The United States just saw the worst monthly unemployment report in its history by far. But bizarrely, the stock market actually rallied on the news. Indeed, since late March, the major market indexes have all increased by over 30 percent. What gives?
What we are seeing is the discrepancy in effectiveness and generosity between the rescue given to large banks and businesses by America's central bank, the Federal Reserve (or Fed), and the rest of the population, which is barely staying afloat on haphazard and incomplete aid measures from Congress.
The Fed rescue in concept is not the problem — it is not wrong to want to keep the financial markets from seizing up or big businesses from collapsing, because that would lead to even worse economic disaster. However, there is no reason why the Fed should not be demanding egalitarian reforms to the institutions it is supporting, or why it shouldn't include the rest of the American people in its luxurious grasp.
Let me first review what's been happening. The Fed has been printing up trillions to spend stabilizing various financial markets, buying Treasury bonds, corporate debt, municipal bonds, and even risky "junk" bonds. They also have levered up the $454 billion corporate slush fund Congress appropriated (and overseen by Treasury Secretary Mnuchin), making the total loan program worth about $4.5 trillion. It seems that the corporate sector and the top of the income distribution are absolutely swimming in liquidity, and since returns on safe U.S. debt are lousy, and a few big companies like Amazon are doing very well, money is flooding back into stocks — so the markets go up even as unemployment skyrockets.
We should consider what this means carefully. Many people have characterized the Fed market-stabilization efforts too hastily as actual cash payments to Wall Street, which is not really the case. A lot of economics writers tut-tutted that the Fed was simply restoring normal important market functions to head off a financial crisis, not providing a benefit from the state, and leftists who suggest otherwise are rubes.
While narrowly accurate, this view is badly incomplete. It is true that the Fed is not directly handing money to Wall Street banks or anyone else — these are only loans for the most part — but it is true that its power is the foundation on which the financial system rests. Even in normal times, the backing of the Fed provides the credibility, security, and fraud protections that allows the whole thing to run — indeed, it directly owns and operates half the American payments system. So it is not quite accurate to say these crisis measures are a subsidy, because that implies some pre-government market baseline that does not exist. The deep truth is that there is no such thing as a "normal" financial market absent state intervention, because the entire banking system is effectively an outgrowth of state power. Without the Fed's constant support, and regular access to its ability to print infinite money (this is the second time in a decade that it has blasted the big banks with trillions in cheap credit), the whole thing could not even get off the ground.
Given that inescapable state backing, it is entirely proper to consider who benefits from it. One argument for the orthodox economics view is that banks merely "intermediate" between savers and borrowers, (taking money from the thrifty and loaning it to entrepreneurs and home-buyers, etc), and so using the printing press to keep markets operating is a mere technical operation without any political import. But this is obviously preposterous. If financial markets actually worked this way, then finance would be a low-margin business as banks competed with each other on loan terms. Instead, finance is ridiculously profitable — rising from about 10-20 percent of corporate profits in the early 1980s up to a high of 40 percent in 2002, and stabilizing at about 20-25 percent today. Corporate profits as a share of the economy have also increased markedly over the same period, as well as the per-unit cost of financial services.
This happened because finance exerts enormous political control over the rest of the economy. The "shareholder value revolution" forced most big companies to pivot from investment, research and development, and worker compensation towards disgorging immediate profits and borrowing into the Wall Street maw. This has outright killed many productive companies. Financial buccaneers have also coordinated vast numbers of mergers and acquisitions, rolling up competitive markets into monopolies and oligopolies for easy profits and fat fees for banks. Financial markets do not work remotely like Econ 101 models and never have.
Therefore, there is every reason for the Fed to structure its bailouts — both for banks and big corporations — such that these and other noxious trends are reversed. Companies should be forced to keep their workers on staff, drastically cut executive compensation, and hand over equity stakes so the public can collect the upside of future stock increases (which is not currently happening). Any company that doesn't like it can try swimming outside of the Fed kiddie pool.
Perhaps more importantly for the immediate future, there is no reason the Fed can't simply hand out printed money to every citizen. Currently it is legally forbidden from spending money in this way, but this technical distinction has already been deeply eroded, as it is buying up U.S. debt in gigantic quantities — effectively funding the massive coronavirus rescue spending through printing. Every adult could have a Fed bank account, and to keep people from starving during the pandemic, money (let's start with $2,000 per month) could flow directly into citizens' pockets in a matter of hours once it was set up. Paying out an equal amount to every citizen would be facially fair, and considering it as taxable income would allow the state to recoup payments to the rich on the back end. It would also be dramatically more effective economic stimulus than its "quantitative easing" experiments, which seem to mostly benefit the rich.
Free money for everyone would not only be useful today, but also during any future recession. It would not create inflation because during a recession there is slack economic capacity in the form of idle workers and factories. Once full employment was reached, payments could be dialed back down to a trickle to head off price increases.
Ultimately, the Fed is not some neutral, apolitical government agency that simply greases the wheels of the commerce. It is an enormously powerful and inescapably political institution that is propping up half the global economy at the moment. But its power and legitimacy rests on the whole American people, and while it is entirely proper to head off chaotic collapses in finance or business, that power should not be deployed to protect Wall Street's grotesque share of national income, or bloated CEO pay packages. If big corporations can get the benefits that ultimately flow from the power of the printing press, the rest of the American people should get a piece of the action.