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Wall Street has pulled off the greatest scam of all-time. I am not talking about the TARP plan, QE 1, 2 and soon 3, or even the transfer of trillions of dollars to the world’s banks through negative real interest rates set by the Fed. Rather, the extraordinary sleight of hand that Wall Street has pulled off is the transfer of risk from virtually all forms of investing to the government.
Nothing is more attractive to Wall Street than risk-free investing. What could be better than keeping all of the upside of an investment without concern that it might decline?
Washington’s deal with Wall Street is to take the risk out of their business. The terms of the deal are as clear as the participants. If the stock market weakens, the Fed will stimulate. If interest rates start to creep up, the Fed will lower them. Should commodity prices slip too far, more cash will be pumped into the system. If taxes are going up, stimulus will be applied.
Swap lines, essentially dollar loans to needy European countries, pile up day after day with no oversight by anyone. Even China can count on us to loosen or tighten our policy to suit their needs. In short, the Federal Reserve and Washington have become the world’s monetary vending machine.
What this all means is that Wall Street, Europe and the world have off-loaded their investment risk to the American taxpayer. It also means that investing has become almost impossible for the average individual. Let’s take a look at some investments.
• Savings accounts and certificates of deposits. With all the new money in the system, you’d expect at least a little inflation to push up rates on cash and equivalent investments. But the Fed has decided it wants rates to be effectively zero for short-term investors.
• Housing. Four years into the housing crisis, one would expect housing prices to have stabilized and started to increase. However, politicians and foreclosures don’t go together well and realized losses do not help shaky banks remain solvent. So housing goes nowhere and housing investors continue to suffer. Wall Street banks, however, can count on being able to pretend and extend for years to come.