When you begin a long journey to a sunny destination, you expect your vehicle to drive forward, with brakes to keep from going off a cliff, and a reverse feature.
The Fed began our drive out of economic despair to recovery in 2008. To stabilize Wall Street (and the global economy) the Fed began an experimental program to purchase treasury bonds and other securities to flood the markets with capital. With the cheap money, Wall Street could help Main Street by building the economy with jobs and loans for new businesses.
Hypothetically, we could compare Wall Street to Wal-Mart with a very generous Uncle Sam buying all of the goods, every month, in every Wal-Mart. Doesn’t matter who the other customers are or how much they buy, Wal-Mart could restock and keep the prices ridiculously, artificially low. And if the goods weren’t sold, oh well, Uncle Sam would take care of it. Did I mention every month? Pretty cool. If you shop at Wal-Mart.
But there is a downside. Instead of helping others with all of their savings, Wal-Mart’s clients could purchase other stuff. They would have the excess money to blow at casinos, or invest with a Nigerian prince or enjoy buying sprees. Not to mention, the performance and purpose of the retail market would be skewed.
Wall Street did not use their excess capital to help Main Street. They used the extra cash to purchase their own banks in China and continued to purchase risky sticky-wickies for their personal portfolio. And if they lost a few billion dollars, it didn’t matter. They now had money to burn.
In May, Mr. Bernanke thought the destination of economic recovery was near. Therefore, the end of cheap money must come to an end. He warned the markets that after five years it was time to put the brakes on and taper the buying spree of $85 billion dollars a month in treasury bonds. (Treasury bonds are sold to pay for our own debt. Uncle Sam now owns over 4 trillion dollars in bonds and other securities)
Last week’s lethargic building starts and new permits put the soothsayers in a panic. Apartments are popping up, but new homes have stagnated.
The employment numbers are strained. Although the numbers show fewer people out of work, many unemployed have given up trying to find a job, therefore not counted.
Last week Mr. Bernanke implemented the seldom used reverse feature on his drive to economic recovery. His original intent in May was to wean Wall Street off of the cut-rate money. But the money markets are too addicted to almost zero borrowing rates to allow any tapering, at least for now. Our destination to economic recovery may take a little longer. Fasten your seat belts: we could be in for a bumpy ride.