Financial Markets Trump the Economy

The wealthy investor and donor class are being well taken care of since the Federal Reserve switched their focus from supporting the real economy to supporting financial asset prices via the markets. The Martens lay out how this happened in this short excerpt. Never before has economic support and the markets been this negatively correlated and we know why.

Excerpts from Martens’s recent Wall Street on Parade article:

…Like all of the Fed’s other programs propping up everything from junk bonds to money market funds to commercial paper to asset-backed securities to mortgage-backed securities, the core idea is to send the message that the Fed is the willing and able lender-of-last resort. The Fed has publicly stated that it is placing no cap on the money it is willing to create to support the markets.

Notice the last word in the above paragraph – “markets.” For the majority of the Fed’s 107 years of existence, its governing statute, the Federal Reserve Act, was interpreted to limit its lender-of-last resort powers to providing loans to commercial banks and other deposit-taking financial institutions. The Fed’s Discount Window for emergency loans is restricted to deposit-taking banks and precludes borrowing by the trading houses on Wall Street. The theory was that deposit-taking banks are the institutions that provide loans to businesses and consumers to sustain a healthy and growing U.S. economy. That was and is a sound theory.

But for the first time in the history of the Federal Reserve, that sound theory was thrown out the window during the Wall Street-induced financial crash of 2007 to 2010. The Fed made more than $16 trillion in revolving loans to the trading houses on Wall Street, to hedge funds, to foreign global banks – to pretty much any financial institution that had a pulse and in some cases, like its loans to Lehman Brothers and its purchases of toxic assets from Bear Stearns, to those whose pulse had long expired.

Why did the Fed do that?

Because the largest deposit-taking banks in America are now also the largest trading houses, thanks to the repeal of the Glass-Steagall Act in 1999 during the Wall Street-cozy Bill Clinton administration. For the prior 66 years, the U.S. had enjoyed a secure financial system because under the Glass-Steagall Act of 1933,  federally-insured deposit-taking banks were barred from owning securities issuers and trading houses.

Instead of restoring the Glass-Steagall Act when Democrats held both houses of Congress in 2010, what the American people got instead was a toothless piece of financial reform legislation called the Dodd-Frank Wall Street Reform and Consumer Protection Act. It provided the Fed with all the necessary loopholes so that it could run the very same Wall Street bailout programs, plus add more, in the next inevitable financial crisis. That financial crisis is now upon us and the Fed looks as out-of-control as it did when the government’s audit of its previous actions were released in 2011.

Please read the full post by Pam Martens and Russ Martens: August 6, 2020 titled

The Fed Created an Emergency Lending Program to Hold Interest Rates Down; the Tiny Country of Sri Lanka Was the Major User

TSP Smart & Vanguard Smart Investor serves serious and reluctant investors & supports financial justice policies and awareness

Categories: Perspectives