'Free Money' will warp Wall St.
Leaders from Brazil to Germany have criticized the Federal Reserves project to print up $600 billion in free money. The world fears the move will spur inflation, warping global markets. But one place has more to lose than anyplace else: New York.
Fed chief Ben Bernanke is worried that the US economy remains stalled. So hes running his own stimulus.
He cant stimulate people to spend by slashing interest rates; theyre already at zero. So the Fed will ramp up a strategy it tried last year, Bernanke said last week. It will put extra zeroes on the figures in its bank accounts and use this “wealth” to buy government bonds.
This extra money in the economy is supposed to push up stock and housing markets, making people feel richer so theyll buy stuff, too. Presto Everything fixed!
The Fed wont spread its magic money evenly across the economy: The dollar-dropping helicopters will hover over Manhattan, as the Fed dollops the financial industry with this cash. This stimulus will dwarf New Yorks $32.4 billion from last years “Recovery Act.”
But printing programs arent the way to build a healthy financial industry.
At first, the money drop may seem to benefit Wall Street. The extra cash will let banks and investment firms borrow for cheap, pushing up the price of financial assets. Higher prices make Wall Street guys look smart and allows their firms to take higher profits and pay higher bonuses. Plus, other companies (and states and cities, too) want to take advantage of cheap borrowing and theyll pay fees to the banks to do those deals.
Thats how last years Fed “stimulus” propelled Wall Streets profits to a record $61 billion.
The problem is that underneath all of this paper, Wall Street the engine of New Yorks economy remains badly crippled, thanks to bubbleera injuries. Easy money doesnt heal it; it just numbs the pain, like a cortisone shot. It may let the Street keep “playing” at risk of doing itself (and New York) more serious injury.
In fact, its a bad omen that Wall Street has gotten flush again, even as it has shed jobs. After modest gains earlier this year, Wall Street by September had lost nearly 3 percent of its people statewide over the year before. It doesnt take as many people to spin government cash into gold.
What would a healthy turnaround require? Well, thanks to the mortgage and credit bust, banks and investment firms still have way too many bad assets on their books and theyre having an awfully hard time doing the boring grunt work of foreclosures and loan write-downs to get rid of the stuff. The industry should be focusing on this, even though it doesnt generate profits or bonuses just like youve got to do your dirty laundry if you want to go out.
At the same time, Wall Street should be easing its dependence on trading for a fast buck, something that didnt work in the bubble and will get harder, anyway, in light of regulatory “reform.” Financial companies should build up other parts of their businesses, like advising clients.
But now Wall Street could go on another bender with the Feds free money leaving the hard stuff for later. The Fed is making it hard to do the right thing. Good bankers know that theres little reward for virtue; if they hold back on the strategies that the Fed is encouraging, clients will be angry that theyre not making as much money as everyone else. Anyone who tries to do the right thing will be elbowed out by the opportunists helping create the next crisis.
And that crisis will come. Banks may follow the Fed in chasing easy returns but the Fed cant print forever. When the printing press stops, asset prices will fall taking financial firms down with them. If the Fed tries to print forever, global investors will dump our bonds, sending markets spiraling downward and harming New Yorks future as a safe place for capital.
Either way, New York suffers.
In the short term, even if the Fed propels finance toward big profits again, it makes it that much harder for Gov.-elect Cuomo and Mayor Bloomberg to rein in spending. The public-sector unions will have too good a tale: Bankers, responsible for 20 percent of state tax revenues, are guzzling Champagne, while poor people have no medicine. (Never mind that public workers arent poor.)
In the long term, New York needs Wall Street to fix itself even if that means lean years first. Thats the only way Wall Street can compete globally as Asian and European markets move to take over our business. Instead of getting smarter and leaner, our main industry is growing dumber and more government-dependent rotting the Big Apples future.
Original Source: http://www.nypost.com/p/news/opinion/opedcolumnists/the_fed_vs_new_york_Z1xg1iyQ04hApvbyDdG7rJ