The growing consensus that tax reform is an urgent necessity has made things easier for the Federal Reserve. Last week, the Fed revealed that it will soon begin to reduce its massive holdings of all manner of things, including mortgage-backed securities, bought up in the wake of the 2008 crisis. Those original moves were supposed to keep liquidity flowing in the economy and keep “toxic” assets from the balance sheets of going but teetering concerns. The thanks the Fed got after 2008 was the worst recovery from an economic slump since the Great Depression itself. Output never reached old trends, and millions quit on the idea of ever finding work.
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Ben Bernanke had a ravenous appetite for toxic assets. AFP PHOTO / Karen BLEIER (Photo credit should read KAREN BLEIER/AFP/Getty Images)
Now the Fed wants to sell the old toxic assets back into the economy. It must be mighty confident the economy can handle it. The prospects for business profits, loans paying off, and personal income must be pretty good, just now, if an injection of toxicity can work out all right. There must be a sense, at the Fed, that even if these things we always have called toxic assets are introduced into the markets, cash flow above costs will be so great that the losses can be covered. The Fed could believe that a general economic rise is in the offing, reducing, if not eliminating, the signature toxicity of these assets by making them paying once again.
Makes you wonder: what changed?
It wasn’t the passage of time. Remember “yesterday’s man,” President Barack Obama, to use the nickname the Wall Street Journal coined? He was in office for two months shy of eight years of the long march away from the Great Recession, a recovery which technically started in March of 2009, sixty days after the first Obama inauguration. That whole while, those nearly eight years, the Fed never thought conditions were right to release the toxic assets back into the world.
You can see why not. The Dodd-Frank Act of 2010 ladled on the banking regulations. It reduced the number of players in finance and forced the remainder to pass stress tests by posting their capital so it collected government interest payments instead of having a claim on the cash flow of newly successful enterprises. Government bonds, instead of real-world loans, care of Dodd-Frank, on the Obama watch.
Then the Affordable Care Act of 2011 and a host of other new welfare programs made it passing impossible for the average guy to go back to work and make more money, once you factor in the means-testing of the new benefits. Economist Casey Mulligan nailed it all along and called it the Redistribution Recession.
Among further things of that ilk, stimulus spending and so on. Therefore, during the Obama years, all eight of them, the economy grew at an aching pace, as the government financed itself into fatness, while the lower-tier of earners were goaded onto the dole. No wonder we had an opioid crisis.
Can’t throw toxic assets into that situation. Yet here is the Fed in September 2017 saying economy, here they come. So what changed? Eight months ago, President Obama was shuffled off the stage, and in came a new administration pledging as its top domestic economic priorities the canceling of regulations and tax reform. The former has been proceeding apace in the warrens of the agencies, the recent exhibit being the Education Department’s disempowerment of the Title IX discrimination mandates.
