Obama’s Economy: Wall Street Thrives, Main Street Dies


closed-for-business-signThe man at the center of the storm has blown a giant hole in the notion that the Obama administration is looking out for middle class Americans. “Andrew Huszar: Confessions of a Quantitative Easer,” is piece written for the Wall Street Journal by Huszar himself, revealing that he was the person responsible “for executing the centerpiece program of the Fed’s first plunge into the bond-buying experiment known as quantitative easing.” Four years later, the scales have fallen from his eyes. “The central bank continues to spin QE as a tool for helping Main Street,” Huszar writes. “But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.”

There is a plethora of evidence to back up Huszar’s assertion. While Wall Street continues to flirt with record highs, Main Street is stagnating. Despite the happy talk that constantly emerges from the Obama administration and its media cheerleaders, a record-setting 91,541,000 Americans were not participating in the labor force as of October, according to the Bureau of Labor Statistics (BLS). Between the time Obama entered office in 2009 and last month, more than 11 million Americans have left the labor force. If the trend continues, the number of idle Americans will top the number of working Americans in four years.

Huszar’s entry into the trenches began in 2009, long after Congress passed the Troubled Asset Relief Program (TARP) they believed would prevent the complete collapse of the financial system. It was a financial system largely ravaged by the government’s insistence that home ownership should resemble a de facto affirmative action program. While banks themselves were largely irresponsible for bundling mortgages into another asset they could buy and sell, Americans should never forget that it was the federal government, especially during the Clinton administration, that set the stage for the ensuing carnage. The Clinton administration broadened the scope of the 1977 Community Reinvestment Act so precipitously, that by 2007, Fannie Mae and Freddie Mac owned or guaranteed almost half of the $12 trillion U.S. mortgage market. (Their subsequent failures engendered a $188 billion taxpayer bailout. And while that bailout is close to being repaid, the Obama administration is reprising the insanity, once again forcing lending institutions to make dodgy loans, or face federal reprisals).

Perhaps what rankles many Americans is the idea that we’ll never know whether TARP was really necessary. The opinion is divided. On the left, the New York Times’ Simon Johnson called it a “necessary evil” that prevented the collapse of the financial system. Yet even he conceded that the way it was put in place “was excessively favorable to the very bankers who had presided over the collapse.” According to Forbes Magazine’s William M. Isaac, “TARP did nothing to stabilize the financial system that could not have been done without it,” further insisting that the program “created a political firestorm that will have hugely negative consequences for our financial system and economy for years to come.” For Americans less well-versed in economics, two things stand out: not a single resignation was demanded in return for $700 billion of taxpayer funds, and the now-infamous idea of “too big too fail” was firmly established.

As Huszar notes, it was five years ago this month that the Feds “launched an unprecedented shopping spree” ostensibly aimed at containing the crisis, with Fed chairman Ben Bernanke insisting that massive bond purchases would be undertaken “to drive down the cost of credit so that more Americans hurting from the tanking economy could use it to weather the downturn,” Huszar explains. “For this reason, he originally called the initiative ‘credit easing.’”

Was more credit made available to Americans? Huszar lays the foundation for the answer by first explaining that he had worked for the Federal Reserve for seven years prior this latest offer, but had soured on the job. “I had left the Fed out of frustration, having witnessed the institution deferring more and more to Wall Street,” he explained. “Independence is at the heart of any central bank’s credibility, and I had come to believe that the Fed’s independence was eroding.” He finally took the job of managing the purchase of a staggering $1.25 trillion of mortgage bonds over 12 months, because senior Fed officials convinced him they had seen the error of their ways, and were committed to “a major Wall Street revamp.”

Huszar soon realized he’d been had. More credit wasn’t being made available to ordinary Americans, nor was the credit banks did make available getting any cheaper. “QE may have been driving down the wholesale cost for banks to make loans, but Wall Street was pocketing most of the extra cash,” Huszar reveals.

Even when credit was made available, banks took advantage. In 2011, $4 billion of federal funds were disbursed from the Treasury Department to 332 community banks, with the idea that they would be used to make loans to small businesses. Instead, 137 of those banks used $2.2 billion of the money to repay higher cost TARP debt, leaving only $1.8 billion left over for businesses themselves. This partially explains a study by Pepperdine University revealing that 60 percent of small business loan applications were rejected that year. A year earlier, a congressional oversight panel revealed that the Capital Purchase Program, TARP’s largest lending vehicle, had infused billions of dollars into banks of all sizes, who returned the favor by decreasing lending.

Huszar notes that several Fed managers began voicing concerns that QE wasn’t working as planned. But the Fed ignored them and remained focused on “the newest survey of financial-market expectations or the latest in-person feedback from Wall Street’s leading bankers and hedge-fund managers.” When the first round of QE ended on March 31, 2010, the results were stark: relief for Main Street was “trivial,” compared to an “absolute coup” for Wall Street. “The banks hadn’t just benefited from the lower cost of making loans,” writes Huszar. “They’d also enjoyed huge capital gains on the rising values of their securities holdings and fat commissions from brokering most of the Fed’s QE transactions.”

As a result, Wall Street experienced its most profitable year in history in 2009, “and 2010 was starting off in much the same way,” Huszar confirmed.

That’s only part of the story. Since 2009, banks have seen their collective stock price triple. Furthermore, the nation’s top five banks–J.P Morgan Chase & Co., Bank of America Corp., Citigroup Corp., Goldman Sachs and HSBC Bank now own 52 percent of the market, up from 17 percent in 1970.

Through it all, Huszar revealed, the Fed never wondered whether what it was doing was effective. It had so unquestionably hitched its wagon to Wall Street’s star, that a 14 percent market correction, and a slight weakening of the banking sector early in 2010, gave rise to QE2. “That was when I realized the Fed had lost any remaining ability to think independently from Wall Street,” Huszar writes. “Demoralized, I returned to the private sector.”

The Fed returned to QE3, which currently manifests itself as $85 billion in bond purchases per month. And as always, the theory remains that taking “bad paper” off the hands of banks allows them to loan more money, stimulating the economy. Yet while Wall Street is partying, Main Street has seen wages–as in the salaries millions of ordinary Americans depend upon to make ends meet–decline by 4.4 percent since the recovery began in 2009. Furthermore, since 2009, a net total of 270,000 full-time jobs have been created, compared to 1.9 million part-time jobs, a seven-fold difference.

Most Americans are aware that this represents the weakest recovery since the Great Depression. What they don’t know is that if this recovery had been as good as the average of the last 10, Gross Domestic Product would be $1.3 trillion greater, a number that represents $4,038 for every person in America. If job growth had been average, 7.3 million more people would be employed.

Instead, the $4 trillion in purchases made by the Fed, with money essentially created out of thin air, has debased the currency. In turn, the price of food, fuel and other commodities has increased, putting even more pressure on workers with stagnant wages.

Yet as Huszar notes, that is only half the problem. “Because QE was relentlessly pumping money into the financial markets during the past five years, it killed the urgency for Washington to confront a real crisis: that of a structurally unsound U.S. economy,” he writes.

It is a structural unsoundness that is staggering. In 2012, America paid $360 billion in interest payments, financed at a record-low interest rate of  2.4 percent. The average rate over the last 20 years is 5.7 percent. If we simply reverted to that rate, the interest payment on the current debt would balloon to $777 billion per year, just to maintain our current debt level. Tax receipts are expected to hit a record-setting $2.8 trillion this year. That means if our debt was being financed at historically normal interest rates, it would be consuming 28 percent of every tax dollar sent to Washington. But since we’re spending $3.5 trillion this year, we’re adding yet another $642 billion dollars to the debt. Debt that will eventually drive interest payments even higher, because no one has even the remotest incentive to bring our annual deficits to zero, much less begin paying off the national debt that stands at $17 trillion–and counting.

“The implication is that the Fed is dutifully compensating for the rest of Washington’s dysfunction,” writes Huszar. “But the Fed is at the center of that dysfunction. Case in point: It has allowed QE to become Wall Street’s new ‘too big to fail’ policy.”

As Huszar so eloquently notes, it is a policy that has enriched Wall Street at the expense Main Street. And in doing so, it has revealed the utter hypocrisy of an Obama administration and a Democrat party who have long portrayed themselves as champions of Main Street–even as they back this Keynesian-inspired economic insanity to the hilt. It is truly a shame that so many Americans fail to grasp the monstrosity of what is occurring. For Huszar it’s the greatest backdoor Wall Street bailout of all time. It’s far worse than that. When the proverbial music stops playing, Main Street America could find itself on the wrong end of the greatest swindle in the history of mankind.

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  • Merican

    Denninger’s excellent take on this nuz: “Bet That This Gets No Airplay On CNBS”

    http://market-ticker.org/akcs-www?post=225915

  • rbla

    “the utter hypocrisy of an Obama administration and a
    Democrat party who have long portrayed themselves as champions of Main Street”

    This is payback to Wall Street, the big banks and other financial movers and shakers who are, for the most part liberal Democrats, and have been instrumental in propelling Obama into power. The members of the liberal financial elite pride themselves on their philanthropy and concern for
    ‘social justice’. But while they purport to worry about the poor, the underprivileged and various discriminated against minorities their actions in
    pursuit of their self-interest belie such professions of concern. This clique
    lives insulated from the problems they often help to create while engaging in
    social and environmental hypocrisy; imposing rules on others that don’t apply
    to themselves. They are champions of mass cheap labor immigration undermining American workers’ wages and displacing the very minorities they preach about helping. Their globalist policies also include the outsourcing of U.S. jobs thereby enriching and empowering foreign despotic regimes. And all of this is facilitated by corrupting bureaucrats and politicians. And at the same time
    they generously set standards of behavior for the other members of society. For details see

    http://americaneconomicdecline.blogspot.com/2013/09/movers-shakers-and-regulators.html

    • WW4

      “This is payback to Wall Street, the big banks and other financial movers and shakers who are, for the most part liberal Democrats”

      Meh, they’re a mixed bag. Probably more apolitical/self-interested than any label would suggest.

      “They are champions of mass cheap labor immigration undermining American workers’ wages and displacing the very minorities they preach about helping.”

      Well, the U.S. Chamber of Commerce has been pretty staunchly Republican for quite some time, and they are perhaps the biggest organized reason illegal immigrant labor is encouraged.

      When conservatives admit that Big Government and Big Business are two sides of the same coin, I will do a little dance.

      • Seek

        You got that one right. The U.S. Chamber of Commerce has been one of the biggest boosters of Third World mass immigration this side of La Raza.

      • rbla

        I can’t disagree with you. The elite, including conservatives and business has been engaging in class warfare against the American middle class for many years. Their weapons include mass immigration, so-called free trade and the sort of affirmative action mentality that resulted in the subprime meltdown and in the election of an individual totally unqualified to be president.

      • apul

        But it was the DNC ,and the infamous Ted Kennedy that open the doors to immigration ,NAFTA,GATT,FREE TRADE WITH PLA, and they walked lock steep in those vote’s…..Which of these debacle’s promoted an increase in our labor pool ? This month alone we have and increase Trade balance imbalance of 8% …Republicans my ass it’s time to accept the real facts (the open door policy is a democratic liberal based issue)…….Why don’t you ask Ms. Pelosi how she manages her Ag. business and her restraint’s and apartment complexes,she’s one of bigger exploiter of undocumented Illegals in CA. …..And wasn’t it the DNC that said the illegals where doing those jobs that the American labor did not want !…….And what party was it that still bring in the PLA to Silicon valley, Boeing ,G.M., they even managed to fund the new G.M parts plant in the PLA , they also gave the machinery and the Tech. to fabricate wings and fuselages compliments of BOEING……Merv. missile tech Clinton ,to even playing field !. .Carter > Korea nuclear tech., Palestine money “Arafat “died a billionaire, and did I leave out Iran-Carter- another DNC debacle ,even the Vice Pres. Gore got his foot in that door working with Russia ,making Illegal side agreement with Iran “arms anyone” ? I worked in labor , and I and my cohorts put together and simplified most the language You’ll see today in most contracts, cooling off period for termination , binding arbitration, overtime guide lines , and shift scheduling ,’ do any of you remember the destruction that was caused by a CA. DNC operative”? the quality time with family scam, and traffic controls, destroying all of our over time and rest period provisions put into effect in the 40s , we spent years putting together eliminating the tainted unclear Lawyer dialogue, that was destroyed over night by a liberal based demagogy ( so the 10 & 12 hour shift are now norm usurping all overtime and rest period provisions ,and they went one steep further they removed the weight provision protection for women “to increase” their work place viability … And you can give me a conservative any day when it come to prudent coconscious labor negotiation and fair concise dialog ……..And Convs. still have have the ability to protect the interest of women ,not exploit them under the liberal agenda of “equal rights”….(and who was responsible for the right work states the DNC) talk about exploitation ,great way to destroy wage and benefits some thing we still see today , the DNC controlled area have almost no union representation…,Take Wal/Mart so anti union they where incapable of establishing business’s in the E/U ( but they don’t have any trouble being the biggest employer in the PLA) there labor practice’s compliment communism type labor pool employee, there totally representative of the DNC….The only unions established under the DNC is our with rank and file of the civil service employees ,how convenient ,bought and paid for votes and protection and funded by tax payers dollar….What we use to call our “Plant Burdens ……” unproductive liabilities”

  • sashamanda

    In the absence of an honest media, there is little chance all but a minority of Americans — and many of them profiting from the current scheme — will realize what is going on before it’s too late.

  • philbest

    The only significant political movement that stands against all this, is the Tea Party and the Pauls. The Dems, and the Republican establishment, are both accomplices.

  • http://www.shugartmedia.com/ Chris Shugart

    It’s been my experience that Big Time Finance is largely apolitical. They’ll dance with anyone they think will keep them in business regardless of personal ideology.

  • Ellman48

    The Fed is a creature of the bankers, created to foster and promote their interests and welfare, which it has been doing ever since. The current stock market bubble is one example. The banks have excessive reserves which they lend to investors for stock purchases and which the banks themselves use to purchase stocks. So the rich keep getting richer while the middle class has to settle for less than one percent returns on its savings.

    The bankers and Wall Street crowd provide significant contributions to the Democratic Party during election campaigns so this is a symbiotic relationship which is not likely to end anytime soon. The bargain is simple: you contribute to our campaigns and we’ll make sure you make $millions. It’s a parasitic relationship in which the host and the parasite benefit but the consumer, worker and taxpayer get violated.