The Fed's "Growth-Buying" Scheme Is Failing

Shah Gilani

The numbers are in. And they are ugly...

Based on preliminary first-quarter data, U.S. GDP (gross domestic product) growth is 0.1%.

That's not much.

But then again what do you expect for $3.4 trillion of Federal Reserve spending to boost the economy?

So the question is, how is it possible that we've got nonexistent economic growth, or worse, negative growth and possibly another recession looming, when the Federal Reserve since September 2008 has spent $3.4 trillion to prime the economic pump?

This could push the whole economy past the brink...

The Ugly Truth on Fed Intervention

First of all, the preliminary GDP number, which is the total output of goods and services produced by labor and property minus imports, will be revised on May 29, 2014.

A majority of economists are already revising their estimates down into negative territory.

The consensus view expects the revised or "second" GDP number will actually show the economy contracted by 0.5% to 1% in the first quarter.

Not that the second quarter is expected to be bad just because of a slow first quarter. In fact, a majority of pundits, including the Federal Reserve itself, are saying because the first quarter was so bad the economy will bounce robustly in the second quarter.

But if they're wrong and the second quarter shows negative growth, that's really bad.

It's bad because two consecutive quarters in a row of negative GDP growth is the definition of a recession.

Why has the Fed intervention failed so miserably in spurring growth? It's an ugly truth but needs to be told.

Since the credit crisis, which spawned the Great Recession, the Federal Reserve has been trying to build a bridge to growth. The truth is they've spent trillions on their bridge efforts, but they can't deliver the destination.

Here's what's frightening: What seems like misguided Federal Reserve policies to stimulate economic growth by printing egregious amounts of money was never a misguided policy of trying to stimulate the economy. It was a massive liquidity and profit-making program designed to first save, then enrich, the nation's biggest banks.

Economic growth was the expected byproduct of the Fed's "trickle-down" banking bonanza.

Why It Didn't Work

The reason we're not seeing that trickle-down growth is because the banks aren't lending as they were expected to.

They aren't lending robustly into the economy because they've had to pay out billions of dollars in fines and legal costs.

That plus their former freewheeling speculative trading gambits with depositor money are being shut down thanks to Dodd-Frank and the Volcker rule, and they are facing their worst free-market enemy, a flattening yield curve.

It's common knowledge that all the nation's too-big-to-fail banks would have all failed if the Fed hadn't bailed them out. Any one of them collapsing, after what happened when Lehman Brothers imploded, would have brought down all of them like a professional bowler throwing a 50-pound ball down an alley with gutter guards.

It's impossible for there to be any economic activity if there are no banks. So, the Fed did what it had to do to save the big banks.

Shah Gilani

About the Author

Browse Shah's articles | View Shah's research services

Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.

Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.

Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.

… Read full bio