December 18, 2015

The Fed’s New “Operation Twist”: Twisted Logic for Bank Profits at the Expense of the Real Economy

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets…recovery will fail unless we break the financial oligarchy that is blocking essential reform.

One could imagine a more honest case for rate increases: that sustained negative real yields promotes speculation (witness the proliferation of Silicon Valley unicorns), hurts retirees and savers, and puts the viability of long-term investors like life insurers and pension funds at risk. But given how weak this recovery is, and that deflationary pressures are strong, any rate increases should be accompanied by more fiscal spending. Yet the Fed has not said a peep on that front and instead hope the confidence fiary will come to the rescue.

The fact that the Fed is embarking on a policy that will perpetuate the financial system being outsized relative to the real economy, particularly when more and more academic studies confirm that that is negative for growth, confirms that the Fed needs fundamental governance changes to reduce bank influence and increase democratic accountability. A place to start might be having all the regional Fed presidents be nominated by the President and subject to Congressional approval.

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