View Full Version : Why The Obama/Bernake Money Printing Is A Failure

02-11-2013, 07:31 AM
Unless you're a one percenter, then you love it!

Lowering interest rate and making credit abundant doesn't make employers hire more workers.
The Federal Reserve's policy of targeting unemployment is based on a curious faith that low interest rates and lots of liquidity sloshing around the bank system with magically lead employers to hire more workers. I say this is a curious faith because it makes no sense. In effect, the Fed policy is based on the implicit assumption that the only thing holding entrepreneurs and employers back from hiring is the cost and availability of credit.

But as anyone in the actual position of hiring more staff knows, it is not a lack of cheap credit that makes adding workers unattractive, it is the lack of opportunities to increase profit margins by adding more workers.

If the economic boom of the mid-1980s proves anything, it is that the cost of credit can be very high but that in itself does not restrain real growth. What restrains growth is not interest rates, it is opportunities to profitably expand operations.
So exactly what mechanism is the Fed trying to boost with super-low interest rates and massive liquidity (free money) in the banking sector? Answer: push businesses into high-risk ventures.

Federal Reserve Bank of Chicago President Charles Evans: “The investment climate seems to be one where people are increasingly understanding that very low interest rates on super safe assets are going to be around for a while. And if they’re worried by that they need to take on more risk - and taking on that more risk will help get the economy growing.”

In other words, the Fed's policy is to push for more mal-investment. There is no other way to describe the flow of money into risky, marginal ventures.

Note to Fed: there is too much of everything. Too many restaurants, too many apps, too many empty dwellings (19 million at last count), too many malls, too many nail salons. There is too much junk for sale everywhere, from retail outlets to online to jumble/garage sales. The developed world is awash in overcapacity in every sector other than a relative handful of special equipment/services (deep-ocean drilling rigs, etc.)

Pushing businesses to borrow money to gamble in risky ventures is precisely what happened in Japan in the late 1980s. With interest rates low and credit in abundance, bank reps went around to enterprises small and large begging them to borrow money for essentially any reason.

The net result: massive bubbles across asset classes and an overhang of debt that remains 20+ years later, as unpayable now as it was in 1992. That is the result of pushing enterprises into risk-on bets: bubbles and collapses.

What those with access to the Fed's free money--big banks and hedge funds--are doing with the zero-cost credit is invest in rentier skimming operations: buying 5,000 single family homes, buying $1 billion in apartments and homes to rent out, etc.

And why is there a stock market bubble?

The other way to make money with nearly-free credit is to chase risk-on assets, for example stocks. Why would any hedge fund or bank trading desk with easy access to the Fed's free money bother taking risks in the real economy which is burdened with massive over-capacity and sclerotic State-mandated cartels (healthcare, defense, etc.) when the easy money is in chasing assets higher?
How many jobs are created by chasing assets higher? Maybe the Fed thinks that high-end Manhattan restaurants will add staff to handle the influx of new money skimmed from the stock and bond markets, but if they think rentier/speculative skimming is going to add millions of jobs to the economy, they are delusional.

Finally, notice how real family incomes have plunged with Obama in office. The line on the bottom, inflation adjusted is the one that counts.

As I've pointed out before, Obama is the best thing that ever happened to the One Percenters and the worst thing next to FDR for the working people.