Behind the stock market plunge

The stock market fell 4 percent on June 19 and 20 as the bankers and brokers rejected the optimistic economic projections of their central banker, chairman of the Federal Reserve Board, Ben Bernanke. In the process, financial experts confirmed that unemployment has stayed high in the last three years of the so-called “recovery.”

The Dow Jones industrial average plunged 206 points on Wednesday, June 19, and then a further 353 points on Thursday. Wall Street was reacting to an announcement by Bernanke that the Federal Reserve was planning to wind down its monthly purchase of $85 billion in bonds from bondholders.

When the Federal Reserve Board purchases bonds it does not spend cash. Instead, it creates money by opening up an account on its books saying that it owes money to the seller of the bonds. This has the effect of simply pumping money into the economy. It is a form of ongoing bailout that is allegedly aimed at stimulating the economy and indirectly at creating jobs.

To date, this policy has been a bonanza for bondholders and a complete failure for the workers. During this period when the Federal Reserve has been buying bonds, and in an earlier period when it was buying up bad mortgage bonds from banks and mortgage companies, real unemployment has been virtually unchanged. Well more than 25 million workers have been unemployed, underemployed or forced to work part time.

In his latest announcement, Bernanke said that the Fed would wind down the bond-buying program based on predictions that unemployment would drop to 7 percent in 2014, and that the “recovery” was showing strength and the job market steadily improving.

Why should the markets plunge if the future economic picture is rosy? If things were truly as Bernanke said, then the bosses would be looking forward to a future of higher profits and the market should rise.

Even if Bernanke thinks the economy is showing strength and the job market is rebounding, Wall Street doesn’t believe it.  That is why the market plunged. And because the bankers want to stay on the bond-buying gravy train, they have resorted to actually letting some truth escape regarding unemployment and the economy.

From the horse’s mouth — unemployment has not improved in 3 years

“The Fed has made the unemployment rate the measuring stick for its stimulus effort. It doubled down on Wednesday saying that it would buy bonds until the rate fell to 7 percent.

“But the unemployment rate so far has fallen almost entirely because people have stopped looking for work. The share of adults with jobs, known as the employment-to-population ratio, has barely changed over the last three years [emphasis, FG]. …

“’Why is monetary policy linked to unemployment as opposed to employment-to-population ratio?’ Amir Sufi, an economist at the University of Chicago, wrote on Twitter. ‘Seems bonkers. Does anyone seriously think the labor market is improving dramatically?’” (New York Times, June 21)

Economists at Goldman Sachs and other big financial institutions expressed similar positions.

The reason that the Dow went down 537 points in two days was expressed clearly by Paul Christopher, chief international strategist at Wells Fargo, the largest private mortgage company in the country, which has a large stake in getting things right. The bankers have given a vote of no confidence in the central bank.

“People aren’t sure that the economy is well enough for the Fed to pull back. … The market is signaling to the Fed that we don’t trust your assessment of the economy.” (New York Times, June 21)

This message should be seriously considered by the workers. It is now almost exactly four years since the so-called capitalist “recovery” began. The capitalist central bankers have been trying to promote a recovery by pumping in money and it has failed. There is no recovery for the workers.

Now that the financiers are facing the prospect of losing part of their bailout, they have begun to tell some of the bitter truth about the grim jobs picture and the dim prospects for the capitalist economy. Fightback is the only answer to Wall Street’s message.

Goldstein is author of the book, “Capitalism at a Dead End.”