E The Federal Reserve Financed WW2 But Cannot Finance America Now

Congress could permit the Fed to finance key drivers of the economy, like good roads and bridges. In a backdoor sort of operation, the Fed was used by congress to finance the last highway bill, as explained by Ellen Brown on Talkmarkets.

Some critics have said that the Congress overstepped but it is a complicated argument that really is not convincing. Even if the Fed claws back the funds, the highway bill is funded and the congress has set precedence for the Federal Reserve.

When looking at all the Fed did during World War 2, this is a very minor tweak of Fed policy. There are, of course, Build America bonds. But they are issued by state and local governments and are not backed by the full faith and credit of the United States. The Fed could pedal special treasury bonds that build America. But it doesn't.

Yet many are ready to pounce on the Fed for being the lender of first resort, even in the limited way Ellen Brown explained in her article. Libertarians do not want the Fed to be out front in any plan to rebuild America.

Libertarian anarcho-capitalist Doug Casey makes the case that low interest rates cause a misallocation of capital, which allows financial engineering. But in my opinion that is less a function of low interest rates than it is a function of stupid business leaders.

Casey makes a good case, however, that across the board stock buybacks is a massive misallocation of easy money. He shows earnings per share have been stagnant since 2013.

But I doubt the answer of most libertarians would be to let the Fed be the engineering lender into real projects for US growth, although I am sure Casey would prefer real growth to the economy rather than the fake growth we have now.

I am not saying that companies buying back stock is not a financially wise decision. It could be, depending on the business. But when they all do it at the same time it becomes a bit of a fraud, making the stock market look stronger than it really is. Earnings would tumble without stock buybacks. And the market would have cratered without the illusion of wealth creation. 

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Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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Barry Hochhauser 4 years ago Member's comment

Fascinating, this was a side to the Fed I had no idea even existed. Heroic indeed. Shame we seem to have lost some of that heroism over time.

Gary Anderson 4 years ago Author's comment

Yes, certainly, Barry, you wonder why the Fed is so timid nowadays. The darkest interpretation is that it is a globalist conspiracy, and the US was more useful then than now. And/or it is because the banks bet on low rates now and the Fed is bank first and economy second. I hope those are not the real meaning of this failure of the Fed to work with government to get America moving. I am convinced that the Fed does bet on low rates and that is having a huge impact on the new normal.