Evidence That The Fed Prints For Wall Street (Not Main Street)

Here's some compelling evidence that the Federal Reserve is looking out for Wall Street investors instead of the Main Street economy: S&P and GDP expectations have been inversely proportional since the Fed announced "Operation Twist" (a bond buying scheme) in October, 2011. As you can see on this chart from Bloomberg, Operation Twist has greatly benefited those whose incomes are strongly tied to the market. But, for the tens of millions of middle class Americans who were unfortunate enough to lose their financial standing after the bursting of the Fed's housing bubble, economic prospects haven't been looking so good.

On the other hand, the Fed's liquidity pumping has juiced the stock market like crazy throughout this economic depression. Every time the Fed has either announced or implemented a new liquidity pumping scheme, the market has risen. Every time one of the Fed's schemes has ended, the market has declined. The economy simply hasn't been strong enough to support the market without the Fed's help. But these actions aren't indefinitely sustainable, and they certainly aren't without long-term consequences.

Fed Liquidity Pumping Good For Wealthy, Bad For Rest

The premise is simple: the wealthy have a disproportionate amount of their net worth in investments, and the Fed has been propping up the stock market and inflating asset bubbles. Therefore, the price inflation-driven economic recovery has been robust for the richest 7% and weak to non-existent for everyone else. And never forget, wealth and exposure to inflation are inversely-proportional. In other words, those with less money spend a greater percentage of their incomes on essentials--food, energy, etc.--whose prices have been rising as a result of the asset bubble. From Pew Research:

During the first two years of the nation’s economic recovery, the mean net worth of households in the upper 7% of the wealth distribution rose by an estimated 28%, while the mean net worth of households in the lower 93% dropped by 4%, according to a Pew Research Center analysis of newly released Census Bureau data.

From 2009 to 2011, the mean wealth of the 8 million households in the more affluent group rose to an estimated $3,173,895 from an estimated $2,476,244, while the mean wealth of the 111 million households in the less affluent group fell to an estimated $133,817 from an estimated $139,896.

These wide variances were driven by the fact that the stock and bond market rallied during the 2009 to 2011 period while the housing market remained flat.

Affluent households typically have their assets concentrated in stocks and other financial holdings, while less affluent households typically have their wealth more heavily concentrated in the value of their home.

From the end of the recession in 2009 through 2011 (the last year for which Census Bureau wealth data are available), the 8 million households in the U.S. with a net worth above $836,033 saw their aggregate wealth rise by an estimated $5.6 trillion, while the 111 million households with a net worth at or below that level saw their aggregate wealth decline by an estimated $0.6 trillion.¹

Because of these differences, wealth inequality increased during the first two years of the recovery. The upper 7% of households saw their aggregate share of the nation’s overall household wealth pie rise to 63% in 2011, up from 56% in 2009. On an individual household basis, the mean wealth of households in this more affluent group was almost 24 times that of those in the less affluent group in 2011. At the start of the recovery in 2009, that ratio had been less than 18-to-1.

(The focus in this report on the upper 7% of households rather than some other share of high wealth households reflects the limits of the tabulations published by the Census Bureau. The boundaries of its wealth categories dictated the split of households analyzed in this report.)

Overall, the wealth of America’s households rose by $5 trillion, or 14%, during this period, from $35.2 trillion in 2009 to $40.2 trillion in 2011.² Household wealth is the sum of all assets, such as a home, car, real property, a 401(k), stocks and other financial holdings, minus the sum of all debts, such as a mortgage, car loan, credit card debt and student loans.

During the period under study, the S&P 500 rose by 34% (and has since risen by an additional 26%), while the S&P/Case-Shiller home price index fell by 5%, continuing a steep slide that began with the crash of the housing market in 2006. (Housing prices have slowly started to rebound in the past year but remain 29% below their 2006 peak.)

The different performance of financial asset and housing markets from 2009 to 2011 explains virtually all of the variances in the trajectories of wealth holdings among affluent and less affluent households during this period. Among households with net worth of $500,000 or more, 65% of their wealth comes from financial holdings, such as stocks, bonds and 401(k) accounts, and 17% comes from their home. Among households with net worth of less than $500,000, just 33% of their wealth comes from financial assets and 50% comes from their home.



The Census Bureau data also indicate that among less affluent households, fewer directly owned stocks and mutual fund shares in 2011 (13%) than in 2009 (16%), meaning a smaller share enjoyed the fruits of the stock market rally. Likewise, fewer had individual retirement accounts (IRAs) or Keogh accounts (22% in 2011 versus 24% in 2009) and the same share had 401(k) or Thrift Savings Plan accounts (39% in both years). Among affluent households, there was also a decline in the share directly owning stock and mutual fund shares during this period (59% in 2011 versus 62% in 2009), but a slight increase in the share with IRAs or Keogh accounts (70% versus 68%) and a larger increase in the share with 401(k) or Thrift Savings Plan accounts (65% versus 61%).

Overall, net worth per household in the U.S. in 2011 made up nearly all the ground it had lost since 2005—$338,950 versus $340,252 in 2005, the latest pre-recession data published by the Census Bureau. (Total household wealth doubtless rose for a period after 2005 before falling precipitously during the Great Recession of 2007-2009 and rebounding since then. However, no household wealth data are available from the Census Bureau for the years between 2005 and 2009, so it is not possible to pinpoint when, or at what level, the peak in wealth per household occurred.)

Looking at the period from 2005 to 2009, Census Bureau data show that mean net worth declined by 12% for households as a whole but remained unchanged for households with a net worth of $500,000 and over. Households in that top wealth category had a mean of $1,590,075 in wealth in 2005, $1,585,441 in 2009 and $1,920,956 in 2011.³

Seth Mason, Charleston SC

Keynesian-Monetarist Economist: Fed Responsible For High Unemployment

Keynesian-Monetarist Stanford economist John B. Tayor, an advocate of heavy Fed intervention in the economy, has come to believe that the Fed's ultra-loose monetary policy was responsible for the 2008 economic implosion and the subsequent protracted period of high unemployment. Furthermore, he believes that the Fed's "solution" to the economic depression and high unemployment we've experienced over the past 5 years, massive money printing and record-low interest rates, will ultimately result in additional harm to the economy and even more unemployment:

What's your assessment of the Federal Reserve's recent actions to help spur the economy? 

The Fed has engaged in extraordinarily loose monetary policy, including two rounds of so-called quantitative easing.

These large-scale purchases of mortgages and Treasury debt were aimed at lifting the value of those securities, thereby bringing down interest rates. I believe quantitative easing has been ineffective at best and potentially harmful.

Harmful how?
 
The Fed has effectively replaced large segments of the market with itself -- it bought 77% of new federal debt in 2011, my calculations show. By doing so, the Fed has created great uncertainty about the impact of its actions on inflation, the dollar, and the economy.

The existence of quantitative easing as a policy tool creates uncertainty, as traders speculate on whether and when the Fed is going to intervene. It's bad for the U.S. stock market, which should reflect the earnings of corporations.

You believe the Fed's mission needs to be changed.
 
The Fed needs to focus on a single goal of long-run price stability. We should remove the Fed's dual mandate of maximum employment and stable prices, which was put into effect in the 1970s.

From 2003 to 2005, the Fed held interest rates too low for too long. A primary reason was its concern that raising rates would increase unemployment.

The unintended consequence was that low rates fueled the housing bubble, which in turn led to the recession and high unemployment.

More recently, the Fed has cited concerns over employment to justify its interventions, including quantitative easing. Removing the dual mandate would take away that excuse.

That came from a Keynesian!

Seth Mason, Charleston SC

The Definitive Inflation Chart

There are several takeaways from this chart: 1) Inflation was essentially non-existent until the creation of the Federal Reserve in 1913. 2) War, which requires massive government spending, promotes inflation. 3) Inflation has skyrocketed since Nixon took us off the gold standard in 1971, which gave the Fed a carte blanche to print. 4) Bernanke's concern about deflation is unfounded. See that tiny break in the inflation trendline above the "Great Recession arrow"? That's the deflation he's concerned about.

Just for giggles, let's compare that last chart with a chart of the national debt:

Is it clear enough that the Fed enables deficit spending?

Seth Mason, Charleston SC