Wall Street Versus Federal Reserve

The guys – and they mostly are males, not women! – on Wall Street are in the investment game for one thing: making money for themselves. To do that they have to make money for others as well; that comes with the territory. But the main point to remember is simply this: profits from trades and investments are the only goal.

What might be other goals you ask? Well, several goals come to mind. These will do for now:

1. Stable markets in which to invest safely for the long term
2. Stable funding for key industries upon which other industries rely
3. Stable currency values for transacting business in all other matters – domestic, foreign, commodities, interest rates, inflation and deflation rates, etc. 

As you can quickly tell these goals are well suited as policy goals. They are not goals for those who wish to make stunning profits from trading equities. Those folks do best when they upset markets and make their moves while values are shifting to adjust to the imbalances they create for the sole purpose of making money.

You doubt this goes on? Oh please! When exactly were you born? And were you protected from reality all of your life?

People do bad things for selfish reasons. Look at offshore investment vehicles to support my point. Observe also all of the tax avoidance schemes readily available to those who take the risks. And follow closely the actions of paid lobbyists as they manipulate elected officials all over the globe for favored legislation that will either protect their profit centers unfairly, or avoid taxation of profits, or in any other way provide a morsel of advantage over competitors so profits can be generated out of view.

Wealth accumulation in the manners described above have been with mankind since the inception of trading, currency creation, and legislative activity. It is the way of the world. It is unfair. It is unkind. It is against the law often. It is a scourge that we may never rid ourselves of. A fact of life.

So, why bother saying any of this? Because the Federal Reserve is attempting to maintain a healthy economy in spite of all the other players. Congress certainly does not understand how the economy works, but they do understand greed and the benefit they derive by giving seekers of favors what they want. They – the elected official – gains money or power and that’s all they want. The seekers want unfair advantage over others financially and get it from the elected officials.

Destabilization of the markets is the result. And the Federal Reserve’s job is to offset those results in order to maintain a stable market for the long term benefit of the rest of us. And the industries that rely on stability, the pension fund managers, major institutions that do the work of society (churches, universities, hospital and medical researchers and medical providers) and of course banks.

The guys on Wall Street, however, think interest rates are too low. That’s because they make money with interest rate fluctuations, especially when those rates are much higher. The margins these days are so low that one doesn’t actually make a living off of interest rates. So, what to do? Lobby for higher rates. But a funny thing exists that everyone touts but most ignore when it gets in the way.

The free market. That’s right, the free market dictates that interest rates are low when demand for borrowed funds or investible funds are high and the supply of such funds are low.

So, you ask what is the demand for borrowed funds and investment dollars? Well, one telling answer is this: how many loose cash dollars exist in the American economy at this moment that would be available for loans and investments? And the answer would be more than $5 trillion. That figure is probably much higher but at that amount it doesn’t matter if there is another trillion or so lurking around.

With so much available cash sitting idly, interest rates are low. That’s the point. And that’s the truth.

Wall Street guys will try to change your mind but they run into the above fact each time.

What they should do is create exciting uses for idle cash and attract it into play. When most of it has been so employed, then additional use will come only at higher interest rates. See how that happens?

Until we have settled the idle cash question, interest rates will remain low. Get it now, and move on.

The Federal Reserve is doing what it needs to do. Leave them to their function and expertise. For Wall Street guys, leave them to their greedy function but remember whose benefit is being served. It really isn’t yours; it’s theirs.

And that’s another fact of life.

Your welcome!

April 11, 2016