Obama’s nomination of Janet Yellen to succeed Ben Bernanke as chairman of the Federal Reserve was joyously received in Wall Street. Reassured that the “Greenspan put” (the readiness of the Federal Reserve to pump fiat dollars into the financial system to shore up stock and bond prices) remains in force, stock and bond market speculators turned on a dime and pumped the markets back up after word of Yellen’s nomination. Financial market speculation will remain a no-risk game as long as the Greenspan put survives; speculators can be confident that they can borrow whatever amounts they need, at far-below-real-market interest rates.
Even more than current Fed chairman Ben Bernanke, Yellen has been an aggressive supporter of flooding the financial markets with trillions of phony, fiat dollars. Bernanke and Yellen both believe that the continuing inflation of stock market and bond prices will create a “wealth effect” that will fully revive the economy. So far, their expectations, to put it kindly, have not been met by economic performance. We continue to endure the slowest economic recovery since that of the the 1930s socialistic New Deal.
Main Street America will just have to keep scavenging for crumbs, while Wall Street speculators rake in huge trading profits, courtesy of the Fed.
In a free-market economy, little of which remains today, investors would focus on real, underlying economic factors such as the growth outlook for corporate sales and profits, along with increases in the numbers of well-paying, full-time jobs. Stock market prices would reflect that sort of fundamental analysis. More importantly, the stock and bond markets would be funded by individuals’ savings, not by the expectation that banks and hedge funds could continue indefinitely to borrow unlimited amounts of short term money at near zero rates of interest.
In a free-market economy, with a stable currency, bank lending would be for the purpose of financing production of real goods and services, not to fund leveraged buyouts or stock repurchases by corporations to pump up earnings per share artificially. Long-term investors such as insurance companies and pension funds would use the savings of individuals to fund expansion of corporations’ plant and equipment, based on rational expectations of long-term profit generation.
Of critical importance, in a free-market economy individual and corporate debt would be limited by the borrower’s actual, not imagined, ability to repay the debt.
Increasingly since the October 19, 1987, Black Monday stock market crash, the stock market has become a forum for rampant speculation and imprudence on a massive scale. That turn away from fundamentals is the direct product of the Federal Reserve’s flooding the financial markets with liquidity to buoy the stock market averages. Since then, in the 1990s dot.com speculative boom-and-bust and the Long Term Capital Management collapse in 1998, through the implosion of the housing bubble and the bankruptcies of Bear Stearns and Lehman Brothers in 2007-2008, the pattern has been the same: whenever the stock market dives or financial institutions waver, the Fed immediately endeavors to rescue them with massive infusions of monetary liquidity through book entries on the Fed’s books of account, i.e., via creation of money out of thin air. Needless to say, the Fed’s money creation vastly outstrips the growth of America’s real production of goods and services.