Third Major Transfer From the Middle Class to the Wealthy

Mish

The Fed is robbing the middle class once again.

For the third time in 20 years, the Fed has targeted the middle class for the benefit of the wealthy.

Don't believe Fed lies. Its bailout of risky debt including junk bonds helps investors, not employees. 

Once again, the Fed Punishes Prudence.

The Fed will deploy more than $1.45 trillion in support of investors in leveraged assets—more than double the size of the 2008 Troubled Asset Relief Program, and over $7,000 for each working-age American. That includes $750 billion to purchase recently downgraded junk bonds and bond exchange-traded funds—an unprecedented intervention in the private credit markets.

Pumping trillions of dollars into corporate credit and even high-yield debt will further distort markets already shaped by a decade of easy-money policies. This is no abstract concern. The result will be an acceleration of two economy-wide transfers of wealth: from the middle class to the affluent and from the cautious to the reckless.

The transfer from the middle class to the wealthy continues a trend begun in the wake of the 2007-09 financial crisis. 

But bankruptcies among highly leveraged businesses often pose surprisingly little risk to employment. More often than not, creditors choose to keep businesses staffed even when restructuring to retain value for the long-term. By preventing these bankruptcies, the Fed is doing more for equity holders and junior creditors than for employees.

Almost Spot On

Authors Sam Long and Alexander Synkov are almost spot on.

What did they get wrong?

This trend did not begin in the wake of the 2007-09 financial crisis.. Rather it's been an ongoing process. 

Importantly, this is the third major acceleration in the process. 

  1. The first major acceleration began in the wake of the dot-com bust when the Fed bailed out the lenders who made loans to worthless companies. Housing prices soared to the moon as the Fed stood by and watched. Bernanke denied there was a bubble. The transfer of wealth to the likes of companies like Countrywide Financial was massive.
  2. The Second acceleration was in response to the bust. For the second time, the Fed held rates too low to long.  Asset prices went to the moon and speculation surpassed that of the housing bubble and the dot-com bubble.
  3. This preposterous entry into Junk bonds and other bailouts is the third major acceleration and the Fed had to bend some rules to do so. Buying junk bonds is illegal under its actual mandate.

Pole Vaulting the Boundaries

Some claim the Fed pushed the boundaries by buying junk bonds.

I suggest When you take illegal actions and enter numerous uncharted territories on balance sheet expansion, junk bonds, and bond ETFs you are not "pushing" the boundaries, you are pole vaulting over them.

Too Big to Fail

Note my post earlier today: Carnival Deemed Too Big to Fail, Rescued by the Fed.

Carnival needed money. The Fed became the lender of last resort.

Carnival could easily file for bankruptcy reorganization and reschedule debt payments.  One of my friends commented "This is just a play to save the equity, who are Trump’s friends." 

OK but why would the Fed do this? 

"Because he has appointed a ball-less group of wimps. It largely does what he wants. Particularly on a petty issue like this," replied my friend.

The transfer of wealth from the middle class to the wealthy just accelerated.

What constitutes "too big to fail" keeps getting smaller and smaller. 

Why Rob the Middle Class?

Some may be wondering why the Fed has targeted the middle class. 

Because as Willie Sutton once replied when asked why he robbed banks, "Because that's where the money is." 

The poor do not have any assets or money left to setal. 

There Are No Temporary Measures, Just Permanent Lies

Under guise of virus support, the Fed Will Buy Junk Bonds, Lend to States to the tune of an additional $2.3 trillion in additional aid.

Dear Jerome Powell, please tell the truth. This is not virus support, it's stock market support.

This new junk bond "tool" is now permanent.

Always remember, There Are No Temporary Measures, Just Permanent Lies.

Mish

Comments (101)
No. 1-31
JohnB99
JohnB99

How's the saying go, privatize the profits, socialize the risk...whatever.

I always hoped we learned lessons in 2008. Guess that was foolish.

El_Ted0
El_Ted0

The FEDs actions, deplorable as they are, are trivial to the crimes against humanity of this hysterical lockdown.

Realist
Realist

The poor US middle class (and those no longer part of the middle class). Many of them (particularly those who are no longer middle class) voted for Trump as he promised to get their middle class jobs back (coal, steel, various manufacturing). Instead, he gives tax breaks and bailouts for the wealthy.

Trump promised MAGA, and he gave them MADA (Make America Destitute Again).

LouMannheim
LouMannheim

When do people say enough? I keep thinking the majority of ill will in this country is manufactured in concert by the wealthy in both parties. Just look at all the stimulus allocated so far, the proles are still waiting for their $1,200 ...

thimk
thimk

but are the uber wealthy really that intrinsically wealthy. ok so the feds saved the equity. But did they really ? stocks have no underlying value anymore. let's take a look a the price to book ratio shall we ? no Wonder why Buffet isn't buying anything. just a thought .

xil
xil

@Mish, you say, "The Fed is robbing the middle class once again" but i ask, when has it ended?

i am not being facetious above or below.

is this not the fed's raison d'être?

RonJ
RonJ

"The first major acceleration began in the wake of the dot-com bust when the Fed bailed out the lenders who made loans to worthless companies. Housing prices soared to the moon as the Fed stood by and watched."

The FED stood by and cheered. Paul Krugman noted someone who said that Greenspan needed a housing bubble to recover the economy from the .com bubble.

Voila- Bush Jr. announced the Ownership Society program. Later on, Greenspan thanked bankers for getting people into homes they otherwise could not afford.
Prior to Greenspan thanking the bankers, the FBI had warned congress of massive mortgage fraud.

It doesn't take a brain surgeon to put the dots together.

tokidoki
tokidoki

Middle class? What are you talking about? That concept disappeared a long time ago. There's only the top 10% and the bottom 90%.

Sechel
Sechel

The Fed has been stealing form the middle class for decades giving it to borrowers and those with primary access to capital. The Fed isn't unique other governments do the same. Ironically the Fed gets cheers for doing so. Who doesn't like lower mortgage rates? Except the net effect is a drain on savers and consumers.

Doesn't just hurt savers, it hurts pensions and insurance companies and anyone that must fund liabilities. For pensions that must present value their liabilities its a double penalty. The liability goes up and the ability to fund it is hurt.

numike
numike

"Did you ever think one day you'd live through a global pandemic, with a doomsday virus, and the Joker is president? Sounds like a bad made-for-TV scifi movie.”
― Oliver Markus Malloy

Schaap60
Schaap60

Globalization and outsourcing pillaged the working class for the benefit of the middle class and affluent. Since the working class is largely tapped out, the pillaging is just moving further up the ladder. At a certain point a critical mass of people will realize just how much they've been screwed by both parties. I doubt it ends well. Then again, bread ($1,200) and circuses (Netflix) may buy the establishment more time than I can imagine.

numike
numike

Middle class culture, any culture, can only stand if it is rewarded. In prior times the middle class culture was fundamentally supported by the upper classes, who invested in America, creating vast wealth.
They modeled sobriety, hard-work, risk and reward. The working classes modeled the behavior through church and labor unions, standing together for each other and nation.
The wealthy have abandoned America, and the working classes have abandoned religion, unions, and each other. Into that void steps cultural anarchy.
Our culture requires hard-work, and discipline. It requires accountability, primarily of the wealthy. I tire of articles that lament the loss of culture without holding those accountable who have abandoned their responsibilities.

JoeJohnson
JoeJohnson

I'm starting to think Biden can win despite all his inadequacies and lack of mental acuity

Tengen
Tengen

While the middle class is getting boned (as usual) I find it hard to muster TOO much sympathy. They only stay angry for a short time before going back to sleep and pretending all is well. They're going to keep getting shafted (schlonged?) until they stand up for themselves.

Too many people think they have an inalienable right to go through life sleepwalking because they "work hard" at an office somewhere. Each time a disruption happens they can't wait to go back to obsessing over abortion, race, religion, gender, or any of the main wedge issues, or just vegging out to TV and sportsball. They need to learn to focus on what matters, and if it takes a great deal of pain to learn that lesson, so be it.

DBG8489
DBG8489

"When you see that in order to produce, you need to obtain permission from men who produce nothing - When you see that money is flowing to those who deal, not in goods, but in favors - When you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you - When you see corruption being rewarded and honesty becoming a self-sacrifice - You may know that your society is doomed."

Corto
Corto

I'm not following... please someone explain how the Fed buying junk bonds is taking money from me (middle class)?? Will it make something more expensive? Will I see a tax raised? Something else?

Mr. Purple
Mr. Purple

I argue that the term "middle class" is apologetic. The correct term is working class. Properly understood, the only class that produces anything of value is the working class; ergo, the only source of revenue is generated by and stolen from the working class. It can be no other way under this system.

This is also the reason why morals can only be found among the working class, never the rentier class or welfare class.

The world as presently constituted makes a lot more sense when understood this way.

amigator
amigator

Can you say Payroll Tax Cut? One way to start giving the middle class some of its money back. The Fed will not deviate from its course or mission. Ironic it will own a cruise line because the Fed is the ultimate Titanic. There is no turning back now the US will amass debits that will make Japan small again. Grab what you can who knows it might just keep you alive long enough to be rescued.

PS. Only one voice that I have heard payroll tax cut mentioned. I will give you a hint it was somewhere in-between hydroxychloroquine and Lysol comments!

55AJS
55AJS

Nonsense. This war on the middle class began in 1982. It is only now that the funny money rates approach zero that the emperor is discovered to be undressed.

hmk
hmk

If these actions are not really legal by the FED why doesn't someone pose a legal challenge? Is this not possible? I would hope so. This could be considered the
full employment act for the legal profession.

Webej
Webej

I disagree. This all started in 1984 when they decided to rescue the Continental Illinois bank, marking the first upward surge in stock prices, or arguably the second leg after the Mexican debt rescue in 1982. This was the start of financialization, derivatives wagging the dog by the tail, the Fed put, and the era marked by a newly coined term: "wealth creation"

Wealth creation was never about production, but about money castles.

FromBrussels
FromBrussels

Excuse me Mish, but this is a bit of a too populist, black and white story ! The middle class, whatever that may be, by lack of alternatives, is also heavily invested in the markets (bonds and stock) so the bailouts, justified or not, might save a middle class ass or two.....

UrbanDigs
UrbanDigs

It is what it is. Fed is trapped. Will do whatever it takes to keep system from collapsing. That means mitigating credit events, but they will happen anyway. Might as well play it.

WildBull
WildBull

I've been waiting for my bailout check since 2009. My patience is running out.

Jdog1
Jdog1

The Fed has not purchased any junk bonds. If someone can show an actual junk bond purchase, I would like to see it.

CorkOConnor
CorkOConnor

Don't vote. It is a waste of time. You're not going to change anything. Instead, spend the time that others spend on politics and candidates and learn what is going on. Then slowly begin to disengage from the system. Pull capital. Move way out and off the beaten path. Keep a low profile. Live your life. These people are evil. Everything they do is for their own benefit, not yours, not mine.

Casual_Observer
Casual_Observer

Being middle class is the middle class's fault. You never get anywhere unless you understand how to make more money then you need. I say that as someone who was once part of the middle class but is now part of the top 2% of income. If you arent climbing up the income strata, then you are making the wrong choices.

Casual_Observer
Casual_Observer

By the way you can blame the Fed or whatever system is in place. But the truth is this is what victims do. 35% of the country is doing better during coronavirus due to the understanding they have and the choices they made. My parents were part of the middle class and made bad choices at times. I was able to understand what they did wrong and improve my lot in life. We are the pilots of our lives.

maynardGkeynes
maynardGkeynes

I’m opposed to this because it looks to me like it’s at the expense of taxpayers. However, we do have a progressive tax system, which taxes the rich at a higher rate. I don’t quite see how it’s all or even mostly at the expense of the middle class. But, I am open to persuasion, because I do think this is awful on so many other levels.


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