Our housing issue is out now. Get a discounted subscription today!

Let Them Eat Credit

The new normal of low interest rates is designed to sooth the palpitations of capitalists, not to improve the lives of working people.

Traders work on the floor of the New York Stock Exchange at the opening bell on July 29, 2019 in New York City. (Drew Angerer / Getty Images)

The Federal Reserve is cutting the federal funds rate for the first time since the 2008–9 financial crisis. On Wednesday, Federal Reserve chair Jay Powell announced that the United States’s central bank will trim the rate by a quarter of a percentage point, bringing the benchmark rate to a target range of 2 to 2.25 percent.

Powell’s decision to reduce the federal funds rate marks a U-turn from last year, when the Fed was eager to pursue tightening. But these days trouble is on the horizon. Trump’s trade wars — the breakdown of talks with China, the steep tariffs imposed on Mexico — are fueling concerns of the spillover effect of “global factors” on markets.

The move toward easing puts the United States back in line with its global allies. The Bank of Japan just voted to keep its interest rate at -0.1 percent and will continue to buy more than $700 billion a year in bonds. Mario Draghi, president of the European Central bank, recently announced that the ECB will cut rates again this year, dipping further into negative territory, while the Bank of London says it will bring down its rates before December.

Low interest rates have become the new normal of global capitalism — necessary to, as Morgan Stanley chief economist Ellen Zentner recently observed, “sustain the expansion.”

Characterizing the last decade as an “expansion” is a peculiar sort of euphemism. What, precisely, is being sustained through central bank–engineered, low interest rates?

Observers point to the fact that the official unemployment rate hasn’t been this low since the 1960s, that equity markets are soaring, that the United States is enjoying its longest-running growth streak since before the Civil War.

But these achievements have an air of unreality about them. Perhaps in no small part because during the last decade of so-called expansion, wages have barely budged, despite low official unemployment.

Indeed, a lack of wage growth is one of the justifications Powell gave for the “mid-cycle adjustment,” telling Congress last month that wages are “not responding” to the expansion. Fed officials had hoped to see a gradual easing of slack in the labor market, which would in theory push up inflation (to more than 2 percent) and increase wages — which, taken together, would justify putting the federal funds rate on a path toward a more “normal” 4 to 5 percent.

But it hasn’t happened. Official unemployment is expected to drop to 3.5 percent by the end of 2019, yet wages for factory workers and non-manager service workers (82 percent of the workforce) have been stagnant for three decades. In ten years of expansion, only the top decile has seen substantially improved wages.

Recently, some economists have asserted that wage stagnation is a myth. Pointing to Americans’ bigger homes, increased number of dishwashers, better cars, and smartphones, they argue that working people are doing just fine. They blame the appearance of stagnation on one of economists’ favored metrics, the consumer price index (CPI), which they claim understates how much workers are being compensated and overstates actual price inflation.

But no amount of data torture can hide the peculiar features of the supposed recovery. Nearly 40 percent of Americans would be unable to cover an unexpected $400 expense. One in four children relies on food stamps to meet their dietary needs. More than half of US households don’t have enough in savings to cover more than one month of expenses, and according to the New York Fed, household debt reached a new high in the fourth quarter of 2018. Americans may have more color televisions than they did in the past, but the United States remains the most unequal wealthy country in the world.

The lack of wage growth is not the only noteworthy feature of capitalism’s new normal. A decade of easy credit (on top of a multi-trillion-dollar quantitative easing program), combined with a corporate sector emboldened by a generation of business-friendly reforms, has exacerbated a number of trends that exemplify the worst tendencies of capitalism.

A shining example is share buybacks. Buybacks — when companies repurchase their own stocks to take them out of the market, thus increasing their value — are a key feature of neoliberal capitalism. Both shareholders and corporate executives (who are often partially compensated in shares) love them.

In the past ten years, buybacks have become even more popular. Shareholders received a record-breaking $1.25 trillion in share buybacks and dividends in 2018, bringing the post-crisis decade total to nearly $8 trillion in handouts to shareholders and corporate executives.

Today more than 90 percent of corporate profits go to share buybacks and dividends. More and more companies are using cash to buy shares rather than invest in jobs or research and development. Alphabet, for example, just announced its first-ever share buyback program; the tech giant will purchase $25 billion of its own shares.

In our financialized economy, where so much wealth rides on fluctuations in the stock market, companies are pressured by institutional investors (including pension funds) to pursue stock repurchases. But most Americans aren’t benefiting — 85 percent of all stocks are in the hands of the top 10 percent.

Lowering the federal funds rate won’t push companies to invest in workers or brick and mortar expansions. Or, at least, in a decade of low interest rates we’ve seen little evidence that it will.

What’s more likely is that it will encourage more share buybacks, fortifying the trend of creating wealth through manipulating stock prices. In 2017, a third of share buybacks were purchased with debt.

A lower benchmark rate also invigorates the vultures. Private equity firms thrive in a low interest rate environment like the one we have now, and it seems, will have for a long time to come. PE firms like KKR and Blackstone operate using a leveraged buyout model, forcing the companies they take over to borrow a boatload of cash to pay for their own acquisition.

If the PE firms’ “divi recaps” or asset fire sales drive the companies they take over into bankruptcy, no problem. America’s two-century-old limited liability model ensures that PE firms are never on the hook for more than their equity contribution. Whether the company survives or dies, PE executives get paid.

Easy credit means PE firms can pile up debt on companies with abandon — the average PE-owned company today has debt levels that are eleven to twelve times earnings before interest, tax, depreciation, and amortization. And because interest rates are so low, PE investments become an extremely attractive destination for other investors seeking higher returns, perpetuating the leveraged-buyout model.

The unabashed greed displayed by corporate America is not just a result of easy money. It’s also nurtured by a broader ideological climate that privileges the prerogatives of business — that sees the private sector as a site of efficient, rational investment, of innovation and progress. In this climate, cheap credit is pegged as a tool to broaden and deepen the maneuverability, impact, and scope of private corporations.

This is the story we’ve been told for a decade anyway. The reality is far different. In addition to the colossal waste of share buybacks and the wanton destructiveness of PE firms, the last ten years of expansion have seen the privileging of firms that fail even on capitalism’s own terms.

Consider the ride-sharing sector. Uber lost $3 billion last year. Lyft lost a billion. Yet these companies, along with dozens of other loss-making “unicorns,” are Wall Street darlings. Their sky-high valuations rest on the promise they hold, the stories they tell about a future where AI, platforms, and self-driving cars solve everything.

In a low interest rate environment, it doesn’t matter if these companies make a profit. They can simply borrow money to bolster their cash flow, dumping billions into ventures of dubious value.

Instead of investing in modern, sustainable public transportation — something both rural and urban areas desperately need — capital is allocated to retrograde projects that increase fossil-fuel use and foster consumption behaviors antithetical to the needs of society. We don’t need self-driving cars — we need green subways, buses, and trains.

Some policymakers are challenging the new normal.

Elizabeth Warren recently introduced draft legislation called the “Stop Wall Street Looting Act” — a radical proposal that would effectively destroy the leveraged buyback model. Warren calls for an end to the limited liability rights of private equity firms. Her bill’s provisions would make PE firms responsible for the debt they pile onto their portfolio companies. If they drive a company into bankruptcy, the PE firm would be responsible for the acquired company’s debt, and by extension, for paying its creditors — including workers and retirees — what they’re owed.

Bernie Sanders, meanwhile, is tackling the issue of share buybacks. Along with Chuck Schumer, he recently proposed legislation to prohibit companies from repurchasing their own shares until they’ve demonstrated that they are looking out for other stakeholders first. Corporations who want to buy back shares would have to demonstrate that they pay a living wage to all their employees (including paid sick leave) and that they provide health and pension benefits.

The likelihood of these bills passing is nil given the makeup of Congress. Nonetheless, they signal a shifting common sense. They are fueled by a growing realization that the expansion that the Fed is so desperate to sustain is really just a decade of expanded gains for corporations and elites.

The new normal of low interest rates is designed to sooth the palpitations of capitalists, not to improve the lives of working people. Not only do firms funnel cheap credit into speculation rather than new jobs and investment, but also, a lower federal funds rate doesn’t mean cheap credit for everyone. Students can’t borrow loans for school at the federal funds rate. A low benchmark rate doesn’t help the people who are desperate enough to take out payday loans, or the families who rely on credit cards to buy groceries and gas.

The contradictions of a financialized capitalism are mounting, yet most elites and policymakers remain fixated on the balm of monetary policy. It’s time to try something else. If the post-crisis decade has demonstrated anything, it’s that monetary policy won’t bend corporate prerogatives to the needs of working people.