Wall Street hates American workers.  Don’t believe me?  Explain yesterday’s (September 18, 2013) rally in stock and bond markets.   The rally came almost immediately after US Federal Reserve Board Chairman Ben Bernanke announced that there would be no taper in the Fed’s purchase of Treasury and mortgage bonds (totaling $85 billion per month for roughly the last year).  Bernanke cited weak employment growth, and continuing high unemployment rates (that have declined of late, but only because fewer people are seeking work) for why the bond buying would not cease.  There is no end in sight.  With Bernanke’s announcement, it appears monthly bond purchasing by the Fed is like any other government program—the closest thing to eternal life to be found in this temporal world. 

Within minutes of the announcement, the S & P, Dow and Nasdaq indices notched better than 1% gains, and the yield on the benchmark ten-year US Treasury bond dropped fifteen basis points (sending its price soaring). 

The scenario has been playing like a broken record since Bernanke started his quantitative easing program, this latest iteration being dubbed QEIII, because it is the third such venture of increasing the money supply by buying bonds in which the Fed has embarked since the beginning of the financial crisis.  Each time the Fed initiates or pledges sustainment of a bond buying program because of the weak recovery, financial markets cheer the dismal economic state prompting the easing with a sustained rally.  But last May, when the Fed had the temerity to finally hint that it might reduce its bond purchases starting this month, markets crashed (or at least rediscovered for a brief interval that prices don’t forever and always have a one-way trajectory skyward) and bond yields soared (i.e., bond prices crashed).  Of course, the reason the Fed even ruminated about such a drastic move is because, in the meantime, economic activity has increased.   Thus the calculus goes something like this:  better economic activity equals financial market Armageddon.

Regardless of Wall Street’s compulsions, real economic metrics are looking better.  The housing market, the precipitator of the financial crisis and Great Recession, has churned of late with activity, having its best run since the crash (a sparkling new suburban mansion, anyone?).  The automobile market, which had once been so dismal that two of the major domestic brands bankrupted as a result of the recession, is nearly back to the annual volume of sales it enjoyed before the crash (how then, about a sparkling new Suburban?).   The technology industry even weathered the death of its iconic leader, Steve Jobs, though the computer company he once ran is no longer the most valuable company in the world.  All of this is directly attributable to the Fed.  It had nothing to do with the natural course of economic affairs.  Just ask ‘em.  Or, Paul Krugman.  There is never an economic calamity for which the wise economic bards at the Fed don’t have the answer, which is, of course, ever and always, to increase the money supply.   Mr. Krugman, who has disagreed with what he has considered was the Fed’s anemic stimulation programs, still would credit the Fed with the recovery, so far as it goes.  But he believes even thinking about reducing the stimulus of newly created money pouring onto the smouldering economic embers would deprive the nascent fires of the fuel they need to thrive. 

But the employment markets are still dismal.  The rate of unemployed workers has declined, but only because more and more workers are dropping out of the labor force.  Total employment still hasn’t breached its pre-recession peak, down by about two million, while the country gains population at the rate of about a million or so people (admittedly, not all of whom are of employment age) per year.  The growth in the potential number of workers far exceeds the growth in jobs, thus the total employment rate stands at about 63%, from a high before the 2001 recession of over 67%, and before the start of this latest recession at a bit higher than 66%.  Maybe Keynes’ dream that one day people would be free of the grubby need to scratch and claw for their daily bread is finally coming to fruition.  As an absolute and relative matter, fewer and fewer are.  Thus is Wall Street cheered. 

But the problem of low employment rates has next to nothing to do with the business cycle.  Employment rate growth had stalled before the previous recession.  The low employment rate has more to do with why employers favor importing labor than hiring domestic workers, as I explained more fully in a previous post.  In the parlance of the economists, the employment problem is structural, not temporal, though its structural problem is by and large a product of federal government employment and immigration initiatives.

By effectively abandoning any consideration of ending the stimulus of bond buying and zero interest rates, Bernanke’s Fed has essentially guaranteed a repeat of the financial crisis and recession that ultimately led to where it is now. Today’s programs are just extensions and amplifications of its previous economic tweaks.  It would be obvious to a well-trained chimpanzee that repeating the same programs that yielded calamity in the past would yield calamity in the future.  Take as a snapshot total employment relative to the Fed Funds rate (the first graph is of total employment):

Graph of Total Nonfarm Private Payroll Employment

The second is of the Fed Funds rate, the rate that the Fed charges for overnight loans to its member banks:

FRED Graph

(By 2003, Fed Funds had decreased to one percent, from a pre-recessionary high of about 6% in 2001.)

The Fed Funds rate and employment bottomed at about the same time in 2003.  The ultra-low rate then was at least a significant factor in the ensuing housing market bubble, whose bursting set off the Great Recession in 2008, indicated by shading in each of the graphs.  See the difference in the curves?  By 2005, as employment started to grow, the Fed pushed up the Fed Funds rate.  This time, though employment has again started to grow (yet still below pre-recession levels), the Fed has kept the stimulus flowing.  If anything, the next crash will likely exceed in severity this last one.  And that’s not even accounting for the bond buying program, whose granting of perpetual life yesterday so cheered Wall Street. 

When the crisis really got rolling back in 2008, and the Federal Reserve and US Treasury stepped in with massive cash infusions, in a crisis by and large precipitated by massive cash infusions, the handwriting was on the wall.  The Fed was only delaying economic pain, not denying it.  I thought the next crash would come in late 2012.  I was obviously wrong.  Things can’t crash that are still more or less depressed.  As real economic activity has greatly improved, I’ll venture another guess that it will come in mid-2014, along about the time Ms. Yellen takes over the Fed Chairwomanship from the forcibly retired Bernanke.   All that will be necessary for both Wall Street and Main Street to implode is even the slightest of monetary provocations.  Wall Street stays afloat only by the Fed’s ongoing bailouts.  It will crash as soon as the Fed’s power to command the economic tides are again revealed as illusory.   And again, Wall Street will take Main Street down with it.  And again, Main Street will be asked to rescue Wall Street. 

But maybe, just maybe, this time the people will tar and feather and parade down Main Street the economic charlatans, shamans and soothsayers who will have again destroyed the economic vibrancy of the country they created.   Maybe this time the zombie banks and businesses will be allowed to fail (perhaps because there will be no resources to save them) so that new enterprises can find purchase and grow.  The Fed can only maintain the illusion of economic stasis for a limited time.  This period of “moderation” is sure to end soon.

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