Sunday, December 06, 2015

Is the Fed Finally Being Forced to Consider Main Street?

To help Main Street, the Fed simply needs to stop incentivizing speculation over investment and end policies that have shifted wealth and income to the top of the wealth pyramid.
If there is anything about Federal Reserve policy that is now widely accepted as self-evident, it is that Fed policies have further enriched the super-rich and vastly widened wealth inequality. That this is now mainstream is remarkable, for it completely blows apart the Fed's PR claims to be "serving the people" by boosting inflation and making it easy for the super-wealthy to borrow unlimited sums of new money at near-zero rates.
As I noted in The Federal Reserve, Interest Rates and Triffin's Paradox, there is no way Fed policy can be win-win-win for all participants. As I explained in Why the Fed Has to Raise Rates, the Fed's unspoken Prime Directive is maintaining U.S. and dollar hegemony, and this requires a strong dollar, which pressures exports and Corporate America's global sales and profits.
You can't it both ways: you can't weaken your currency to boost exports and retain a global reserve currency.
But the Fed is also in another lose-lose conflict: the public-relations fight for its political legitimacy. Though it generated very little news flow, you can be sure Fed insiders saw the writing on the wall when the House of Representatives approved a measure to audit the Fed--in essence, a move to bring the Fed to heel.
If the Fed continues to enrich the super-rich at the expense of the rest of us, there will be political consequences.
The Fed is now being forced to deal with the blowback of its policies that have enriched Wall Street at the expense of Main Street.
So how can the Fed help Main Street?
While many voices are calling for guaranteed income for all or some other type of helicopter money, the Fed does not have the power or mandate to send free-money checks to every household.
The conventional wisdom is that zero-interest rates help Main Street by lowering the cost of borrowing to buy vehicles, homes, boats, etc.
But if we look at high-interest payday loans, college student loans and credit cards, we find rates that are far above the low rates paid by wealthy people. The benefits of low rates are limited to mortgages for certain classes of buyers and credit offered to the super-wealthy.
The rates paid by the working poor are essentially unchanged by the Fed's zero-interest rate policy (ZIRP): credit cards that charged 19% in 2008 are still 19%.
Meanwhile, zero rates have stripped savers of billions of dollars in interest they would have earned were rates normalized, i.e. within the historical range. Normalizing rates (i.e. pushing them up) would not change already-high credit card rates, but it would shift income to savers.
Zero-interest rates incentivize speculation, not investment. Look what corporations have done with cheap credit: they've used it to buy back shares, boosting the value of insiders' holdings and enriching the already-wealthy who own the majority of equities.
Higher rates would disincentivize enrich-the-rich speculation and shift income to savers. As for the false claim that low rates boost investing in new production: can anyone name one factory that was built solely because rates have been near-zero?
Meanwhile, a trillion dollars was borrowed and used to buy back shares in a speculative frenzy that didn't create a single job.
Another way to help Main Street is to lower the cost of commodities and goods by strengthening the U.S. dollar via raising rates. Strengthening the USD lowers the cost of imported commodities and goods; as the purchasing power of the USD rises, everyone's dollars go farther.
While the Fed cannot directly end regulatory capture (i.e. death of democracy) by corporations and the super-wealthy, it can end policies that have further enriched the top .01% who have used their wealth to purchase the regulatory and legislative machinery of the state.
And it can stop paying banks interest on reserves stashed in the Fed.
To help Main Street, the Fed must stop incentivizing speculation over investment and end policies that have shifted wealth and income to the top of the wealth pyramid. Main Street's woes are largely structural: the high cost of regulations, the soaring cost of healthcare insurance, the artificial-scarcity costs imposed by cartels enforced by the federal government and the pressures generated by globalization and automation.
The Fed can't solve those problems, but it can certainly stop enriching the already-super-wealthy at the expense of the rest of us.
My new book is in the top 10 of Amazon's category of international economics: A Radically Beneficial World: Automation, Technology and Creating Jobs for All. The Kindle edition is $8.45, a 15% discount from its list price of $9.95.

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