The renewed turmoil on global financial markets, which saw major falls on Asian markets and a one percent downturn on Wall Street yesterday, underscores the fact that none of the problems that erupted in the 2008 meltdown have been overcome. On the contrary, the latest gyrations are a sure sign that a new crisis is in the making—one set in motion by the very policies put in place by central banks over the past five years.
The initial spark for the selloff was the announcement by Federal Reserve Chairman Ben Bernanke that if economic conditions in the US improved, the Fed would consider easing back on its purchases of bonds under its policy of “quantitative easing”. The panicky response on the markets to this statement has been since compounded by fears of a credit crunch in China due to the tightening of money policy by financial authorities.
Since the third round of quantitative easing (QE3) was announced last September, the Fed has been spending $85 billion per month on purchases of Treasury bonds and mortgage-backed securities, expanding its balance sheet at the rate of $1 trillion per year.
At his press conference last Wednesday, Bernanke issued repeated assurances to the financial markets that the Fed was not tightening monetary policy, but merely easing pressure on the accelerator, and that should economic conditions worsen, even more monetary easing would be carried out.
But such has become the extreme dependence of financial capital on continuous injections of ultra-cheap liquidity from the Fed that even the hint of a future cutback in the flow of funds brought an instant paroxysm on the markets. Bond prices fell, bringing a rise in bond yields (interest rates). On Wall Street, the Dow fell, losing some 200 points in the period immediately following Bernanke’s press conference and dropping a further 350 points the next day before recovering slightly on Friday.
Economic stagnation and contracting markets mean that profits are not reinvested, but lead to the accumulation of large cash balances on the books of corporations—estimated to be as much as $2 trillion in the US economy—which are then used for speculative operations in financial markets.
The violent reaction to the possibility that quantitative easing might be cut back shows the extreme dependence of the capitalist economy on this form of economic parasitism.
…there are signs that perhaps Bernanke is right and the real failure is Obama and Congress. The much vaulted housing “recovery” has been fueled by easy money that allowed investors to buy houses cheap which, when combined with banks holding properties in foreclosure off the market, has resulted in rising prices. In the Guardian, Heidi Moore points out that “double digit rises” in housing prices are not sustainable especially when “house prices are rising when the rest of the economy is languishing; that’s either a sign of an overheated market or some external manipulation.” Economist Dean Baker warns, we seem to be in a new housing bubble and “we may be in for another round of very bad news if interest rates ever return to more normal levels.”
So, both the stock market bubble and the housing bubble, fueled by the Fed’s cheap money policies, may be coming to an end. Optimists pointed to these as the bright signs in the “recovery,” but now we are seeing that they are really a mirage based on the Fed injecting massive amounts of money into the economy.
The reason there is no recovery has been evident to many – the White House and Congress have not put in place policies to create a real recovery. Their focus on reducing the deficit, which has proven to not be based on sound research or an understanding of economic history, starved the country of what it needed most – job creation and rising wages. Instead the people got policies thatcaused stagnant wages and budget cuts that the IMF this week called “senseless and ill-designed.”
The current economy funnels money to the wealthiest (even casinos are getting bailouts); as a result the US middle class is shrinking. In fact, a report this week rates the US middle class as the 27thwealthiest in the world. There are a series of policies, some discussed in this article, that would reverse this trend and create a foundation for a 21st century economy.
Jim Rickards – Slashing rates a big mistake
Wall Street veteran Jim Rickards believes any problems the Reserve Bank has in trying to stave off a recession are its own fault. He also thinks the US Federal Reserve’s talk of winding back Quantitative Easing will prove to be just that, talk.
“The Fed has no clue what will happen when it starts selling assets,” IMF Chief Economist Olivier Blanchard told a meeting of the Institute of International Finance in Paris. “So it cannot make any commitments in term of quantities.”