Bubblicious Fed Hurts Job Growth

Secretary of Labor Thomas E. Perez's October 24th announcement that jobless claims only decreased by 12,000 to 350,000 for the week ending Oct. 19 was immediately seen by liberal economists, who had predicted a further drop to 340,000, as justification for more Federal Reserve money printing to supposedly stimulate hiring. This demand comes despite the fact that the Fed has already ballooned purchases of securities by 27% this year, while job creation is up by only 1.7%. The Fed has no capability to create jobs, because it cannot stimulate investment in new plant and equipment, which drives the economy and gives workers the growing incomes to increase their consumption. But the Fed has been very successful at inflating new asset bubbles, with housing prices up another 13.5% and the stock market up 26% this year. Liberals have a weird penchant for claiming failed strategies work if "investment" is increased. Demanding the Fed blow bigger bubbles runs the risk that those bubbles eventually pop and is preventing the banks from focusing on lending that creates jobs.

Liberal economists claim the United States Federal Reserve can fight unemployment by increasing the supply of money in the economy, through the purchases of bonds held by the public. This supposedly puts cash in the hands of the public, drives down interest rates, and also allows the public to borrow at lower rates to invest in expanding business and creating jobs. But since only a small sliver of the "public" has bonds for sale, the Fed actually loans money to banks to buy bonds, and then the banks sell the bonds to the Fed at a profit. And here is the flaw in liberalism's magic money creation scheme; if banks can make risk-free profits trading bonds with the Fed, why would they make risky loans to the public to invest in expanding business and creating jobs?

The Federal Reserve's investment in bonds averaged about $700 billion for the ten years leading up to 2007. When the financial crisis hit in 2008, the Fed immediately began buying bonds to increase cash in the hands of the public and prevent any panic. This type of intervention was not unusual and had happened over 20 times since the Fed was founded just over 100 years ago. But what is not "business as usual" is that the Fedis continuing its crisis purchases and now holds over $3.5 trillion of bonds.

Banks historically paid interest to recruit deposits from senior citizens living on the income from their savings, and then lent money to businesses at higher rates to make profit spread. But between 2009 and 2010, the Fed made $9 trillion in overnight loans directly to the major banks and brokers at a rate of 0.1%. The Fed's cheap money drove down the interest rates paid to bank depositors. Seniors' income collapsed and many were forced to spend their savings to survive. As seniors' consumption shrank, businesses curtailed new investment and employment stagnated.

Each month the Labor Department publishes an employment report that can be misleading, since it is seasonally adjusted and subject to later reporting revisions. But despite the Fed money printing, over the last two years employment has been treading water by growing at the same 1.7% rate as annual population growth. But this failing to grow jobs faster than new entrants join the labor force has caused the duration period of unemployment in America to leap from an average of 10-20 weeks from 1980 to 2009, to 35-40 weeks over the last two years.
Just five years after being bailed out by the American taxpayers, the U.S. banking system is generating record profits thanks to the Fed's generosity. All the legislation Congress passed to supposedly reduce bank risk-taking has had the perverse effect by reducing lending and expanding leveraged derivative speculation. No one is exactly sure how much risk banks are taking in derivatives; but the world's economy is only $72 trillion and the outstanding derivatives have been leveraged up to $700 trillion.

Powered by the Fed's cheap money, JP Morgan's trading and investment banking activities now generate more than forty per cent of the firm's net profits. After JP Morgan reported a jaw-dropping annual profit of $24.4 billion in July, the bank began a national layoff of thousands of lending officers in August.

The size of U.S. banks was once a competitive edge to spur American investment and sustain job growth. But the Federal Reserve's continuing money printing has caused banks to restrict lending and focus on trading activities. By inflating asset bubbles with cheap money the Fed's actions have been great for a few investors and bankers, but those Fed policies continue to hurt American job growth.

Secretary of Labor Thomas E. Perez's October 24th announcement that jobless claims only decreased by 12,000 to 350,000 for the week ending Oct. 19 was immediately seen by liberal economists, who had predicted a further drop to 340,000, as justification for more Federal Reserve money printing to supposedly stimulate hiring. This demand comes despite the fact that the Fed has already ballooned purchases of securities by 27% this year, while job creation is up by only 1.7%. The Fed has no capability to create jobs, because it cannot stimulate investment in new plant and equipment, which drives the economy and gives workers the growing incomes to increase their consumption. But the Fed has been very successful at inflating new asset bubbles, with housing prices up another 13.5% and the stock market up 26% this year. Liberals have a weird penchant for claiming failed strategies work if "investment" is increased. Demanding the Fed blow bigger bubbles runs the risk that those bubbles eventually pop and is preventing the banks from focusing on lending that creates jobs.

Liberal economists claim the United States Federal Reserve can fight unemployment by increasing the supply of money in the economy, through the purchases of bonds held by the public. This supposedly puts cash in the hands of the public, drives down interest rates, and also allows the public to borrow at lower rates to invest in expanding business and creating jobs. But since only a small sliver of the "public" has bonds for sale, the Fed actually loans money to banks to buy bonds, and then the banks sell the bonds to the Fed at a profit. And here is the flaw in liberalism's magic money creation scheme; if banks can make risk-free profits trading bonds with the Fed, why would they make risky loans to the public to invest in expanding business and creating jobs?

The Federal Reserve's investment in bonds averaged about $700 billion for the ten years leading up to 2007. When the financial crisis hit in 2008, the Fed immediately began buying bonds to increase cash in the hands of the public and prevent any panic. This type of intervention was not unusual and had happened over 20 times since the Fed was founded just over 100 years ago. But what is not "business as usual" is that the Fedis continuing its crisis purchases and now holds over $3.5 trillion of bonds.

Banks historically paid interest to recruit deposits from senior citizens living on the income from their savings, and then lent money to businesses at higher rates to make profit spread. But between 2009 and 2010, the Fed made $9 trillion in overnight loans directly to the major banks and brokers at a rate of 0.1%. The Fed's cheap money drove down the interest rates paid to bank depositors. Seniors' income collapsed and many were forced to spend their savings to survive. As seniors' consumption shrank, businesses curtailed new investment and employment stagnated.

Each month the Labor Department publishes an employment report that can be misleading, since it is seasonally adjusted and subject to later reporting revisions. But despite the Fed money printing, over the last two years employment has been treading water by growing at the same 1.7% rate as annual population growth. But this failing to grow jobs faster than new entrants join the labor force has caused the duration period of unemployment in America to leap from an average of 10-20 weeks from 1980 to 2009, to 35-40 weeks over the last two years.
Just five years after being bailed out by the American taxpayers, the U.S. banking system is generating record profits thanks to the Fed's generosity. All the legislation Congress passed to supposedly reduce bank risk-taking has had the perverse effect by reducing lending and expanding leveraged derivative speculation. No one is exactly sure how much risk banks are taking in derivatives; but the world's economy is only $72 trillion and the outstanding derivatives have been leveraged up to $700 trillion.

Powered by the Fed's cheap money, JP Morgan's trading and investment banking activities now generate more than forty per cent of the firm's net profits. After JP Morgan reported a jaw-dropping annual profit of $24.4 billion in July, the bank began a national layoff of thousands of lending officers in August.

The size of U.S. banks was once a competitive edge to spur American investment and sustain job growth. But the Federal Reserve's continuing money printing has caused banks to restrict lending and focus on trading activities. By inflating asset bubbles with cheap money the Fed's actions have been great for a few investors and bankers, but those Fed policies continue to hurt American job growth.