In a week where we learned:
-- Weekly, seasonally-adjusted Unemployment claims jumped back up to 445,000, increasing 35,000 from the previous week's revised number of 410,000; and...
-- Consumer spending collapsed in early January; and...
-- U.S. Breaks Housing Price Decline Record Set During Great Depression; and...
We also received a slew of brutally negative pieces of information concerning the many ways by which state and municipal budgets are being nothing less than eviscerated, all but insuring even more draconian funding cuts at the local level for the foreseeable future: "
Crushing State Budget Cuts Wiping Out Stimulative Effects of Tax Deal."
On top of the "crushing" state budget cuts, however, we're just now learning that, thanks to our new Republican House of Representatives: "States Will Soon Have To Start Paying Interest on Their Massive Unemployment Borrowing," David Dayen, FireDogLake, 1/10/11.
It doesn't stop there folks; you see, the municipal bond sector is getting brutally hammered in the marketplace, in general: "Illinois Seeks To Issue $8.75 Billion Bond To Pay Overdue Bills As Muni Issuance Market On Verge Of Shutdown," Zero Hedge, 1/13/11.
As I noted in my diary from December 8th, 2010, respected pundits are telling us that: G.O.P. Is Executing Plan To 'Bankrupt' States, 12/8/10
The truth is, many U.S. states and municipalities are currently posting everything in red ink. And, the Federal Reserve could step in and help, but apparently, Ben Bernanke won't give Main Street the time of day nor the steam off of his piss, let alone a real bailout.
As blogger George Washington points out, in his post currently running over at Naked Capitalism and now being republished for Kossacks here on DKos, down below, Ben's too busy propping up the stock market with another trillion or two. And, in a society where 10% of the population owns 98.5% of all financial securities, that (simply) sucks!
# # #
(DIARIST'S NOTE: Naked Capitalism Publisher Yves Smith has authorized the diarist to reprint her blog's posts in their entirety for the benefit of the Daily Kos community.)
Guest Post: "The Fed No Longer Even Denies that the Purpose of Its Latest Blast of Bond Purchases ... Is To Drive Up Wall Street"
George Washington
Blog via Naked Capitalism
Saturday, January 15, 2011 8:05AM
The stated purpose of quantitative easing was to drive down interest rates on U.S. treasury bonds.
But as U.S. News and World Report noted last month:
By now, you've probably heard that the Fed is purchasing $600 billion in treasuries in hopes that it will push interest rates even lower, spur lending, and help jump-start the economy. Two years ago, the Fed set the federal funds rate (the interest rate at which banks lend to each other) to virtually zero, and this second round of quantitative easing-commonly referred to as QE2-is one of the few tools it has left to help boost economic growth. In spite of all this, a funny thing has happened. Treasury yields have actually risen since the Fed's announcement.
The following charts from Doug Short update this trend:
CHART: Daily Treasury Yields Since 2007 and the Effective Federal Funds Rate Click for a larger image
CHART: Daily Treasury Yields Since January 2010 and the 30-Year Fixed Rate Mortgage Click for a larger image
CHART: Treasury Yield Percent Change Since 11/4/2010 When QE2 Details Were ReleasedClick for a larger image
Of course, rather than admit that the Fed is failing at driving down rates, rising rates are now being heralded as a sign of success. As the New York Times reported Monday:
The trouble is [rates] they have risen since it was formally announced in November, leaving many in the markets puzzled about the value of the Fed's bond-buying program.
*
But the biggest reason for the rise in interest rates was probably that the economy was, at last, growing faster. And that's good news.
"Rates have risen for the reasons we were hoping for: investors are more optimistic about the recovery," said Mr. Sack. "It is a good sign."
Last November, after it started to become apparent that rates were moving in the wrong direction, Bernanke pulled a bait-and-switch, defending quantitative easing on other grounds:
This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.
As former chief Merrill Lynch economist David Rosenberg writes today:
So the Fed Chairman seems non-plussed that Treasury yields have shot up and that the mortgage rates and car loan rates have done likewise, even though he said this back in early November in his op-ed piece in the Washington Post, regarding the need for lower long-term yields:
"For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment."
But the Fed Chairman is at least getting what he wants in the equity market. Recall what he said back then -- "higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion."
So now the Fed has added a third mandate to its charter:
1. Full employment
2. Low and stable inflation
3. Higher equity valuation
The real question we should be asking is why Ben didn't add this third policy objective back in 2007 and save us from a whole lot of pain over the next 18 months?
And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.
Indeed, leading economic consulting firm Trim Tabs (25% of the top 50 hedge funds in the world use TrimTabs' research for market timing) wrote on Wednesday:
The Federal Reserve's quantitative easing programs have helped stock market participants, financial institutions, and large companies but have done little to address the structural problems of the economy, according to TrimTabs Investment Research.
"Quantitative easing is supposed to produce stronger economic growth and lower unemployment," said Madeline Schnapp, Director of Macroeconomic Research at TrimTabs. "While QE1 and QE2 have worked wonders on the stock market, their impact on GDP and jobs has been anemic at best."
Similarly, Ambrose Evans-Pritchard wrote today:
The Fed no longer even denies that the purpose of its latest blast of bond purchases, or QE2, is to drive up Wall Street, perhaps because it has so signally failed to achieve its other purpose of driving down borrowing costs.
Unfortunately, a rising stock market doesn't help the average American as much as you might assume.
For example, Robert Shiller noted in 2001:
We have examined the wealth effect with a cross-sectional time-series data sets that are more comprehensive than any applied to the wealth effect before and with a number of different econometric specifications. The statistical results are variable depending on econometric specification, and so any conclusion must be tentative. Nevertheless, the evidence of a stock market wealth effect is weak; the common presumption that there is strong evidence for the wealth effect is not supported in our results. However, we do find strong evidence that variations in housing market wealth have important effects upon consumption. This evidence arises consistently using panels of U.S. states and individual countries and is robust to differences in model specification. The housing market appears to be more important than the stock market in influencing consumption in developed countries.
I pointed out in March:
Even Alan Greenspan recently called the recovery "extremely unbalanced," driven largely by high earners benefiting from recovering stock markets and large corporations.
*
As economics professor and former Secretary of Labor Robert Reich writes today in an outstanding piece:
Some cheerleaders say rising stock prices make consumers feel wealthier and therefore readier to spend. But to the extent most Americans have any assets at all their net worth is mostly in their homes, and those homes are still worth less than they were in 2007. The "wealth effect" is relevant mainly to the richest 10 percent of Americans, most of whose net worth is in stocks and bonds.
I noted in May:
As of 2007, the bottom 50% of the U.S. population owned only one-half of one percent of all stocks, bonds and mutual funds in the U.S. On the other hand, the top 1% owned owned 50.9%.
*
(Of course, the divergence between the wealthiest and the rest has only increased since 2007.)
And last month Professor G. William Domhoff updated his "Who Rules America" study, showing that the richest 10% own 98.5% of all financial securities, and that:
The top 10% have 80% to 90% of stocks, bonds, trust funds, and business equity, and over 75% of non-home real estate. Since financial wealth is what counts as far as the control of income-producing assets, we can say that just 10% of the people own the United States of America.
The bottom line is that quantitative easing is not really helping the average American very much ... and is certainly not worth trillions of dollars.
# # #
(Congratulations to Naked Capitalism Publisher Yves Smith, for being named one of "The 20 Most Influential Blogs in Financial Media," based upon a just-concluded survey by MindfulMoney, as discussed in this story [see link earlier in this sentence] from the folks over at Minyanville.)