February 05, 2008
The brave new world of finance-2: Further indicators of insanity
(For previous posts in this series, see here.)
The current weird situation in which the stock market rises on what you or I might think is bad news can also be seen with labor figures. When reports are released that unemployment is low (which ordinary people would think is a good thing), the stock market tanks. When unemployment figures rise, the stock market also rises. Why? We are told that if unemployment is low, that means that workers are in demand and thus have more clout in negotiations and their wages are likely to rise. Again, you and I might think it is a good thing for working people to be earning more. But for investors, this is bad because rising wages means lower profits for companies and an increased possibility of rising prices, which means the possibility of inflation, which means that the Federal Reserve might raise interest rates to reduce the money supply and thus lower the risk of inflation. And we know the love affair that investors have with low interest rates. Hence the stock market goes down.
All this may be perfectly rational behavior within the weird world of finance. But to me there is something profoundly disturbing, immoral even, about an economic value system that is so committed to low interest rates that it even cheers on news that by any measure is not good for ordinary people. As Barbara Ehrenreich writes yesterday: "So thoroughly is the economy decoupled from ordinary experience that according to a CNN poll, 57 percent of Americans thought we were already in a recession a month ago. Economists may complain that this is only because the public is ignorant of the technical definition of a recession, which specifies at least two consecutive quarters of negative growth. But most of the public employs the more colloquial definition of a recession, which is hard times. And -- far removed from whatever happens on Wall Street, the Nikkei, Dax, or the curiously named FTSE -- most Americans have been living in their own personal recession for years."
You or I might think that it would be desirable to have an economy in which almost everyone was working and putting money away in savings for their future and the future of their children. But such a scenario seems to give the financial sectors and investors in Wall Street nightmares. And unfortunately, they are the ones who seem to control monetary and fiscal policies.
We seem to be living with a financial system has lost touch with human needs.
Why is it that our sense of what is a healthy economy has been overturned? One reason is that the US economy has switched from one that was dominated by the manufacturing sector (i.e., where companies actually made and sold stuff like steel and cars) to one that is dominated by the co-called FIRE sector (finance, insurance, and real estate).
The US is rapidly ceasing to be the country that makes things that people in other countries want to buy. The US has been running up huge trade deficits since 1970, with the rapidly increasing deficit in goods exported to other countries failing to compensate for the (small) surpluses in the services sector.
The FIRE sector, rather than actually manufacturing goods, essentially uses money to make more money and this change in activity has profound consequences. One negative consequence of the dominance of the interests of the financial sector over the general economy is that economic policy seems to be now driven to serve the needs of investors, not actual manufacturers. As a result of the desire to placate the Wall Street investors, we now have a situation where the goal of the Federal Reserve seems to be not to maintain the long-term health of the nation through careful management of long-term fiscal policy, but to shore up the value of the stock market in the short term.
We saw this desire to placate Wall Street brutally on display just recently. The week ending on Friday, January 18 had seen stocks plunge worldwide on reports of further massive losses incurred by American financial institutions due to the sub-prime mortgage debacle (more on that fiasco later). Monday, January 21 was the Martin Luther King holiday in the US where the exchanges were closed but stocks dropped sharply that day worldwide, and dropped again on Tuesday, January 22 in the far east before the US markets opened on Tuesday morning. Everyone was braced for a massive plunge in the stock market when the US markets opened on Tuesday. But in an effort to prevent this, the Federal Reserve did something it very rarely does, and that was to have an emergency conference call among its governors and decide to slash interest rates by a huge amount (0.75%) before the US markets even opened, as an emergency move on a day when it does not usually make changes in interest rates. This news struck me as a bad sign, that the Fed thought the situation was serious. But the stock market responded with cheers, because low interest rates make money cheaper to borrow and this enables financial speculators to make even more money. The only thing Wall Street loves more than low interest rates is a surprise lowering of interest rates. Then on Wednesday, January 30, at its regular meeting the Fed lowered the interest rates again by another 0.5%. The Dow Jones stock index, which had been in negative territory, suddenly shot up nearly 300 points within an hour of the announcement, before sinking back into negative territory.
To me, the Fed taking such remarkable and dramatic steps meant that they thought the economy was in serious trouble and heading for recession. Recessions are awful things, shutting down companies and throwing lots of people out of work. But for Wall Street investors, all that seems to matter is lower interest rates, whatever the cause. They are already putting renewed pressure on the Fed for further and deeper cuts in interest rates since the last one did not really work as far as they were concerned and merely kept the status quo. They are circling like wolves, essentially demanding that the Fed lower the rates even more, perhaps by even larger amounts. If the Fed does not keep lowering rates, the stock market is likely to decline. We seem to have reached the stage where it is taken for granted that the main role of the Fed is to please Wall Street investors by keeping stock prices high by manipulating interest rates. As long as they do that, the long-term health of the economy seems to be ignored.
Next: The crazy 'stimulus package' – Get your free money here!
POST SCRIPT: The lobbyists' preferences
See which candidates have garnered the support of lobbyists.