By Rudy
Barnes, Jr.
Why
does the Federal Reserve keep interest rates near 0%? So that the mega-banks and corporations of
Wall Street have an unlimited supply of cheap money to invest and to pay their
top executives unreasonable salaries; and also so that the government doesn’t
have to worry about interest on its $19 trillion debt. Keynesian economists are so unconcerned with interest
on the national debt that they advocate even more borrowing to stimulate a
sluggish economy.
Who
are the losers in this economic scenario?
Savers, of course, and future taxpayers if interest rates rise and the
national debt is not reduced. The U.S.
Treasury could create new money to pay the debt, $5 trillion of which is held by
the Fed, but the downside is that when new dollars are created the value of existing
dollars is reduced pro-rata. That’s
back-door inflation.
Meanwhile,
Wall Street prospers while Main Street suffers with “trickle-down” benefits. All the while Wall Street exploits the public
with its insatiable appetite for profits—from mega-banks like Wells Fargo that
create new fees for unwanted services, to pharmaceuticals that extort unreasonable
profits through the Affordable Care Act (Obamacare) that has no cost controls.
If
our economy is to be saved from this partnership between the Federal Reserve and
Wall Street, Congress and the President must become accountable for monetary
policies. Such policies have been
shrouded in mysterious debate for too long.
Conservative economists argue that the debt must be reduced and
ultimately balanced, while liberal Keynesian economists argue that we don’t
need to worry about the national debt since the Fed controls interest rates.
It
is an uneven playing field, with Wall Street clearly having the advantage over
Main Street—and experience has taught us that mega-banks and businesses show no
mercy in their pursuit of profits. With
interest rates near 0% and little prospect that they will be allowed to rise
anytime soon, there is no incentive to save and every reason to spend what we
have or invest it in Wall Street so long as we have artificially low interest
rates and inflation discouraging savings.
The
incentive to invest in stock rather than save obviously benefits Wall Street. The Dow has tripled since 2008, but what
happens with the next stock market crash?
It’s not a matter of if, but when.
With interest rates at or near 0%, the Fed can’t reduce them to stimulate
the economy. The remedy of liberal
economists is to borrow or create more money and spend it or give it away
(helicopter money), or even pay big businesses to borrow and create new jobs.
What
about productivity and new jobs? The
mega-businesses of Wall Street are flush with cash, but they aren’t investing
in new jobs but instead buying back their stock or speculating on investments to
generate the most profit for its shareholders.
It’s all about profits, and new jobs aren’t needed these days to make
those profits. You’re a winner if you
own lots of stock, but a loser if you don’t.
Of course, everyone is a loser when the stock market crashes.
What
can we do about the incestuous relationship between the Federal Reserve and
Wall Street? The Fed is a central bank
that is not part of government but an extension of the banking community. Congress should mandate more accountability
for the Fed’s monetary policy, but that’s a scary prospect for members of
Congress who seek big contributions from Wall Street. They don’t want to consider policies that
could jeopardize financing their future campaigns.
If
nothing is done, we’ll likely see a repeat of 2007-2008, with another bailout
of banks and businesses that are too big to fail, but that have failed due to their
unrestrained greed for profits—except that next time the Fed won’t be able to
reduce interest rates to stimulate a recovery since rates will already be at or
near 0%. Wall Street remains addicted to
cheap money, and the Fed will continue to feed that addiction unless and until Congress
acts to restrict it.
Monetary
policy is of increasing importance to the nation’s future. Congress should require more public accountability
for U.S. monetary policies that control interest rates and money supply, and reinstate
Glass-Steagall restrictions on bank investment activities. Because the Federal Reserve has virtually
unrestrained control of U.S. monetary policy, it is perhaps the most powerful
entity in U.S. politics, and one that should be more accountable to the public.
Notes
and References:
Robert J. Samuelson is somewhere
between a traditional and Keynesian economist.
For his commentary on the old Fed
is dead, see https://www.washingtonpost.com/opinions/the-old-fed-is-dead/2016/09/18/9203b9b2-7c35-11e6-bd86-b7bbd53d2b5d_story.html?utm_term=.05e9eeef576f&wpisrc=nl_headlines&wpmm=1. Samuelson
observes: “Now the Fed and other major central banks seem deeply frustrated.
They’ve flooded the world with cheap money. By Moody’s estimates, the amount is
$13 trillion. That was used to buy bonds and other securities. It includes
purchases by the Federal Reserve, the European Central Bank, the Bank of Japan
and the Bank of England. For all their trouble, the central banks have got no
more than a weak recovery that avoided a second Great Depression.”
On the uncertainty of monetary
policy and where does the Federal Reserve
go from here, see
On two contrasting views on the
national debt:
For a traditional/conservative
view, see the first step to solving the
debt crisis: stop digging, at https://www.washingtonpost.com/news/in-theory/wp/2016/08/29/the-first-step-towards-solving-the-debt-crisis-stop-digging/?utm_term=.617bb61382dd&wpisrc=nl_popns&wpmm=1.
For a Keynesian/liberal view, see
a free lunch for the federal government
at https://www.washingtonpost.com/news/in-theory/wp/2016/08/29/a-free-lunch-for-the-federal-government/?tid=a_inl&utm_term=.20d55684c321.
The Fed has long planned to
divest itself of the assets it has purchased under quantitative easing policies since 2008. For a contrary view, see Fed should keep trillions in bonds to provide stability, at http://www.reuters.com/article/us-usa-fed-research-bonds-idUSKCN1120HP.
On ending “the era of cash to
enable central banks to cut interest rates into negative territory” and “free
up monetary policy in ordinary recessions in a low interest rate world,” see https://www.washingtonpost.com/opinions/is-it-time-to-do-away-with-cash/2016/09/21/459fa5b0-5f5a-11e6-af8e-54aa2e849447_story.html?utm_term=.375d260686da&wpisrc=nl_popns&wpmm=.
On the related topic of Christianity and Capitalism as Strange
Bedfellows in Politics, see http://www.religionlegitimacyandpolitics.com/2016/06/christianity-and-capitalism-strange.html and references
in its Notes and References to Related
Blogs.
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