Saturday, February 6, 2010

Americans Become Poorer as Our Money Flows to Banks

I was standing on line in Hannaford's supermarket on route 9W in Kingston, New York yesterday when I overheard two elderly women talking. One told the other that she had less money than in years and that she was starting a garden in order to provide herself with food, something that she hadn't done since her childhood during World War II. I suspect part of the reason is the freezing of the social security increase this year. The town in which I live, Olive, NY, raised taxes by six percent even as the social security administration claims that there is no inflation.

The ongoing transfer of wealth to money center banks and Wall Street has intensified under the Bush-Obama administration, with the claim that America desperately needs financial firms to stay in business despite ongoing abuse and mismanagement. In fact, the Fed heavily subsidizes money center banks and Wall Street even in good years.

In basic economics, the notion of a firm is that a good or service is provided in exchange for payment. The reason people pay firms is that they produce a valuable product. Numerous firms compete and price is driven to approximate long run total costs, eliminating excess profits.

In the case of Wall Street and the money center banks, there is no product produced. Trading stocks or borrowing money from banks to purchase securities in other currencies is not of value to anyone except the beneficiaries of the loans. But when they lose money, the federal government claims that the loss of investment banks would be harmful to the public.

This, of course, is nonsense. Firms that produce value do not need subsidies. The trillions that have been donated to the Wall Street Welfare mothers are proof that Wall Street produces no value and ought not to exist.

The Fed has been printing large amounts of money, and handing it to money center banks who in turn lend it to Wall Street for speculative purposes. This has been going on since the Fed began. The increase in the money supply reduces the financial holdings of non-loan beneficiaries. Lower and middle income retirees with certificates of deposit become poorer as the Fed cheapens the value of their assets. Wealthy people with stocks and extensive leveraged real estate holdings become wealthier.

In recent decades this process has resulted in misallocation of resources. Since World War II there has been over-construction of private houses at the expense of inner cities and investment in manufacturing and risky start ups. As a result, the best jobs have left the country as massive numbers of useless, super-sized houses have been constructed. In turn, the same party, the Democratic, that has pushed for massive subsidization of unnecessary construction of large, expensive-to-heat houses cries about "sustainability" and "global warming".

Now, wealth is being transferred from middle class bank account holders and workers simply to subsidize investment in the carry trade, borrowing at zero interest rates to invest at higher rates overseas. The welfare mothers on Wall Street have become increasingly brazen.

The grandma on line in the supermarket is seeing taxes and other prices rise while her income is stagnant. But hedge funds and Goldman Sachs are lent billions. This has become an economy managed largely for the benefit of a financial elite at the expense of the average American. America increasingly becomes a poor country to subsidize non-valuing creating investment concerns and government looters.

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