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Third Major Transfer From the Middle Class to the Wealthy

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The Fed is robbing the middle class once again.

For the third time in 20 years, the Fed has targeted the middle class for the benefit of the wealthy.

Don't believe Fed lies. Its bailout of risky debt including junk bonds helps investors, not employees. 

Once again, the Fed Punishes Prudence.

The Fed will deploy more than $1.45 trillion in support of investors in leveraged assets—more than double the size of the 2008 Troubled Asset Relief Program, and over $7,000 for each working-age American. That includes $750 billion to purchase recently downgraded junk bonds and bond exchange-traded funds—an unprecedented intervention in the private credit markets.

Pumping trillions of dollars into corporate credit and even high-yield debt will further distort markets already shaped by a decade of easy-money policies. This is no abstract concern. The result will be an acceleration of two economy-wide transfers of wealth: from the middle class to the affluent and from the cautious to the reckless.

The transfer from the middle class to the wealthy continues a trend begun in the wake of the 2007-09 financial crisis. 

But bankruptcies among highly leveraged businesses often pose surprisingly little risk to employment. More often than not, creditors choose to keep businesses staffed even when restructuring to retain value for the long-term. By preventing these bankruptcies, the Fed is doing more for equity holders and junior creditors than for employees.

Almost Spot On

Authors Sam Long and Alexander Synkov are almost spot on.

What did they get wrong?

This trend did not begin in the wake of the 2007-09 financial crisis.. Rather it's been an ongoing process. 

Importantly, this is the third major acceleration in the process. 

  1. The first major acceleration began in the wake of the dot-com bust when the Fed bailed out the lenders who made loans to worthless companies. Housing prices soared to the moon as the Fed stood by and watched. Bernanke denied there was a bubble. The transfer of wealth to the likes of companies like Countrywide Financial was massive.
  2. The Second acceleration was in response to the bust. For the second time, the Fed held rates too low to long.  Asset prices went to the moon and speculation surpassed that of the housing bubble and the dot-com bubble.
  3. This preposterous entry into Junk bonds and other bailouts is the third major acceleration and the Fed had to bend some rules to do so. Buying junk bonds is illegal under its actual mandate.

 

Read Original Article at thestreet.com

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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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