‘The Failure of Fiscal-Monetary Policy, 2008-2013’
ByDr. Jack Rasmus,‘Shadow’ Federal Reserve Chairman’,GREEN SHADOW CABINET
“Fiscal and Monetary policies since the financial crisis and the protracted recession that began in 2008 have failed to generate a sustained recovery of the US economy—except for big banks, big corporations, investors and speculators, and the wealthiest 10% households. All have benefited significantly from record profits growth and record returns on stock, corporate bonds, derivatives and other financial securities’ investments since 2009, while median family earnings have continued to decline every year and Main St. America has been left behind.
Fiscal Policy Failures
Obama’s fiscal stimulus spending programs of 2009-2012 have been grossly insufficient—not just in terms of levels of spending, but in the composition and timing of that spending as well. On the tax side, Obama programs have been grossly over-weighted toward business tax cuts and personal income and inheritance tax reductions for wealthy investors and households. Instead of leading to investment and jobs in the US, the business tax cut bias has resulted in record cash hoarding by big business and multinational corporations in excess of $3 trillion. Instead investment and jobs in the US, that corporate cash hoard has been, and continues to be, diverted to record stock buybacks and dividends payouts, to investment and job creation in offshore emerging markets, and to investment in speculative financial securities.
The failure of Obama fiscal stimulus programs to create jobs has contributed significantly to the weakest job recovery from recession of the 11 prior recessions since 1945. In addition to hoarded business tax cuts, hundreds of billions of dollars distributed in subsidies to the States since 2009 were promised first ‘to create jobs’ and then at least ‘to save jobs’. Neither happened. State and Local governments instead laid off 700,000, engaging in massive job destruction instead of job creation which continues to date. $100 billion in stimulus spending targeted for infrastructure investment—promised for ‘shovel ready’ projects—were instead redirected to long term, capital intensive projects and little job creation. In 2013 more than 21 million still officially remain jobless; in actual fact, more than 25 million. While the administration touts the creation of 5 million new jobs, it remains silent on the 5 million who have left the labor force unable to find any form of work. Full time permanent jobs have disappeared while more than 6 million involuntary part time jobs were created and millions more temporary jobs. Of the jobs lost since 2009, 60% were top tier jobs paying more than $18/hr. while 58% of the jobs created since 2009 were the lowest paying jobs at less than $12/hr. Not surprising, as a consequence of continuing massive unemployment and falling real wages, median wage earner families’ real income has fallen consistently since 2008.
Administration housing policies have been no less a disaster. Token spending programs promised to save US homeowners in 2009 were in fact mostly incentives to banks and mortgage companies to move owners out of their homes to resell to new buyers. Foreclosures escalated to more than 14 million to date, about 1 out of every 4 homeowners with a mortgage, while more than ten million homeowners still languish in negative equity. State attorney generals’ legal suits against banks and lenders in response to the ‘robo-signing scandal’ in 2010 were subsequently brokered by the Obama administration in 2011-12 in favor of the banks, allowing the latter protection from all future liability in exchange for a pittance settlement providing illegally foreclosed homeowners damages averaging a mere $1500. Further administration subsidies to banks and mortgage lenders in the form of the 2012 ‘HARP 2.0’ program have fattened bank profits while providing a minimal number of homeowners in negative equity any relief. The recent much-hyped housing recovery is largely the result of purchases of banks’ foreclosed housing stock by wealthy speculators (US and foreign), private equity and hedge funds, who area loaned money by the banks who in turn borrow the funds at zero interest from the Federal Reserve—or, alternatively, the building of apartments at a feverish pace to house the 13 million plus foreclosed former homeowners.
Monetary Policy Failures
Monetary policy, driven by the US Federal Reserve, the central bank of the US, has amounted to more than five years and $3 trillion of ‘Quantitative Easing (QE)’ printing of money by the Fed, which has been then directly used to buy collapsed mortgage bonds and other instruments owned by banks, shadow banks, and wealthy individual investors—most probably at prices above their true depressed market values. In addition, the Fed has provided tens of trillions of dollars more to banks and shadow banks in essentially free money, zero interest loans. The Fed has even allowed banks to redeposit the free money with it, for which it pays the banks interest. In short, the Fed policy has been to subsidize purchases of investors with QE while additionally paying banks to borrow money from it for free.
QE and Zero rate policies have had virtually no effect on the real economy and recovery, while creating bubbles in the stock market, corporate junk bond market, farmland real estate prices, derivatives trading and foreign currency exchange speculation. QE and free money flows directly from the Fed into financial speculation and investment in the various liquid, short term, price driven financial markets globally. While fattening the wallets of professional speculators, banks, and ‘portfolio’ operations of multinational companies, monetary policies have created numerous negative effects and have hindered, not stimulated, the recovery of the real non-financial economy. Five years of near zero rates have mean zero returns and income growth for seniors and households dependent on fixed incomes; have accelerated the collapse of pension funds and even 401k matching contributions by employers; have resulted in real income decline for tens of millions of households; have diverted much needed potential lending to small businesses into stocks and other speculative markets; and has set off a global ‘currency war’ as economies worldwide in recession attempt to use QE to lower their currency values to gain export advantages vis-à-vis competitors. Monetary policy is thus slowing much needed investment, serving as a drag on consumption, and destabilizing once again the global financial system.
The Alternatives To Traditional Fiscal-Monetary Policy
Traditional Fiscal-Monetary policies implemented by the Obama administration result in lopsided recovery on behalf of the wealthy and corporations, and stagnation at best for the rest. The consequence is a ‘stop-go’ recovery, of short and shallow periods of growth followed by relapses and stalling in the rate of growth and even double (and triple) dip recessions. This scenario will continue so long as the policies of the past five years continue.
The failure of traditional policies is the consequence of their inability to adequately address the mountain of debt burdening the majority of households (bottom 80%), on the one hand, and the steady decline of real disposable income by those same households as well. Major structural reforms of the economy must replace reliance on failed Fiscal-Monetary policies above. These structural reforms must target the reduction of excess household debt while reversing the declining share of income by the 80% in favor of the top 10%, and especially top 1%, and their corporations, which serve as the conduit through which the wealthiest have been consistently accruing more and more share of national income.
Restructuring can only be achieved by means of a series of major overhauls of the US tax system, the banking system, the retirement and health care systems, by reversing the immense damage wrought on US jobs and incomes by Free Trade policies and offshoring, and by restoring a balance in union-management power destroyed over the past three decades by various legislative, court and technological measures and developments.
An initial ‘short list’ of overhaul-restructuring policies along the several ‘economic fronts’ noted above include: restoring the tax structure back to 1978 levels at minimum and introducing a Financial Transactions Tax of 1% on stock, bond, derivative and forex trades; introducing a public banking system for all forms of consumer credit to provide loans at ‘no profit’ cost of money for mortgages, autos, education, consumer installment, and small businesses. Nationalizing all 401k and private pension plans into a new expanded national social security system that provides a minimum of two-thirds of wage income; a medicare for all health system funded by a payroll tax of 15% on all forms of incomes, wages and capital; an immediate suspension and renegotiation of all Free Trade agreements; national legislation creating a ‘card check’ system for union recognition and bargaining; and selective expunging of bank financed student loans and predatory mortgage and credit card loans.
Excess household debt and declining real disposable income has resulted in a collapse of spending and tax multipliers that have rendered traditional fiscal policy ineffective. Similarly, Federal Reserve monetary policies of QE and zero rates have result in a resurgence of speculative finance that is collapsing money multipliers for real asset investment by diverting credit from real investment and job creation. Only policies and measures that restructure the US economy fundamentally across critical sectors, and thereby reduce debt loads for the bottom 80% households while raising real disposable income for the same, will prove successful long term in overcoming the current general stagnation of the US and global economy and ensure a return to a trajectory of sustained economic growth.
Liberal mainstream economists’ claim that all that is needed is simply more spending will mean more of the same stagnation. Conservative mainstream economists’ claim that more business tax cuts, more deregulation, and more deficit spending cuts will mean a transition from current stagnation to another deeper economic contraction and perhaps financial crisis and even depression. Both are incorrect. Both seek simply to readjust the relative mix of the same policies. More of the same Fiscal-Monetary policies of the past decade will prove as ineffective in the future as they have been in the past. A fundamental restructuring of key sectors of the economy is necessary for long term recovery.
Dr. Jack Rasmus, April 18, 2013
Green Shadow Cabinet
Federal Reserve Chairman