Nomi’s Note: Another week of D.C. drama…
Both the House and Senate agreed to a 45-day budget extension. And President Biden signed it into law.
That will kick the can on the budget drama in Congress into pre-Thanksgiving time.
A full budget will eventually pass, though.
Over the past 20 years, the government has failed to meet its deadline 14 times, resulting in funding delays. But in the end a budget always passed.
Meanwhile, over in the real economy, the Fed’s favorite inflation indicator came in cooler than expected on Friday.
I’m talking about core PCE, the personal consumption expenditures price index, excluding food and energy.
August numbers came in at 3.9% on a 12-month basis. That was the smallest monthly increase since November 2020.
And coming up this Friday we have the September jobs report.
That means the Federal Reserve still has more data to chew on for their next interest rate decision. They’ll use it to decide whether they do a final 0.25% rate hike this year in November or wait until December.
But what’s happening in D.C. underscores one thing. That is, the Fed can’t make an impact on the real economy.
And it’s not the first time the Fed has been powerless in the face of financial turmoil. I dove deep into its role in the 2008 great financial crisis in my latest book, Permanent Distortion.
And today, with permission from my book’s publisher, I’m unlocking an excerpt for you. Read on…
In 2008, the Fed created a financial Frankenstein’s monster that altered the course of money and power in the 21st century.
The idea was that cushioning the fall of a reckless banking system with whatever tools necessary (a phrase used repeatedly in 21st-century central bank lingo) was equivalent to securing the real economy, or Main Street.
For those on Wall Street monitoring the deteriorating condition of loans and toxic assets created from them, the global financial crisis had been brewing steadily since early 2006, when subprime loan foreclosures began to spike.
Eventually, the extent of the crisis born of the financial engineering of subprime loans would be blown into the open by the combustion of two Bear Stearns hedge funds.
Those hedge funds were engaged in overborrowing to buy toxic securities laced with subprime loans and complex derivatives.
This combustion precipitated the May 31, 2008 takeover of Bear Stearns by JPMorgan Chase – with the Fed’s blessing and financial support – to ensure that JPMorgan got a good price and the Fed bore the brunt of the risk.
At the time, few even thought to question whether the Fed’s actions fulfilled or were even related to its dual mandate to maintain full employment and low inflation.
In the upper echelons of society, the concern was that banks weren’t functioning reliably, stock and bond markets were in free fall, and scores of investment bankers could see their bonuses evaporating.
On the lower rungs of the economic ladder, there was more visceral fear – of not being able to pay rent, losing jobs, being kicked out of homes, and having a less stable future.
There were many facets to the panic that ensued, but one pivotal moment changed the tone of everything.
This followed the collapse of one of Wall Street’s oldest, most venerable investment banks, Lehman Brothers, on September 15, 2008.
The event didn’t appear to be based on a planned action on his part, but was more of a gesture: Hank Paulson – former Goldman Sachs CEO and chairman-turned-treasury secretary – dropped onto one knee before Speaker of the House Nancy Pelosi.
As the story goes, Paulson pleaded with her to do whatever her considerable political clout could muster.
The former Wall Street titan needed the Treasury’s $700 billion bailout package, which contained some crumbs for citizens and ample help for megabanks, to be approved by the House of Representatives.
Fears that ATMs the world over might effectively stop spitting out fresh new bills to customers were prevalent – the 21st-century equivalent of banks closing their doors as they had during the 1929 stock market crash and the ensuing Great Depression.
Passing the Emergency Economic Stabilization Act would save the day, said Paulson – or at least save Wall Street.
Markets were diving, a sign of worse things to come. That was the day that Paulson urged a fiscal solution (meaning funds approved by Congress and ultimately paid by taxpayers) for a banking-caused catastrophe.
And so it began…
On December 16, 2008, the Fed cut interest rates to zero and provided the biggest banks access to cheap funds with no strings attached.
Money that cost nothing wasn’t enough, though. Fears about credit seizing up plagued markets. Recessions engulfed the world. This led to a rate-cutting exercise, predominantly by the larger central banks.
Around the world, leaders were deeply concerned that the hubris and greed underlying Wall Street would crash their own markets and subsequently their economies.
The chaos that abounded led those countries not in the inner circle of power to call into question the entire US-dollar-centric global monetary system.
Smaller emerging countries, larger ones such as China and Russia, and the United Nations and the Organisation for Economic Co-operation and Development (OECD) united in admonishment over the lack of oversight of US banking practice.
Developing countries faced more inequality and civil strife, as foreign direct investment favored markets over long-term economic projects, too.
What transpired in the years that followed was social unrest from Hong Kong to Brazil and from Spain to the United Kingdom as people felt economically violated by their governments, while financial markets rallied.
Easy money had a profound impact on political decisions and economies in countries from Latin America to Asia and throughout the European Union.
Despite the premise that emergency central bank action would save the Main Street economy, the unprecedented monetary support from the world’s main central banks to the banks and markets increased inequality, magnified debt, ushered in isolationism, and elevated the wealthy and powerful.
Ultimately, it was a catalyst for destabilizing the international economy.
As a result of the financial crisis, central bank leaders from highly developed economies could fabricate more money than inflation-constrained emerging-market central banks could.
Latin American and East Asian governments were forced to make a “Sophie’s choice” calculation: to suffer hyperinflation alongside more attractive interest and exchange rates and employment levels, or to try to control inflation with higher domestic rates at the risk of harsh internal credit conditions and rising unemployment.
East Asian nations were “luckier,” in a sense, as they could target money toward production and industry and sell public and private assets to balance their budgets, instead of simply privatizing their nations for the benefit of foreign-country investment and control.
How did this spark the massive inequality wedge between the real economy and the financial markets? How did it further the divide between developed and developing nations?
By institutionalizing a system that fabricates unlimited money without reference to the productive economy and its participants – workers, consumers, Main Street retailers, households.
Central banks were both unable and unwilling to direct support into the real economy. But that didn’t stop them from providing back-door financing to Wall Street.
They insisted that markets and the economy were tightly linked. But the evidence derived since the financial crisis proves they’re not.
Central banks were no longer just in the business of balancing money and credit, as per their mandates. Instead they had become the force of the markets themselves.
[Adapted from Permanent Distortion: How the Financial Markets Abandoned the Real Economy Forever. Copyright © 2022 by Nomi Prins with permission from PublicAffairs, an imprint of Perseus Books.]
Nomi’s Note: Nomi here again. Unfortunately, since I first started writing Permanent Distortion, the distortions in the markets have gotten even more extreme. And central banks, including the Federal Reserve, are on a path to abuse their power even further…
This summer, the Fed started laying the foundation for a complete and total overhaul of our financial system. It’s a scheme to enact enormous change to the appearance and value of our money – in a way we haven’t seen since 1971.
I recently published a video report with my findings. As you’ll see, these changes could impact the savings of millions of Americans, especially those with more than $2,500 in the bank. To learn more about what’s coming – and get my wealth-preservation playbook – watch my investigative report here.