The ghosts of the Bernanke-Yellen Fed continue to haunt Americans

For most Americans, the economic impact of the coronavirus has been more devastating than the virus itself. Considering COVID-19 is particularly dangerous to those with pre-existing illnesses, the impact of the virus on the economy was predictable — it was already sick.

While President Donald Trump could boast record-high stock prices, America has long suffered from a population saturated with growing debt burdens, low savings rates and economic insecurity.

His administration deserves credit for deregulatory policy and tax cuts that did have real and positive impacts on wages and job gains so far. But it also inherited an economy that candidate Trump rightfully identified as a “big fat bubble.”  

It’s difficult to overstate the perverse consequences that the Bernanke-Yellen Fed has had on average Americans.

In the aftermath of 2008 financial crisis, the Federal Reserve’s major policy tool was a combination of low-interest rates and quantitative easing — expanding its balance sheet by purchasing U.S. Treasuries and mortgage back securities from U.S. banks. It also relied upon a new tool, paying interest on excess reserves, which meant that money that would have otherwise gone to the U.S. Treasury was instead used to pay banks not to lend.

When conservative commentator Tucker Carlson and the populist right rail against the consolidation of corporate power in the modern era, they are actually attacking the real impact of these policies — though their anger is rarely directed towards America’s central bankers who are at fault.

Low-interest rates empowered large companies to borrow cheaply, often resulting in buying up smaller competing firms without their connections to Wall Street. Meanwhile, the Obama-era Dodd-Frank Act served to increase the consolidation of the banking sector as it significantly increased compliance costs that proved insurmountable for many regional and local banks.

America’s post-2008 regime created a playing field that richly rewarded Wall Street and big business at the expense of main street and mom and pop shops. It is not a coincidence that the sharp increase in income inequality the West has seen in the past decade has come at a time of extreme central bank policy — a data point that is often ignored by leftwing academics who always seem to want the Fed to do more.

Even more perversely, the actions of the Bernanke-Yellen Fed actively punished Americans who did not ride up the resulting stock bubble. The Fed’s low-interest-rate environment – previously without any historical precedent – actively undermined the ability for savings to grow in traditional savings accounts, CDs, government bonds or other traditional conservative assets.

For American investors looking to see returns on their savings, they were pushed into the stock market and other riskier investments. This is true for both individual Americans as well as pension funds and insurance companies. The result is a financial system that has not only binged on debt but has systematically underpriced risk.  

This becomes glaringly clear when we consider the number of publicly traded companies with billion-dollar-plus valuations that have never been profitable. This includes modern-day “blue chip” companies such as Uber, Tesla and Spotify.

Meanwhile, other companies, such as Netflix, have taken on tens of billions of dollars of debt, even as its underlying business strategy has fundamentally changed from content streaming to content producer.  

As we saw in cases such as WeWork, it’s likely that many of these debt-laded businesses will eventually fail. In a healthy economy, this would be natural and healthy — freeing up capital that can be invested in sustainable business models. In an economy where American savings and retirements have been pushed into investing in these bad businesses, however, the widespread failure of these companies can be catastrophic — particularly in an age of passive investing in which robots guided by algorithms are trusted with the management of the financial future of so many.  

It didn’t have to be this way.

A Fed grounded in sound economic theory would have avoided the extreme hubris of our current generation of financial central planners. Instead of wielding weapons they didn’t fully understand to prop up Wall Street and the pre-2008 status quo, they could have allowed major banks to fail and reckless bankers to be held accountable for their actions. While such action would have meant short-term pain, it was vital for the creation of a less fragile financial system, with robust competition in banking.   

It would have also given Americans better options to grow their capital beyond the stock market. Instead of American savings being funneled through Wall Street, a healthy financial system would have allowed proper interest rates to encourage savings in small and regional banks — growing the ability of these firms to invest in local businesses. A world not directed by central banks means a financial world more aligned with local and regional interests, rather than that of globalist financial institutions. 

Unfortunately, rather than learning from the failures of 2008, world leaders seem to be doubling down on them.

The Fed has already returned to its 2008 playbook and is positioned to do even more going forward — with both Ben Bernake and Janet Yellen now lobbying for their successor to actively begin buying corporate debt. Doing so would only continue to make Americans beholden to debt-addicted companies, and make the eventual reckoning of their unsustainable business models all the more painful.

Tho Bishop is an assistant editor and political commentator at the Mises Institute.