Killing the Middle Class
The Federal Reserve continues to sign on to Obama's war on the poor.
If one takes the mainstream media seriously, Ben Bernanke's announcement that the Federal Reserve would begin “tapering” its purchase of government bonds and mortgage securities by $10 billion dollars per month was the reason for Wall Street's rally on Wednesday. Yet as the chart here reveals, the reaction to the Fed's decision was a rapid and precipitous drop first, followed by a large rally, when Bernanke dropped the far more important shoe: interest rates would remain near zero for the foreseeable future. Thus, the nation remains wedded to a policy best described by Andrew Huszar, who was responsible for executing the first round of Quantitative Easing (QE), as “the greatest backdoor Wall Street bailout of all time.”
And while Wall Street has flourished, Main Street remains mired in the “new normal.” It is the new normal where a staggering 75 percent of the jobs created this year have not only been part-time, but low-paying. It is the new normal where the “decline” in unemployment to 7 percent is belied by the reality that a record high 91,541,000 of Americans are no longer in the labor force as of October, and the workforce participation rate is 63 percent, the lowest its been since 1978. Some of that decline can be attributed to Baby Boomers retiring, but the participation rate of workers aged 16-54 also declined during the recession – and has yet to recover.
And that's assuming the figure of 7 percent unemployment itself hasn't been manipulated, apart from not counting those who are no longer looking for work. The House Committee on Oversight and Government Reform has initiated an investigation into a New York Post report that employment data leading into the 2012 election may have been deliberately manipulated. “Just two years before the presidential election, the Census Bureau had caught an employee fabricating data that went into the unemployment report, which is one of the most closely watched measures of the economy,” writes the Post's John Crudele. “And a knowledgeable source says the deception went beyond that one employee – that it escalated at the time President Obama was seeking reelection in 2012 and continues today.”
Tellingly, the Fed's announcement on Wednesday makes yet another reference to the reality that the continuing implementation of QE has been predicated, at least in part, on the unemployment rate. For months, Bernanke insisted he would continue QE and its low-interest rate environment until the unemployment rate dipped below 6.5 percent. How the Fed could base anything on employment figures that are deceiving at best, or an outright hoax at worst, demonstrates how desperate they are to pursue their policies irrespective of reality.
Yet a little reality intruded nonetheless. As CNBC noted, in the midst of Wednesday's stock market euphoria “a sharp jump in new jobless claims in the latest week to 379,000 and an upward revision to the number of the prior week's new claims offered the market little support.”
What really offered the market support was the far less subtle change in interest rate policy that accompanied the taper. Just under two years ago, Bernanke announced that the Fed planned to keep interest rates low through 2014, as part of a policy that even the New York Times characterized as one “that began as shock therapy in the winter of 2008” and transformed “into a six-year campaign to increase spending by rewarding borrowers and punishing savers.”
Last month, Boston Fed President Eric Rosengren contended that particular brand of shock therapy could continue into 2016. “You could easily imagine if we have relatively slow growth in the overall economy, even though it picks up from where we are now, that it could be 2016,” he said. “You'd certainly need to have growth 3 percent or faster if you'd want to see short-term rates rising at that point.”
On Wednesday, that assessment changed once again. The Fed will now keep interest rates near zero, “well past” the time when the unemployment rate falls below 6.5 percent. What does “well past” mean? Whatever the Fed decides it means.
Those interest rates have been a godsend for Wall Street, forcing many investors out of low-yield bonds into equities, which have soared. But the harsh reality of the Wall Street boom underscores the phoniness of Democrats' concern with regard to addressing the “income inequality” President Obama characterized as a “fundamental threat” to American prosperity: 5 percent of Americans hold 60 percent of stock market wealth, and the top 10 percent own 80 percent of it.
It is that asset wealth that has fueled income inequality more than anything else over the last five years. A study conducted by economists at the University of California, Berkeley, the Paris School of Economics and Oxford University reveals that the top one percent of earners garnered 19.3 percent of household income in 2012. That's their largest share of the pie since 1928.
One of the study's authors, Emmanuel Saez of the University of California, Berkeley, contends that the surge may be due in part to those Americans cashing in stocks to avoid higher capital gains taxes that kicked in last January. He admits that some of the data is based on projection and could be revised, but his established data covering the years 2009-2012 is equally telling. “Top 1 percent incomes grew by 31.4 percent while bottom 99 percent incomes grew only by 0.4 percent from 2009 to 2012,” he writes. “Hence, the top 1 percent captured 95 percent of the income gains in the first three years of the recovery.”
In spite of this data, Bernanke insists that the Fed's objectives “are squarely tied to Main Street,” as he insisted in response to questions at the National Economists Club last month. “The economy has been growing, jobs have been coming back and the Fed has been an important factor in maintaining that momentum.”
Again, this is the weakest recovery since the Great Depression, job growth is overwhelmingly part-time and low-paying, and the Fed has created a massive asset bubble best described by David Stockman, who was President Reagan's director of the Office of Management and Budget: “The Fed is exporting this lunatic policy worldwide,” he explained. “Central banks all over the world have been massively expanding their balance sheets, and as a result of that there are bubbles in everything in the world, asset values are exaggerated everywhere.” This is due to the reality that there is a virtually unlimited supply of money – printed out of thin air, no less – chasing a fixed set of assets. As a result, Stockman noted one other unfortunate reality: most bubbles come to a violent end.
Thus, the art is letting the air out of the bubble gently, which is what the taper is all about. Yet there is an unseemly level of hubris attached to the idea that the Federal Reserve can maintain that kind of control. As the NY Post's John Crudele explains, there comes a point in time when those willing to finance American's unconscionable level of debt begin to realize “they too are being fleeced” by near-zero interest rates “simply because the Fed has been the shill in the crowd at each bond auction for half a decade.”
That would be the same half a decade in which the rich got much richer and the middle class stagnated, even as Americans have been told time and again by this administration that things are getting better – even as interest rates remain at historic lows precisely because they aren't. Art Cashin, director of floor operations for UBS, best explains what is occurring after five years of unrestrained stimulus: “This market, this whole economy has kind of a split personality,” Cashin said. “Wall Street is making a record, and yet your brother-in-law can't find a job.”
Originally published at FrontPage Magazine.