows is that the Fed knew from 2010-on that stuffing the banks with excess reserves was neither lowering unemployment or revving up the economy. The liquidity was merely driving stocks higher.

It's worth noting, that the Fed knows that credit does not flow into the economy without a transmission mechanism, that is, unless creditworthy borrowers are willing to to take out loans. Absent additional lending, the liquidity remains stuck in the financial system where it eventually creates asset bubbles. And that's exactly what's happened. Instead of trickling down into the economy where it would do some good, the Fed's monetary stimulus has cleared the way for another catastrophic meltdown.

The chart suggests that the Fed's primary objective was to reflate stock and bond prices to help the banks grow their way out of insolvency and avoid government takeover. Former Treasury Secretary Timothy Geithner alluded to this in an interview with CNBC in 2009 when he said: "We have a financial system that is run by private shareholders, managed by private institutions, and we're going to do our best to preserve that system." Unfortunately, the banking system was insolvent at that point in time, a fact that was confirmed in sworn testimony before the Financial Crisis Inquiry Commission by Fed chairman Ben Bernanke. Here's what he said:

"As a scholar of the Great Depression, I honestly believe that September and October of 2008 was the worst financial crisis in global history, including the Great Depression. If you look at the firms that came under pressure in that period...only one...was not at serious risk of failure. So out of maybe the 13 of the most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two."

Think about that for a minute. Not only was the US banking system hopelessly underwater, but also the world's most lucrative and powerful industry was about to be removed from private hands and "nationalized." Shareholders would be wiped out, bondholders would take severe haircuts, management would be replaced, and credit production would be returned to the representatives of the American people, US government officials.

Do you think the prospect of nationalization might have scared the hell out of Wall Street? Do you think the banksters might have concocted some crazy plan along with Bernanke and Treasury Secretary Henry Paulson to precipitate a crisis by euthanizing Lehman Brothers so they could extort $700 billion from Congress (TARP) before launching round after round of money printing under the deliberately-opaque moniker, Quantitative Easing?

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Of course, they would. These are the same guys who had already stolen trillions of dollars from credulous investors in a fraudulent mortgage laundering scam that crashed the economy and brought the financial system to the brink of ruin. Does anyone seriously think that they'd wince at the prospect of dinging the public a second time by shifting their toxic assets onto the Fed's balance sheet or by accessing free liquidity to fuel their illicit derivatives trades or their other pernicious high-risk activities?

Keep in mind, the Fed never could have carried off this massive looting operation without the help of both the Congress and the president. This simple fact seems to escape even the most vehement critic of the Fed, that is, that the Fed needed policymakers to strangle the economy while it implemented its plan or it would have had to abandon its reflation strategy.

Why??

Well, because if the economy was allowed to rebound, then higher employment would push up wages and raw material costs, which in turn would boost inflation. Higher inflation would force the Fed to raise short-term interest rates which would put the kibosh on the cheap money Wall Street needed to buy-back its own shares or engage in other risky speculation. So the real economy had to be sacrificed for Wall Street. Hence, "austerity."

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Mike is a freelance writer living in Washington state.

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