By Pam Martens and Russ Martens: June 23, 2016
Millions of Americans think that Congressional Republicans are in conspiracy with groups like the U.S. Chamber of Commerce, Cato Institute, Koch brothers, and the Mercatus Center to advance an agenda of increasing corporate profits while sacking the needs of the poor and middle class. That doesn’t mean, however, that Republicans can’t sometimes spot a conspiracy on the part of others.
Yesterday, four Republicans on the House Financial Services Committee, during the semi-annual monetary policy testimony by Fed Chair Janet Yellen, presented a persuasive argument that it’s really the Federal Reserve (which was flattered by many House Democrats at the hearing) that’s sacrificing the poor and middle class in order to benefit the rich and “the Goldman Sachs CEOs of the world.”
Congressman Ed Royce, Republican from California, said that he was “concerned that the Federal Reserve has created a third pillar of monetary policy, that of a rising and stable stock market.” Royce said that Yellen’s predecessor, Fed Chair Ben Bernanke, had told the Committee that the goal of quantitative easing was to increase asset prices like the stock market in order to create a wealth effect.
Royce raised the specter that the Fed is actually being held hostage by the stock market and Wall Street, stating:
“Every time in the last three years when there has been a hint of raising rates and the stock market declined accordingly, the Fed has cited stock market volatility as one of the reasons to stay the course and hold rates at zero.”
Under law, the Fed’s two primary pillars of monetary policy are to promote the goals of maximum employment and stable prices. Yellen denied that the Fed has a third pillar of shoring up the stock market.
Royce is clearly on to something. When the stock market tanks, the share prices of the big Wall Street banks plummet to a greater degree than the overall market because of the trillions of dollars (yes trillions) in derivatives they hold and the lack of transparency as to whether the counterparties on the other side of these trades will be solvent in a plummeting market.
The Federal Reserve is in no position to quietly sit back and watch the equity capital of its most dangerous banks melt away in a stock market selloff when it is desperately attempting to boost capital levels at these same mega banks.
Secondly, a stock market selloff impacts the confidence of the fragile consumer, millions of whom have at least a little money in their 401(k) plan in the stock market. This is another reason for getting rid of 401(k) plans and returning to corporate pension plans known as defined benefit plans so that the worker can advocate for his own interests instead of the stock market’s. (See related article below on the psychology behind the “ownership society.”)
Congressman Scott Garrett, Republican from New Jersey, said that the super low interest rates targeted by the Fed have raised the value of the stock market and he asked Yellen pointedly who the beneficiaries of this happen to be. Without waiting for an answer, Garrett cited a Gallup poll which showed that “90 percent of households with incomes over $75,000 own stock. Only 21 percent of households earning under $30,000 own stock.”
In fact, it’s actually the super rich who own the vast majority of the stock market. According to the most recent 2013 Federal Reserve “Survey of Consumer Finances,” which is conducted every three years, the rate of direct or indirect stock ownership by the very top income group “increased 3.9 percentage points from 2010 to 2013, reaching 92.1 percent, slightly above the 91.7 percent found in the 2007 survey.”
Garrett stated curtly to Yellen: “Who are you benefitting? The rich. Who are you hurting? The poor.” Finishing with the ultimate insult, Garrett asked Yellen why she needed to benefit “the Goldman Sachs CEOs of the world.”
Congressman Steve Pearce, a Republican from New Mexico, said that seniors who had the majority of their money not in the stock market but in savings accounts had borne the brunt of the financial crisis by watching their interest rates plummet to almost zero as the Fed has pursued a zero interest rate policy since December of 2008. (The Fed hiked its Federal Funds rate this past December to a measly 0.25 to 0.50 percent and the stock market proceeded to stage a tantrum in January.)
Michigan Republican, Congressman Bill Huizenga, suggested that the Fed itself has become a Global Systemically Important Bank (G-SIB) with a balance sheet of over $4 trillion, representing almost 25 percent of U.S. GDP. He said the Fed has also increased its risk profile by doubling the maturity of its assets from about 5 years to 10 years. Huizenga asked if the Fed was running a stress test on itself, along with the other mega banks.
To the amazement of many in the room, Yellen said the Fed did run a stress test on itself.
Advance the red dot in the lower bar of the video to begin the hearing.