The Federal Reserve can't save us. Can Trump fix the impending global recession?
The coronavirus pandemic is exposing some ugly truths about the world we live in and, as we head in to what now looks certain to be a global recession, another one is coming in to focus: the Federal Reserve can’t save us.
At 2.30pm on Wednesday the Fed chair, Jerome Powell, was due to hold his latest press conference. Like a lot of events, that meeting is now canceled. Powell pre-empted it by announcing an unprecedented second cut to interest rates on Sunday and unveiled plans to pump $700bn into the financial system.
For many it was deja vu all over again. After the last financial crisis the Fed rode in with very similar plans and it worked, sort of. If anyone thought that the Fed could pull it off again this time, the reaction on Monday morning swiftly put paid to that. Stock markets went into freefall.
The US has enjoyed 11 years of growth and yet interest rates have hovered close to zero since the last recession. Even when the going was good the Trump administration vigorously fought any rate rises (keen to pump up the stock markets at any cost) and Trump himself has threatened to sack Powell, who is supposed to be independent of political interference.
The Fed’s benchmark interest rate, used to set rates for everything from mortgages and car loans to savings and credit card rates, is 0% to 0.25% after the second rate cut. Powell has said he is not keen on negative rates – an Alicein-Wonderland development that has one Danish bank actually paying borrowers to take money off their hands – but it is hard to see what other tools he has.
Yes, the Fed can pump more money into the financial system, as it did last time, but this isn’t a financial crisis – at least not yet. Consumers, who make up 70% of the US economy, may get even cheaper loans but for now they have nowhere to spend it and consumer confidence is dwindling as fast as the nation’s toilet paper supplies. The situation will only worsen when and if people start to lose their jobs.
This is a crisis that will take congressional intervention to overcome. And that, frankly, is terrifying.
It is not hard to find fault with the Fed. Full employment is one of its mandates but it is largely uninterested in what sort of jobs are created. Its mandate is to maintain the status quo, not challenge it. Now, with the Fed sidelined, we will swap a calm, independent, voice for the bellicose buffoonery of the White House and a president who has made no bones about playing favorites with the crony business leaders he wheels out at every opportunity to chorus their approval.
The Trump administration is talking bailouts already for the airlines, hotels and others. What he can pass remains to be seen. Trump has no friends on the other side of the House and slim chance of making any. Even if he can get something approved, how effective will it be? The omens are ominous.
If you want to imagine what a Trump bailout will look like, look no further than his 2017 tax cuts.
“The rich will not be gaining at all with this plan,” Trump promised as he pushed through the $1.7tn cuts that the, then booming, US economy neither needed and which the future could ill afford.
The tax cuts were sold on a lie. “Our focus is on helping the folks who work in the mailrooms and the machine shops of America. The plumbers, the carpenters, the cops, the teachers, the truck drivers, the pipe-fitters, the people that like me best,” promised Trump.
In fact, more than 60% of the tax savings went to the most wealthy 20%, according to the non-partisan Tax Policy Center. Quite a number of them were in Congress.
Companies including AT&T, General Motors and Wells Fargo all promised to invest in new jobs. Instead they bought back their own shares and laid people off.
Sure, the tax cuts helped boost the 401k retirement savings plans most Americans now rely on in lieu of a pension. But the rises in share price disproportionately benefit the economic elite. The wealthiest 10% of Americans own 84% of all stocks and the top 1% of households own nearly 38% of all stock, according to research by the New York University economist Edward Wolff.
The tax cuts were such a dud that even Republican voters don’t like them. Bailouts for big business as the average American struggles with the Covid-19 crisis on top of healthcare costs, student debts and persistent low wages could be political suicide for Trump. Nevertheless he will have to do something – we can’t rely on the Fed any more.