Fed Chair Jerome Powell then answers, following what looks like a script because these loaded questions are now being thrown at him regularly. He admits that the Fed’s policies have increased asset prices, then says the Fed as a matter of policy doesn’t comment on asset prices, and hence cannot comment on asset bubbles, but then assiduously denies that this increased wealth of the asset holders, which he admits the Fed has engineered, widened the wealth inequality to the majority of Americans who hold no or nearly no assets, and who got shafted by the Fed. It’s like getting pushed on live TV into saying that, yes, indeed, two plus two equals three!
Dudley said that the Fed purchased these huge amounts of Treasury securities and mortgage-backed securities in March to bail out hedge funds, mortgage REITs, and others through the backdoor as the Treasury market went haywire. Hedge funds, he wrote, “were caught in an untenable trade of being long cash Treasuries and short Treasury futures,” and those highly leveraged huge trades began to blow up (transcript of my podcast).
And this, Dudley wrote in the editorial, “brings us back to moral-hazard problem: investors win during good times (they can assume more risk and earn higher returns) while the Fed and the U.S. Treasury (ultimately taxpayers) assume part of the downside risks when there is trouble in financial markets. This is likely to encourage even greater risk-taking down the road, making it more likely that investors and markets will need to be rescued in the future,” he said, adding, “This doesn’t seem to be a good road to stay on.”
“I think the merging of the Fed and the Treasury, which is effectively what’s happening during Covid, sets a precedent that we’ve never seen since the Fed got their independence. And it’s obviously creating a massive, massive raging mania in financial assets, and as you just pointed out, Joe, it has not spilled over to Main Street.”
AGR; Conservatives love claiming the dogma of ‘free market’ until they start losing money in it, and then they jump on the socialism bandwagon, getting a lions share of taxpayer provided social welfare, entitlements and bailouts.