How the Fed Fuels the Boom-Bust Cycles

People keep fighting over the fiscal policies of Democrats versus Republicans, while ignoring the gorilla in the room – the Federal Reserve Bank. With its ability to control the interest rates and print money out of thin air, the Fed has created and popped all the bubbles of the last 40 years.

Obama Years: The “recovery” under Obama was the result of two tools of Fed’s financial engineering.

The first is the reduction of interest rates to 0% – this came to be known as ZIRP (Zero Interest Rate Policy). This lasted almost the entirety of Obama’s terms. Cheap debt always creates a lot of economic activity.

bubble - Obama years

Second, to really spice things up, the Fed printed trillions of dollars out of thin air and used it to buy government bonds and mortgages among other things. This illegal and so-not-free-market action was given a nice name, Quantitative Easing (“QE”).

bubble - QE

Consequences: So while seemingly the economy recovered, it created many short-term and long-term disastrous consequences.
1) People who save money – rare these days, but think of retired people – were devastated by the drop in interest rates. Imagine a retired middle class couple with $200,000. They lost about $10,000 a year in interest. Pension funds have also been severely affected.
2) Low interest rates allowed the government to borrow like a drunk sailor. Obama and Congress borrowed $10 trillion and doubled the national debt.

debt- Obama

3) Mortgages became cheap again during Obama years. The banks also reduced the standards for down payments, credit scores etc. Thus we have Bubble 2.0. This is only wealth effect, as the bubble will pop again.
4) Obama’s government gave out $1 trillion in student loans like Santa Claus. Young people loved it, but now close to 40% of Millennials are living with their parents, unable to pay back the loans.
5) Corporations borrowed trillions at low interest rates and used that money for buybacks, thus boosting their own stock prices. (No, corporations didn’t use the debt to create new products and employ new people). CEO’s then got big bonuses, based on stock performance!

Past Boom-Bust Cycles: By understanding the Fed’s interest rates, you can view the administrations of past presidents through a new prism.

Let’s start with Jimmy Carter:

Fed - Carter

You can see how insanely the interest rates were raised from about 6% to 17.5%. Also, like a bipolar patient, the Fed dropped the rates by 8% points in 1980 and then raised it by 12% points again. This is insane monetary policy that will wreck any economy.

It’s no wonder that the Carter years were terrible, inflation was high and he lost the reelection.

Reagan Years: The overall trend was constantly and massively decreasing interest rates. Just based on this, one could have predicted the booming 1980s. Also, if you thought this would lead to bubbles, you’d be right. The housing/real estate market had a bubble which burst (and bankrupted Donald Trump); and the stock market bubble famously burst in 1987.

Fed - Reagan

crash 1987

1987 October Stock Market Crash


Clinton Years: For the most part, the Fed rates were stable between 5% and 6%. When the dot com bubble too hot, the Fed raised the rates at the end of Clinton’s terms and popped the bubble.

Fed - Clinton

Bush Years: Very simply, the Fed drastically lowered the interest rates after 9/11. This created the housing bubble, which got exacerbated by all kinds of shenanigans — liars loans, subprime loans, 0% down payment, banks bundling the loans and selling them away etc. Then, when the Fed raised the interest rates from 1.5% to 5.25%, it’s no surprise that the bubble burst.

Fed - Bush

If you’re wondering why the entire EU zone’s bubble burst at the same time as the US, the answer is simple: the US and EU are controlled by the same banking cartel. Their interest rates were – and still are – perfectly synchronized

bubble - central banks int rates sync

The Central Banks also have printed $14 trillion out of thin air to buy stocks and bonds, most of that happening since the great financial crisis of 2008. This voodoo economics was also coordinated — first the US Fed did it (QE1, QE2 and QE3) and, when it stopped, Japan and ECB picked up the (digital) printing press.

bubble - central banks QE

The mainstream media and the politicians never discuss the Federal Reserve Bank. That’s one of the amazing idiosyncrasy of USA, the “free” country.

who rules


Author: Chris Kanthan

Related Article: Financial Crisis – Imminent and Inevitable

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