When you begin a long journey to a sunny destination, you hope your vehicle allows you to drive forward, with brakes to keep from going off a bridge, and a reverse feature.
The Fed began our drive out of economic despair to recovery in 2008. To stabilize Wall Street (and the global economy) the Fed began an experimental program to purchase treasury bonds and other securities to flood the markets with capital.
Hypothetically, we could compare Wall Street to Wal-Mart with a very generous Uncle Sam buying all of the goods, every month, in every Wal-Mart. Doesn’t matter who the other customers are or how much they buy, Wal-Mart could restock and keep the prices ridiculously, artificially low. And if the goods weren’t sold, oh well, Uncle Sam would take care of it. Did I mention every month? Pretty cool, If you shop at Wal-Mart.
But there is a downside. Instead of helping others with all of their savings, Wal-Mart’s clients could go purchase other stuff. They would have the excess money to take risks, go on buying sprees. They could use the extra cash to purchase their own bank, buy a few sticky-wickies for their personal portfolio. Not to mention, the performance and purpose of the retail market could be skewed.
In May, Mr. Bernanke thought the destination of economic recovery was near. The end of must come to an end. He warned the markets that after five years it was time to put the brakes on and taper the buying spree of $85 billion dollars a month in treasury bonds. (Treasury bonds are sold to pay for our own debt. Uncle Sam now owns over 4 trillion dollars in bonds.)
But he miscalculated the dependence of Wall Street on cheap money. The markets went into a tizzy. Interest rates spiked up. The recovering housing market began to show signs of slowing.
Last week’s lethargic building starts and new permits put the soothsayers in a panic. Apartments are popping up, but new homes have stagnated.
The employment numbers are strained. Although the numbers show fewer people out of work, many unemployed have given up trying to find a job, therefore not counted.
Yesterday, Mr. Bernanke reversed his May decision. His original intent was not to slow the economy but to wean Wall Street off of the cut-rate money. Our destination to economic recovery may take a little longer. Fasten your seat belts, we could be in for a bumpy ride.