(BOSTON) – Technically the “Great Recession” ended in June of 2009, but Gallup reports that 66 percent of Americans say it’s not over yet. Economists tell us the economy is starting to look good (manufacturing & housing starts, up; gasoline prices and unemployment, down) but 68 percent of the people tell pollsters the economy is bad, and 67 percent say the country is on the “wrong track.”
Wall St. has been on a roll for four years and the Dow-Jones Average ended 2013 at an all-time high, having its best gains since 1995 (30 percent including dividends), yet wages are stagnant and food stamp rolls are at an all-time high.
Historically, Wall St. has been seen as a fair barometer of how the country was doing. In 1929, the market crashed and the country entered a long depression. Beginning in the 1950’s, a booming Wall St. was generally paralleled by prosperity on Main St. Thus the current contradiction – Wall St. soaring and Main St. sagging – is a significant historical anomaly that tells us a lot about the true health of the American economy.
In fact, what the people are telling the pollsters is a truer reflection of the real economy than all that cheering on the floor of the New York Stock Exchange. As George Will pointed out in a thoughtful recent commentary: “since December of 2007, the U.S. population has grown by 13 million people, but today there are 1.3 million fewer jobs.” Will adds that “If the workforce participation rate (the actual number of people having jobs or actively seeking them) was the same as December 2007 the unemployment rate would be 11.3 percent instead of 7.0 percent and nobody would even be talking about a Recovery.”
Still we are left with the question of why Wall St. is doing so well and Main St. isn’t. Here we must turn a gimlet eye on the role of the Federal Reserve, which last month celebrated its 100th birthday and this month will see a changing of the guard from Chairman Ben Bernanke to his successor, Janet Yellen.
Bernanke’s eight year reign – neatly paralleling the Recession he has wrestled with – will be principally remembered for the establishment of record low interest rates (nearly zero) and the launching of the controversial program “Quantitative Easing” (QE), more popularly known as “easy money” or “printing money,” though economists prefer the more polite “liquidity infusion.”
QE, since its inception in November of 2008, has amounted to over four trillion dollars, a “stimulus” that by comparison dwarfs Obama’s much better known “stimulus package”.
The result of the Fed’s enormous “liquidity infusion” is that stock markets have nearly doubled in value since 2009, while the real economy has staggered along with merely 2 percent growth.
The clear tip-off to the connection between Fed policy and market fluctuations is that whenever Bernanke even mentioned the possibility of reducing QE, stocks tumbled. Conversely, whenever he said the continuing “fragility of the economy” ruled out any imminent cut back in QE, the markets rallied.
Historically markets were driven by expectations of stocks profitability. Today they are driven by the pursuit of speculative gains derived from the manipulations of the Federal Reserve. The unnatural result of this circumstance is that the American economy is now in a situation where the interests of the financial markets are directly opposite the interests of the rest of the economy. Thus continued good news for Wall St. will remain dependent on bad news for Main St, until such time as the markets escape their dangerous addiction to QE.
The challenge for Bernanke, and now Yellen, will be to somehow rein in QE and its growing “bubble” of unnaturally inflated stock prices without creating panic in the markets.
The Fed’s announcement in December of a very timid reduction in QE, coupled with a retreat from its long-standing promise to raise interest rates when unemployment falls to 6.5 percent, was not reassuring. Bernanke’s insistence that the reduction could be easily reversed if the economy wobbles was even less so.
Perhaps most alarming is that the Fed’s continuance of rock bottom interest rates has effectively eliminated the traditional role of the bond market as a restraining force on a national administration deeply committed to borrowing and spending to grow government.
What we know for certain is that the Wall St. binge must one day end, but sadly it will be Main St. that will most likely suffer from the hangover.
William Moloney’s columns have appeared in the Wall St. Journal, USA Today, Washington Post, Philadelphia Inquirer, Baltimore Sun, Washington Times, Denver Post, and Human Events.