August 23, 2010
By now, you are probably more than familiar with the “backdoor bailouts” of the Wall Street Banks – the most infamous of which, Maiden Lane III, included a $13 billion gift to Goldman Sachs as a counterparty to AIG’s bad paper. Despite Goldman’s claims of having repaid the money it received from TARP, the $13 billion obtained via Maiden Lane III was never repaid. Goldman needed it for bonuses.
On August 21, my favorite reporter for The New York Times, Gretchen Morgenson, discussed another “bank bailout”: a “secret tax” that diverts money to banks at a cost of approximately $350 billion per year to investors and savers. Here’s how it works:
Sharply cutting interest rates vastly increases banks’ profits by widening the spread between what they pay to depositors and what they receive from borrowers. As such, the Fed’s zero-interest-rate policy is yet another government bailout for the very industry that drove the economy to the brink.
Todd E. Petzel, chief investment officer at Offit Capital Advisors, a private wealth management concern, characterizes the Fed’s interest rate policy as an invisible tax that costs savers and investors roughly $350 billion a year. This tax is stifling consumption, Mr. Petzel argues, and is pushing investors to reach for yields in riskier securities that they wouldn’t otherwise go near.
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“If we thought this zero-interest-rate policy was lowering people’s credit card bills it would be one thing but it doesn’t,” he said. Neither does it seem to be resulting in increased lending by the banks. “It’s a policy matter that people are not focusing on,” Mr. Petzel added.
One reason it’s not a priority is that savers and people living on fixed incomes have no voice in Washington. The banks, meanwhile, waltz around town with megaphones.
Savers aren’t the only losers in this situation; underfunded pensions and crippled endowments are as well.
Many commentators have pointed out that zero-interest-rate-policy (often referred to as “ZIRP”) was responsible for the stock market rally that began in the Spring of 2009. Bert Dohmen made this observation for Forbes back on October 30, 2009:
There is very little, if any, investment buying. In my view, we are seeing a mini-bubble in the stock market, fueled by ZIRP, the “zero interest rate policy” of the Fed.
At this point, retail investors (the “mom and pop” customers of discount brokerage firms) are no longer impressed. After the “flash crash” of May 6 and the revelations about stock market manipulation by high-frequency trading (HFT), retail investors are now avoiding mutual funds. Graham Bowley’s recent report for The New York Times has been quoted and re-published by a number of news outlets. Here is the ugly truth:
Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to the Investment Company Institute, the mutual fund industry trade group. Now many are choosing investments they deem safer, like bonds.
The pretext of providing “liquidity” to the stock markets is no longer viable. The only remaining reasons for continuing ZIRP are to mitigate escalating deficits and stopping the spiral of deflation. Whether or not that strategy works, one thing is for certain: ZIRP is enriching the banks — at the public’s expense.
Geithner And Summers Draw Flak
August 30, 2010
It’s coming from everywhere. House Minority Leader, John “BronzeGel” Boehner, while giving a speech in Cleveland on August 24, called for the ouster of Treasury Secretary Timothy Geithner as well as the removal of National Economic Council Director, Larry Summers. Bridget Johnson reported for The Hill that on August 28, Representative Tom Price (R-Georgia) echoed the call for Geithner and Summers to step down: “They need to resign because the policies that they’re putting in place are not being effective.”
An editorial from the Republican-oriented Investors Business Daily expanded on Boehner’s criticism of the duo, without really giving any specific examples of what Geithner or Summers did wrong. That’s because what they did wrong was to protect the banks at the expense of the taxpayers — the same thing a Republican administration would have done. As a result, there have been simultaneous calls from the left for the sacking of Geithner and Summers. Robert Scheer wrote a piece for The Nation entitled, “They Go or Obama Goes”. Here is some of what he said:
Economist Randall Wray wrote a great piece for Wall Street Pit entitled, “Boehner Gets One Right: Fire Obama’s Economics Team”. Professor Wray distinguished his argument from Boehner’s theme that because neither Geithner nor Summers ever ran a business, they don’t know how to create jobs:
As an aside: If you take offense at Professor Wray’s suggestion that the government should get actively involved in job creation, be sure to watch the interview with economist Robert Shiller by Simon Constable of The Wall Street Journal.
The Zero Hedge website recently published an essay by Michael Krieger of KAM LP. One of Krieger’s points, which resonated with me, was the idea that whether you have a Democratic administration or a Republican administration, both parties are beholden to the financial elites, so there’s not much room for any “change you can believe in”:
“Keeping people divided and distracted” helps preserve the illusion that there really is a difference between the economic policies of the two parties. If you take a close look at how President Obama’s Deficit Commission is attempting to place the cost of deficit reduction on the backs of working people, the unified advocacy for the financial sector becomes obvious. What we are left with are the fights over abortion and gay marriage to differentiate the two parties from each other.
It’s time to pay more attention to that man behind the curtain.