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Federal Reserve Rains Money On Corporate America -- But Main Street Left High And Dry

First Posted: 11/03/10 03:42 PM ET Updated: 05/25/11 07:10 PM ET

Bernanke

Bill Gross will be one of the few to benefit from the Federal Reserve's announcement this afternoon.

The legendary money manager, who oversees more than $1.2 trillion at Pacific Investment Management Co., stands to profit off the plan hatched by the nation's central bank. The Fed announced that it will buy between $850 to $900 billion of U.S. government debt, also known as Treasuries, through June to spur the recovery. Over the coming months, the Fed will then communicate its specific plans well ahead of any such purchases, allowing wealthy investors and firms a chance to buy those assets first so they can sell it back to the Fed at a profit. Folks like Gross will be the biggest beneficiaries.

When it comes to helping Wall Street and corporate America, the Federal Reserve spares no expense.

It expanded its authority and bailed out securities and insurance firms. It tethered the main interest rate to zero. It more than doubled its balance sheet to $2.3 trillion by purchasing mortgage-linked securities and U.S. government debt. To arrest the free-falling economy and jolt it back to life, the nation's central bank has engaged in an unprecedented campaign to ensure banks have cash and corporations access to credit.

That part of the Fed's plan has worked. The economy is progressing through a slow, though not entirely visible, recovery. Employers are gradually adding workers to their payrolls. Industrial production is rising, as is personal consumption. The economy is slowly growing.

The problem is that the Fed's actions have served to help just a small, but powerful, constituency: Wall Street, and the firms that do the most business on it.

The rising tide the Fed ushered in with hopes that it would lift all boats hasn't materialized. Now, on the verge of another round of asset purchases and other steps in order to further bring down the cost of credit, questions are being raised over just who, exactly, the Fed would help.

Asked Thursday how he did "so well in the past 18 months," Gross, who runs PIMCO's $252.2 billion Total Return Fund, told Bloomberg Television that in addition to a variety of other investments he's made money "from mortgages, yes, in terms of buying them in front of the Fed and selling them to the Fed over the six- to 12-month period of time." Translation: the man who runs the world's biggest bond fund is profiting from buying securities he knows the Fed will eventually want, and then selling them to the Fed at a premium.

Meanwhile, families are being devastated by historic unemployment and record home foreclosure rates. Households and small businesses can't get credit. A quarter of homeowners with a mortgage owe more on that debt than the home is worth. Borrowers are declaring bankruptcy in near-record numbers.

"In my darkest moments, I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places," Richard W. Fisher, president of the Fed bank of Dallas, said last month before a gathering of economists in New York.

As part of its legal mandate, the Fed is required to pursue policies over the long-term that lead to "maximum employment, stable prices, and moderate long-term interest rates." But the extraordinary steps taken to battle the Great Recession's persistently high unemployment rate -- like buying Treasuries, mortgage-backed securities and the debt of mortgage giants Fannie Mae and Freddie Mac -- haven't been enough.

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