Instead of Helping American Workers, the Fed Prints Money and Swallows US Debt
by John Lawrence, June 25, 2020
The Federal Reserve is printing trillions of dollars and buying US government debt. The market for US Treasury bonds is a hard sell these days because they pay so little interest: 1.37% for a 30 year bond, less than the inflation rate. China is dumping its Treasuries. It will probably accelerate the rate of dumping if tensions between the 2 countries continue. China was the US' largest creditor till recently when Japan took over that role. While the Federal Reserve has set interest rates effectively at zero, credit card companies are still charging as much as 30% interest which creates a huge number of Americans debtors especially when you throw in student loan debt which stands at $1.5 trillion. In fact, revolving consumer credit card debt reached nearly $1.1 trillion at the end of February 2020, according to the Federal Reserve G19 Report. Americans were paying as much as $121 billion in interest and fees combined by the end of 2019. That's no surprise since the Federal Reserve reported in February 2020 that the average interest rate on credit cards reached an astronomical 16.61%. While billionaires can borrow money at zero percent interest, average Americans pay 16% and up.
The effect of zero interest rates on savings accounts and Treasury bonds is to force everyone into the stock market which, although we're in a recession bordering on depression, continues to go up. It is totally divorced from reality; it wouldn't go down even in a depression like it did during the Great Depression. The Fed is keeping it artificially pumped up because so much American wealth is at stake there.
The Fed is buying Treasuries and mortgage backed securities (MBSs) to the tune of trillions of dollars. Wolf Street reported:
In March (2020) and April combined, the Fed monetized 100% of the additional Federal debt. Over the two-month period of March and April, the US government increased its debt by $1.56 trillion (most of it in April); and over the same two-month period, the Fed bought $1.56 trillion in Treasury securities (most of it in March) and thereby monetized 100% of the additional pile of debt during the two-month period.
The Fed is just swallowing all kinds of debt which is enriching the richest Americans and foreign banks even more. Problem is this forced feeding of cash by the Fed is not trickling down to the American people. It is not creating jobs. Now the Fed is creating even more ways to monetize debt by creating Special Purpose Vehicles (SPVs). These SPVs can buy assets the Fed is not allowed to buy, and they can lend to entities and rich individuals to buy certain assets. Under the arcane Federal Reserve Act, these SPVs require taxpayer backing from the Treasury Department to protect the Fed from losses. The SPVs can buy asset backed securities (ABSs) on a non-recourse basis which means that, if there are any problems, taxpayers take the losses. Indirectly via its Special Purpose Vehicles and its Primary Dealers, the Fed can buy even old bicycles, as long as taxpayers take the losses.
Wolf Street reported:
These ABS can be backed by credit card loans, auto loans, student loans, equipment loans, floor plan loans, insurance premium finance loans, some loans guaranteed by the Small Business Administration (SBA), and eligible loans on receivables. The loan amounts will be “equal to the market value of the ABS less a haircut and will be secured at all times by the ABS,” the Fed says.
A little history on Term Asset-Backed Securities Loan Facility (TALF) : At the end of 2010, under orders from Congress, the Fed released data on over 21,000 transactions it performed during the Financial Crisis, which revealed among many other outrageous acts, that the Fed lent to well-connected individuals and all kinds of hedge funds and others under its TALF program so that they would buy certain assets, such as these consumer loan ABS, drive up their prices, sell them to pension funds and others later for a huge profit, and pay back the loans to the Fed.
These well-connected individuals included John A. Paulson, Michael Dell, Christy K. Mack (wife of former Morgan Stanley CEO John Mack), Kendrick R. Wilson III (former Goldman executive and top aide to Hank Paulson Jr.), H. Wayne Huizenga (founder of AutoNation and Waste Management), Jonathan S. Sobel (head of Goldman’s mortgage department), etc. Some very wealthy people made a lot of money off the Fed’s bailout programs even as workers and the economy was in deep trouble.
So the Fed is paying John Paulson money by means of an SPV. Paulson is the guy who bet against the subprime mortgage market in 2007 and made one billion dollars in one day. Goldman Sachs had to pay him off, but eventually due to all the legerdemain in the financial markets, it was French and German taxpayers that paid him for his astute bet. That's casino capitalism at its best. Now he has direct access to the Federal Reserve's money printing press. Why? When there are so many poor and unemployed people in the US, why is the Fed intent on only bailing out financial markets, meaning rich people? Suffice it to say that the Fed is able to buy most anything from rich people and monetize their debt. Because of this and the fact that the rich can borrow at zero percent interest, they engage in risky bets. If they win, they pocket the money. If they lose, the Fed bails them out at zero percent interest.
Compare this with how the situation was dealt with during the Great Depression. Instead of force feeding wealthy people with interest free cash and adding trillions to the US National debt, FDR created the Reconstruction Finance Corporation (RFC). The original legislation establishing the RFC did not limit it to lending to financial institutions; it was also authorized to provide loans for railroad construction and crop lands. In other words it created jobs for average Americans. An amendment passed in July 1932 allowed the RFC to provide loans to state and municipal governments. The purpose of these loans was to finance projects like dams and bridges, and the money would be repaid by charging fees to use these structures. To help with unemployment, a relief program was created that would be repaid by tax receipts. Under the New Deal, the powers of the RFC were greatly expanded. The agency now purchased bank stock and extended loans for agriculture, housing, exports, businesses, governments, and disaster relief. The RFC actually made money on these loans.
So the RFC could actually create jobs for average working people (and not just for hedge fund managers) doing constructive things like building houses and infrastructure. Part of the New Deal was the Works Progress Administration (WPA) relief program which made the federal government by far the largest employer in the nation. A Green New Deal would create money much as the Fed does with a few keystrokes on a computer, but, instead of just providing liquidity to banks, hedge funds and rich people, it would provide money for productive jobs paid for by the government. The government needs to be employer of last resort in order to recreate a full employment economy.
A Green New Deal would convert the American economy from a fossil fuel dependent economy to one fueled by renewable energy. In so doing it would provide good paying jobs for those in American society who have been left out or left behind. The Fed should monetize the $3 trillion backlog in American infrastructure repair and rebuilding. Making the Fed a public bank instead of a bank whose main purpose is to swallow US government debt and give money to rich people in order to provide "liquidity" would go a long way to reducing inequality and bringing the American poor including minorities into the middle class. IMHO the COBID pandemic will insure that the old economy based on 70% consumerism is not coming back. The new normal will be based on government spending to create a Green New Deal or will sputter along at about half its former level.
