Another Taxpayer-Funded Thanksgiving Feast for Wall Street

"Thus the real reason for Thanksgiving, deleted from the official
story, is: Socialism does not work; the one and only source of
abundance is free markets, and we thank God we live in a country where
we can have them." ~ "The Great Thanksgiving Host," The Ludwig Von Mises Institute - a Tea Party favorite re-write of American History.

Just think, only two years ago Wall Street's billionaires were on
their knees begging for help. Their reckless financial games had crashed
the economy. Every firm on Wall Street teetered on the edge of
collapse. Without trillions of dollars of government bailouts and asset
guarantees, they were finished -- kaput. (Please see The Looting of America for the blow by blow on how the "abundance" of financial markets failed.)

But then... a reprieve! The billionaires were bailed out. Congress
passed the mildest financial reforms possible. The biggest banks -- the
survivors -- came out of the recession even bigger than before. Wall
Street got richer again, and bonuses are now back to near-record levels.
Sure, they have to pay back TARP money. Big deal. The profits and
bonuses that money leveraged is theirs to keep as if nothing had
happened. Is this a great country or what?

But while things are booming on Wall Street, the rest of our economy
is in serious trouble. It won't take much to push us into another
downward deflationary spiral, sending unemployment even higher.
(Already, year-to-year core inflation has hit its lowest level since
this statistic was first recorded back in 1957.) We need 22 million new
jobs to get back to full-employment and it's ludicrous to believe that
the private sector can create them on its own in the next decade. But
Federal job creation is unthinkable with Congress in gridlock. Meanwhile
the states are engaged in a massive anti-stimulus program as they cut
back spending in response to crumbling revenues. It seems that the only
institution left with a modicum of will and means to prime the economic
pump is the Federal Reserve, with a plan called QE2 (a second round of
quantitative easing, which means pumping more money into the financial
sector.)

Quantitative Easing is one amazing program and the media is missing what it's really about.
The headlines are focusing only on the negative reactions from critics
like Sarah Palin (who, no doubt, can see inflation rising from her front
door), and from countries that are worrying about the trade impact of a
declining dollar. But the big story is what QE2 will do to our wealth
distribution, and that's much more disturbing.

For starters we need to keep in mind that the Federal Reserve is a
bank's bank, not a representative body of the American people. As a
bank, the Fed's main lever for moving the economy at this point is to
"motivate" financial elites to act. How? Make them richer.

Their plan is this: Over the next several months, the Federal Reserve
will go into the government bond market and purchase about $900 billion
of government long-term securities. It will pay for those securities
with printed cash, which will be pumped into the financial system. In
the process, the price of government securities will get bid up and
their effective interest rates will come down. (Why? Let's say you own a
$1,000 U.S. Treasury bond that pays 5 percent fixed interest or $50 per
year. If the price of that bond were to double to $2,000, the fixed
interest would still be $50 per year, so the effective rate would fall
to 2.5 percent. If the Fed can bid up the price of long-term fixed
federal bonds, it will drive down their effective interest rate yield.)

As bond yields drop, a bunch of things are supposed to happen.
General long-term interest rates will come down, which might to lead to
more business investment and cheaper mortgages. But in our current
economic environment that impact is suspect. Mortgage rates already are
very low, and businesses already have loads of cash that they're not
investing. The fundamental problem, of course, is that the average
consumer isn't buying a new home -- or much of anything -- because
they've either lost their job or are afraid they will soon. Lower
interest rates aren't enough to prompt these worried people to spend.

The Fed also hopes (quietly) that buying all those government
securities will cause the dollar's value to decline. This would make
U.S. exports cheaper and, supposedly, lead to more export markets for
U.S. products and get our export-oriented businesses hiring again. But
these are not mom and pop operations. They're highly automated
industries and can meet much of the projected increase in demand without
hiring many more workers.

But here's the real kicker on QE2. It's fundamentally
designed to make the rich feel even richer so that they (not you) will
go on a spending spree! As the Fed's bond buying binge
drives down bond interest rates, investors look for higher yields
elsewhere -- namely, the stock market. As the elites move their money
from government bonds to stocks, they drive up stock prices. (QE1 did
just that over the past year.) Everyone holding large quantities of
stocks starts to feel wealthier as they watch their portfolios get
fatter. Stockholders, with newfound wealth burning a hole in their
pocket, will go on a major shopping expedition -- which stimulates the
economy and creates more jobs. This is the so-called "wealth effect" the
Fed is hoping to achieve by launching QE2.

Sounds good, right? It certainly does if you have lots of stocks in
your IRA and 401k accounts. Thanks to QE2, you might regain some of what
you lost during the crash. But unless you have a very, very big
portfolio, rising stock prices are not going to send you out on a
massive shopping spree to stimulate the economy. In fact, if your job
seems a bit shaky, you probably won't spend much more than you are right
now. And the Fed knows this very well.

In truth, the Fed's new stimulus plan is not designed for
the average person because that's not who owns most of the stocks in
our country. According to a study by Edward N. Wolff, in
2004 the wealthiest 1 percent of Americans held 45 percent of all stocks
and mutual funds and 64 percent of all financial securities. These are
the folks who will enjoy the "wealth effect," courtesy of our bankers'
bank. QE2 will be another stupendous windfall for financial elites --
our country's latest and greatest effort at trickle-down economics.

Oh, and there's one more little problem with the "wealth effect." No
one is sure that there really is such a thing. Empirical studies have
been inconclusive. So it's possible that when stock market assets rise
in value, the super-wealthy will just smile and keep their special gift
from Bernanke to themselves further exacerbating our obscene
distribution of wealth.

So let's cut the crap and say it like it is: To save the
economy that Wall Street elites wrecked, the Federal Reserve will
further enrich those same elites with the hope -- and a hail Mary --
that they'll spend more money, which might spill down to the rest of us. Now, doesn't that make you feel better?

We can expect more rip-offs like QE2, as we average taxpayers become
wards of the super-rich. Things are so bad that even iconic liberals
like Paul Krugman are defending the Fed and its latest trickle-down
plan.

Why are Wall Street billionaires getting away with heist after heist?
Because our two political parties let them -- even encourage them. What
we need is an independent progressive political formation that will
make the two demands most needed right now: 1) use government to create
millions of new green jobs by any means necessary, and 2) pay for it all
with a windfall profits tax on the financial elites -- the very people
who wrecked the economy in the first place...and then got bailed out at
our expense. We don't need a Tea Party, we need a Jobs Party.

You want more evidence? Just listen to the "bipartisan" drivel coming
from the deficit reduction commissions that want to make average
Americans pay for the debts run up by the elites. It's downright
nauseating to hear these august commissioners argue for lowering the top
tax rate. They pretend this is fair because they also will eliminate a
few deductions, but in the end it will distribute trillions up the
income ladder.

Where is the deficit commission that will call for a return to the 70
to 90 percent tax rates on the super-rich that served us well under
presidents from Eisenhower to Nixon? Sadly, arguing for real taxes on
the super-rich would take the kind of guts that our two major parties
auctioned away to their Wall Street donors long ago.

In the meantime, Black Friday is here. Go out there and spend your
"wealth effect", and let's just hope to god you have a job to pay for
it.