The Fed Has Failed the Nation, in One Chart

March 31, 2015

There is only one way to end the financial tyranny of the Federal Reserve--abolish it, and put an end to the predatory pathologies of its policies.

The Federal Reserve has failed not just the nation and the U.S. economy, but more importantly, the American people that it supposedly serves. It has also failed the world, by showing other central banks that they can reward private banks and the top .01% with absolute impunity.

The supposed goal of the Fed's zero-interest rate policy (ZIRP) and quantitative easing (QE) was to make borrowing easier for both corporations and consumers, the idea being companies would borrow to invest in new productive capacity and consumers would buy the new goods and services being produced with cheap credit.

The secondary publicly stated goal was to spark a rally in stocks, bonds and real estate that would spark a wealth effect: as households saw their net worth rise, they would feel wealthier and thus more likely to buy goods and services they didn't need on credit.

The real reason for ZIRP and QE was to rebuild the balance sheets and profits of banks on the backs of savers who have earned near-zero thanks to the Fed's manipulation of markets. But setting aside the obvious success of the Fed's real goals--enriching the banks and the super-wealthy who have access to near-zero interest credit--let's see what corporations did with the Fed's nearly-free money.

Did they invest in new productive capacity? No, they bought back their own stocks--trillions of dollars worth, to boost stock prices and managerial bonuses. Note what happened when the last stock buyback binge faded: stocks crashed.

The great stock buyback binge (Fortune.com)

The Fed's free money for financiers enriched the top layer of corporate management and the top 1% who own most of the nation's equities. You can read the details here: Factset Buyback Quarterly.

Chart source: Jim Bianco, Bianco Research, LLC, November 2014

The other group of financiers with access to the Fed's free money for financiers has been private equity. So did the private equity multi-millionaires borrow the Fed's largesse to build new plant and hire new employees? Did they invest the borrowed billions in productive startups?

No--they used the money to buy existing companies and bleed them dry. The Glory Days of Private Equity Are Over (Via Mark G.),

private equity has been holding back the economy. When you buy out a drugstore chain or car-rental company and load it with debt, you aren’t investing in the productivity of the economy. More often, by cutting back on new products and services, you are removing productivity from the economy. While generating wealth for endowments and pension funds, private equity can destroy wealth in the economy—my guess is 0.5%-1% lower gross domestic product in an already subpar recovery.

There you have it: the Fed has lowered productivity and GDP and stripmined savers, widows and orphans to further enrich the obscenely wealthy. Recall this from my entry last week, Will Cash Always Be Trash, Or Will It One Day Be King?

Between 2009 and 2012, the first years of the economic recovery, the top 1% saw their incomes climb 31.4% — or, 95% of the total gain — while the bottom 99% saw growth of 0.4%.

There is only one way to end the financial tyranny of the Federal Reserve--abolish it, and put an end to the predatory pathologies of its policies.

NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.