Thursday, May 6, 2010
Should a Stock Market Decline Stop Us From Breaking Up the Giant Banks or Fully Auditing the Federal Reserve?
As of 2007, the bottom 50% of the U.S. population owned only one-half of one percent of all stocks, bonds and mutual funds in the U.S. On the other hand, the top 1% owned owned 50.9%.
From the San Francisco Chronicle:
Half of America has only 0.5% of the stocks and bonds
Source: Institute for Policy Studies
(Of course, the divergence between the wealthiest and the rest has only increased since 2007.)
As I noted in January:
We've never seen this before – such a huge rally, and the little guy is out.In other words, the stock market rally is due almost entirely to hedgies, pension funds, banks and other institutional investors, and not every day investors.
TrimTabs notes that small investors pulled out $14 billion net from stock mutual funds from the beginning of last year through mid-December, on top of a net $245 billion withdrawn in 2008.
Given that, at the end of September, individuals held 80% of the $19 trillion in stock in U.S. companies, both private and public - according to the Federal Reserve (see this, for example)- recovery will not happen so long as the little guys are sitting on the sidelines.
TrimTabs notes that most of $592 billion taken out of money market mutual funds last year has gone into bond and bond-hybrid funds instead.
No wonder David Rosenberg is saying:
- "People have been lured into two bubbles seven years apart, and for a lot of them it's over."
- "The bulls say if the market is up this much without retail investors, just watch when they come in, but it isn't going to happen."
- Investors who have not been spooked or angered by the market are probably too poor to buy anyway.
Many people say that keeping the stock exchange up is important to maintaining people's wealth. But since the bottom 50% of Americans don't have much skin in the game, and the giant prop desks are probably doing most of the trading, the stock market really doesn't affect most Americans very much.
After Hank Paulson initially asked for $700 billion to bail out the banks, Congress refused. Then the stock market tanked (and Paulson said there would be martial law unless TARP was approved), and Congress gave Paulson his bailout. They said they had to do it, because their constituents were being hurt by the stock market downturn.
As I pointed out last November, there are a lot of millionaires in Congress:
Indeed, Herbert argues that the real reason that Congress approved the TARP bailouts is that their money was on the line. In other words, they had a lot of skin in the game, and so they voted to bail out their own assets. But they just pretended it was for the good of the American people.
A report by University of California, Berkeley economics professor Emmanuel Saez concludes that income inequality in the United States is at an all-time high, surpassing even levels seen during the Great Depression.
The report shows that:
- Income inequality is worse than it has been since at least 1917
- "The top 1 percent incomes captured half of the overall economic growth over the period 1993-2007"
As others have pointed out, the average wage of Americans, adjusting for inflation, is lower than it was in the 1970s. The minimum wage, adjusting for inflation, is lower than it was in the 1950s. See this.
- "In the economic expansion of 2002-2007, the top 1 percent captured two thirds of income growth."
On the other hand, billionaires have never had it better (and see this).
Of the 535 members of Congress, over 44% - 237 to be exact - are millionaires. Fifty have net worths of at least $10 million, and seven are worth more than $100 million. By comparison, around 1% of Americans are millionaires. There is no other minority group that is as overrepresented in Congress. See this.
Whether or not Herbert is right (Paulson did pull a bait-and-switch), the information discussed above makes for valuable background for looking at proposed reform legislation and the stock market.
Specifically, I have seen many questions on well-known financial sites asking whether today's plunging stock market is related to top Senators' decision today to audit the Federal Reserve and break up the giant banks (and see this).
I have no idea whether there is anything to this question. But I do know that the economy can only be stabilized if the history of what happened is fully revealed.
And the Fed is an important part of what happened.
And I know that the economy can only recover long-term if the giant banks are broken up.
So ignore the short-term stock market scares. Fully audit the Fed and break up the mega-banks ... or the economy will never really recover.