Wednesday, October 22, 2014

BEYOND IRONY: Fed Chairman causes the very inequality she bemoans

Chairman Yellen complains about inequality, yet seems oblivious to her own role in exacerbating it.  Quantititative easing makes money plentiful and cheap; and this has benefitted those who can access the money in extraordinary ways.  Let me count a few of the beneficiaries:

  • The big Wall Street banks, .. which can borrow directly from the Fed, essentially free. Because banks are in the business of making money from money, they use the Fed’s money to make more money by trading with it, investing it in government debt and pocketing the profit or by lending it out at wide spreads. ...No other business on the face of the earth gets its raw material so cheaply. No wonder bank profits have soared.
  • Wall Street’s traders and investment bankers...know – and have known for years, thanks to the Fed’s telegraphing of its quantitative easing program – that the Fed will be a continuing buyer of their risky securities at (ever-rising) market prices. Since the onset of Mr. Bernanke and Ms. Yellen’s policy, the Fed’s balance sheet has grown to $4.5 trillion, from around $800 billion before the crisis. That’s a whole lot of securities bought at high, profitable prices and paid directly to Wall Street traders. The Fed might as well have been paying the traders’ seven-figure bonuses directly.
  • The Fed’s low-interest rate policies have also been a bonanza for Wall Street’s investment bankers – and their bonuses — as companies around the world race to raise debt capital at low rates. 
  • Private equity firms ... borrow money cheaply and leverage the billions of dollars in equity – said to be $3.5 trillion these days — to buy and sell companies. The buyout firms, and of course Wall Street, also get fees from all this deal activity. 

Meanwhile the little guys on fixed income get crushed by low interest rates:
...because they can’t get a return without taking an inordinate amount of risk, by either investing in the stock market, ...,or by “reaching for yield” by investing in risky debt securities that are increasingly overpriced. Either way, Ms. Yellen’s policies are crushing these 62 million American households. 


  1. Hi Professor Froeb - This was an interesting read. Do you believe then the Fed should raise interest rates now? How do you think the interest rate raise might affect the overall economic growth, which is still far below from pre-recession days?

    Thank you,
    Swami Subramanian

  2. I think that the fed policy of printing money will drive up asset prices, and stimulate investment, until they stop, or until people lose faith our currency.

  3. Professor Froeb - I found a similar blog on NYTimes

  4. To All… This blog was indeed interesting because it addresses the core concepts of demand and supply and its relevance to economic growth. The Feds. sought to create economic stimulus through quantitative easing because of the political backlash/rancor associated with the fiscal stimuli. Quantitative easing QE at its best, stimulates demand through the lowering of key interest rates that promotes lending and hence increases spending on goods and services. The financial crisis of 2008 warranted regulation however these measures must be eased to reap the true benefits of QE such as the move by the Feds to ease restrictions on mortgage lending, as per the Wall Street Journal Oct. 22nd, the Feds are looking into reducing the 20% downpayment for potential homeowners. Thus there should be an appropriate mix of fiscal and monetary policies to continue economic growth.
    Dave Delwyn

  5. This recovery can be looked at as a recovery built on the backs of our seniors as they struggle to get the yield they need. As you mentioned, they have stretched maturities, credit levels and even based their income portfolio on things like Utility stocks and MLP’s just to get the cash-flow they need. All of which are at extremely stretched valuations. I don’t know exactly how that ends when rates normalize, but my intuition tells me it won’t be good.

    In addition, lowering interest rates across the entire yield curve serves to create asset bubbles as the "Risk Free Rate" *that isn't even AAA anymore* is utilized in basically every valuation model for virtually every financial asset I can think of. The only folks who benefit from asset bubbles are.... THOSE WITH ASSETS.

    I don't know what the right policies would be to navigate this environment. However, expansionary monetary policy with contractionary fiscal policy (taxes and regulations) certainly doesn't seem to make much sense... To Professor Froeb’s point, our role as the world’s reserve currency has benefited this country immeasurably. It is imperative that we retain that status.

  6. Whatever Fed does should always be taken wisely because that’s where the big movement is and if we are not careful then we will lose big time. I am trading with OctaFX broker where I get daily market updates which allows me to trade easily and always bring massive profits, so that’s why I love it so much and they also have 24 hours active customer service available which helps me work well and I always feel really comfortable working with them.