Tuesday, August 5, 2014

Hubris Of The Fed

     The stock market has had a little trouble lately on its fairytale expedition to never, never land where shares prices increase simply because the sun rises and the Federal Reserve bunnies dance with magical monetary policy in fields of brightly colored flowers of delusion. You may wonder why, after recent record highs, the stock market seems to have throttled back a little.
     Well it certainly is not earnings, economic data, the crisis on our Southern border, the hot war between Israel and Hamas, the cold war between the United States and Russia over the latter's incursion into the sovereign nation of Ukraine, the Argentine debt crisis, the European debt crisis, or arguably the worse U.S. economy since the Great Depression of the 1930s. No, what moves the market now is talk of the Federal Reserve increasing their benchmark interest rate from its historic low of zero to a quarter percent, which it has maintained for six years.
     The stock market is like the Roman Emperor Nero, who played his fiddle while Rome burned. As long as the market has its security blanket of Federal Reserve monetary policy, which has pumped almost 4 trillion dollars into what would otherwise have been a flaccid market at best the last 5 years, they are as quiet as a baby suckling at his mother's breast. But as soon as there is talk of raising interest rates in conjunction with the Fed reduction in the amount of bonds they are buying each month to drive money into the market, those in the market scream like that little baby when he is detached from his mother before he has had his fill.
     The economic reality is that during the last decade the median wealth amongst American families has decreased from $87,000 down to $56,000. A majority of that decrease has happened in the last 6 years that Barack Obama has been president, and the Federal Reserve has been handing out the candy of higher share prices at the expense of average Americans. Too low of interest rates over an extended period of time has the same effect as too high of interest rates, both stifle economic growth. Low interest rates have conspired with excessive federal regulations and laws like ObamaCare, to constipate real economic growth.
     The real irony of the Obama-led Federal Reserve keeping interest rates so low for so long is that Democrats screamed from the rooftops that it was just this kind of monetary policy which lead to the financial crisis of 2008. Recently in a congressional hearing, Federal Reserve Chairman Janet Yellen would not agree to setting any metrics on when certain monetary policy would be implemented by the Fed. This hubris on the part of Ms. Yellen is typical of those in government who have never worked in the private sector economy, but somehow think their economic theories cooked up in the vacuum of the university can change the economic reality of a free market.

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