In November the Federal Reserve began creating $75 billion a month out of thin air through its second quantitative easing program, a government bond-buying scheme that provides financial institutions with cash and raises the U.S. governments budget deficit. Dubbed QE2, the Fed plans to carry this through June of next year.
After the Fed had lowered short-term interest rates to near zero in its initial efforts to stimulate growth, it enacted its first round of quantitative easing in early 2009, effectively printing $1.75 trillion over the course of a year.
One of their aims is to increase demand for government bonds and thereby lower long-term interest rates, which unlike short-term interest rates are ultimately determined by the capitalist market, not the Fed. This lower long-term rate is then supposed to encourage businesses and individuals to borrow and spend. But lately none of this has been happening.
Interest being paid on government bonds is instead going up in the United States and around the world. Worries of inflation because of money-printing in the United States and United Kingdom, and the spiraling debt crisis in the euro zone, is unnerving investors in sovereign debt denominated in dollars, euros, and pounds. And the concomitant rise in mortgage rates is having a similar effect on inflated real estate markets.
Financial institutions continue to pay down debt more than they are investing; their debt has declined from 121 percent of the gross domestic product in 2008 to 98 percent today. U.S. companies are hoarding cash. And individuals continue to snub enticements to spend on their credit cards, take out loans, or refinance mortgages as they try to save and reduce their debt burdens.
Credit card companies have begun a new round of pushing high-interest cards on individuals. They are now targeting those with low credit scores previously considered too high a risk by creating new subcategories and archetypes of people they have convinced themselves will pay.
Despite this, consumer credit in November heading into holiday shopping was at its lowest in six yearsexcluding federal loans pushed on students to pay for hyperinflated tuition on hopes they will be able to pay them off with higher-paying jobs after graduation. Workers are paying more with available cash and savings, rather than going deeper into debt.
In early December the Federal Reserve was forced by a congressional act and a suit by Bloomberg LP to disclose details of its lending in 2008-2009. The data reveals the degree to which a panic-stricken Fed acted behind the scenes to patch up the crumbling world financial systemto the tune of some $3.3 trillion. They did it earlier than many knew and took on big risks with very low interest loans and paltry collateral. It also illustrates the paramount role of U.S. capitalism as well as the deep interconnections between the financial systems of Europe and America that had developed along with the growth of the so-called shadow banking system made up of unregulated financial institutions dedicated to making money from buying and selling debt.
Federal pumps billions into European banks
The Fed responded in December 2007 to the impending financial crisis with a $10 billion loan to the European Central Bank. While pumping tens of billions into European banks, most went to U.S. institutions with Citigroup topping the list, followed by Morgan Stanley, Merrill Lynch, and Bank of America.
The failure of the various stimulus moves to turn the economy around has led to sharpening factional disagreements among capitalist politicians over how to deal with the crisis. Ron Paul, a Republican congressman from Texas who is opposed to the Feds very existence, was recently named head of the House subcommittee that monitors the agency.
In the latest effort to stimulate the economy, the Barack Obama administration put together a bipartisan $990 billion tax cut and spending bill, which is expected to pass Congress. It maintains and adds to tax cuts and business incentives enacted under the previous George W. Bush administration.
About 5 percent of the bill will be used to extend unemployment benefits for the millions of jobless who are between 26 and 99 weeks without work. There will be nothing, as unemployment continues to hover at 10 percent, for the tens of thousands even longer-term jobless who are being cut off monthly.
Concerned about the impact of all these stimulus measures on their rising national deficit, capitalist politicians are united in their determination to make working people bear the maximum cost.
A two-year pay freeze for employees of the federal government proposed by President Obama passed the House of Representatives December 8.
Govt stimulus is for the wealthy
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