The Fed and Perverse Incentives and Disincentives
“Insiders don’t criticize
other insiders.” – Laurence Summers – Former Treasury Secretary, as quoted by U.S. Senator Elizabeth Warren
By J.M. Hamilton
4-26-2014
An economics professors once told the class I was attending, that economist make terrific historians, but rarely get their forecasts right. He said economist constrained foresight had something to do with too many endogenous and exogenous variables. (Which explains why Dr. Nouriel Roubini is so famous, for correctly calling the financial crisis.) My former prof., it turns out, was exceedingly wise.
The Federal Reserve, largely run by academics and economist, being a case in point. Starting six years ago, the American public has been told repeatedly, since the financial crisis occurred in 2008, that the Fed's extraordinary measures (interest rate suppression, and quantitative easing) are completely necessary to heal the economy and put Americans back to work. Another dozen months go by with similar sub-par results and poor employment figures, and the time line or horizon for what others have called inter-generational wealth larceny (interest rate suppression), and yet another back door bank bailout (quantitative easing), gets stretched out by the Fed Chair for another twelve to twenty-four month window.
Some say the definition of "insanity" is repeating the same act of failure over and over again, and expecting a different outcome. Questionable as the act may seem, there is a method to the Fed’s possible madness.
What the Fed has been exceedingly good at, going back to Mr. Greenspan, is setting up asset bubbles, the most recent of which is great for the wealthy but has done little for the middle-class and the destitute. As JMH has argued, seems that trickle down economics is not only a failure for the economy when the tax code is rigged for the plutocracy, but it is also appears equally unsuccessful when trickle down is deployed by monetary policy means. Then again, JMH has also argued traditional Keynesian economics could indeed work its magic, if Fed largess made its way directly into the hands of he American people, via mortgage relief and outright debt forgiveness. As opposed to the Fed shuttling an ocean of free cash into Wall Street hands. In sum, per the plutocracy: socialism for the elite is good; socialism for everyone else… is, ahem... Bad!
In terms of employment, the Fed's policies would appear to have fallen short (and that's putting it mildly), especially relative to its size-able balance sheet expansion.
This blog pointed this out in two recent pieces: Having Failed, The Federal Reserve does Charity; and the second piece, The Leviathan is Vertically Integrated. In this latter piece, JMH points out the Fed has created a perverse incentive for corporations and the banking sector not to employ Americans... Namely, so as too keep Fed largess (QE uber alles) flowing for the wealthy. The Fed has stated that its extraordinary measures will continue until the unemployment rate drops below 6.5 percent, which gives Wall Street every incentive not to hire. This latter piece also pointed out that the banking sector, including shadow banking and private equity, are now so interconnected throughout the economy, via ownership, interlocking boards, and likely a ruling oligarchy, that they can control employment, and therefore, unemployment and underemployment. Maximization of shareholder value in recent years often consists of not selling and exporting additional goods and services (i.e. increasing revenue); but rather, in engaging in the elimination of, and the export of, American jobs (i.e. cost cutting).
Is this what the McKinsey Group tells business leaders for a sizable fee: Want to make money, cut your staff and hire a handful back as temps... in short, embrace globalization?
Now before you dismiss my argument as paranoid, that the Wall Street Cartel is colluding to hold national rates of unemployment at artificially high levels, so as to keep the Fed's printing presses set on overdrive, consider what has been going on in Silicon Valley for sometime. This is the locale where a company, who's motto is "do no evil," has colluded with the beloved Apple, et al., to suppress employee wages and not compete for each others engineering and IT talent. So if that's happening in Silicon Valley, which has also turned tax avoidance into an art form, can you just imagine the collusion that is going on in other sectors of the economy? One doesn't have to imagine of course, you can read about Wall Street collusion any day of the week: whether it be the LIBOR scandal, storing commodities to keep prices inflated, insider trading, FOREX manipulation, or private equity firms colluding amongst themselves to price fix LBOs, and now, even high frequency trading points to a rigged outcome.
The game/economy is rigged, so why would rates of employment or unemployment be any different? Labor being a key cost for nearly any enterprise. In forsaking the American worker, the elite have cut themselves off from top line growth; but thanks to the Fed, they can increase revenue and profits through speculation, and increase ROE, through stock buybacks, often times financed via the Fed’s fire hose of liquidity (i.e. historically inexpensive debt).
Perverse incentives not to hire are one thing, there is yet another way in which Fed policies disincent employment opportunities. But first a quick digression... Many knowledgeable persons will agree that many sectors of the American economy are now dominated by monopolies and cartels. Ironically, monopolies and cartels are creatures of the state, and protected by the state that fails to enforce anti-trust laws, rules and regs., and creates barriers to entry. Moreover, some of Wall Street's and Omaha's best and brightest have made billions investing in monopolies and cartels, because monopolies not only "short" the customer, and their employees, but they are magnificent at minting exceptional profits, especially for products and services with relatively inelastic demand.
Now your economics professor will tell you that monopolies should not exist in a free market economy because monopolistic profits will attract new entrants into the market place, which will increase competitiveness, enhance consumer services, aid or increase employment, and bring down the cost of goods and services.
However, arguably, we no longer live in a free market economy but rather, a crony economy (where collusion, regulatory capture, tax avoidance, and purchased politicians are the norm). And this economy is kept buoyant for the elite, and is financed by, exorbitant amounts of Fed liquidity.
So let's cut to the chase: Now if you are Mr. or Mrs. R. Barron and you have a lush and deep pool of capital to invest, do you place your equity into: Plan A) the stock market - juiced by the Federal Reserve - at limited costs and overhead to your hedge fund, a stock market which is now dominated by monopolies and cartels (hence minting profits); or, do you go with Plan B) and enter the time consuming process and aggravation of building a business (infrastructure, organization and staff) necessary to compete in a cartel driven market - possibly upsetting your elite friends in the process by eroding the profit making potential of the existing cartel or monopoly?
An economics professors once told the class I was attending, that economist make terrific historians, but rarely get their forecasts right. He said economist constrained foresight had something to do with too many endogenous and exogenous variables. (Which explains why Dr. Nouriel Roubini is so famous, for correctly calling the financial crisis.) My former prof., it turns out, was exceedingly wise.
The Federal Reserve, largely run by academics and economist, being a case in point. Starting six years ago, the American public has been told repeatedly, since the financial crisis occurred in 2008, that the Fed's extraordinary measures (interest rate suppression, and quantitative easing) are completely necessary to heal the economy and put Americans back to work. Another dozen months go by with similar sub-par results and poor employment figures, and the time line or horizon for what others have called inter-generational wealth larceny (interest rate suppression), and yet another back door bank bailout (quantitative easing), gets stretched out by the Fed Chair for another twelve to twenty-four month window.
Some say the definition of "insanity" is repeating the same act of failure over and over again, and expecting a different outcome. Questionable as the act may seem, there is a method to the Fed’s possible madness.
What the Fed has been exceedingly good at, going back to Mr. Greenspan, is setting up asset bubbles, the most recent of which is great for the wealthy but has done little for the middle-class and the destitute. As JMH has argued, seems that trickle down economics is not only a failure for the economy when the tax code is rigged for the plutocracy, but it is also appears equally unsuccessful when trickle down is deployed by monetary policy means. Then again, JMH has also argued traditional Keynesian economics could indeed work its magic, if Fed largess made its way directly into the hands of he American people, via mortgage relief and outright debt forgiveness. As opposed to the Fed shuttling an ocean of free cash into Wall Street hands. In sum, per the plutocracy: socialism for the elite is good; socialism for everyone else… is, ahem... Bad!
In terms of employment, the Fed's policies would appear to have fallen short (and that's putting it mildly), especially relative to its size-able balance sheet expansion.
This blog pointed this out in two recent pieces: Having Failed, The Federal Reserve does Charity; and the second piece, The Leviathan is Vertically Integrated. In this latter piece, JMH points out the Fed has created a perverse incentive for corporations and the banking sector not to employ Americans... Namely, so as too keep Fed largess (QE uber alles) flowing for the wealthy. The Fed has stated that its extraordinary measures will continue until the unemployment rate drops below 6.5 percent, which gives Wall Street every incentive not to hire. This latter piece also pointed out that the banking sector, including shadow banking and private equity, are now so interconnected throughout the economy, via ownership, interlocking boards, and likely a ruling oligarchy, that they can control employment, and therefore, unemployment and underemployment. Maximization of shareholder value in recent years often consists of not selling and exporting additional goods and services (i.e. increasing revenue); but rather, in engaging in the elimination of, and the export of, American jobs (i.e. cost cutting).
Is this what the McKinsey Group tells business leaders for a sizable fee: Want to make money, cut your staff and hire a handful back as temps... in short, embrace globalization?
Now before you dismiss my argument as paranoid, that the Wall Street Cartel is colluding to hold national rates of unemployment at artificially high levels, so as to keep the Fed's printing presses set on overdrive, consider what has been going on in Silicon Valley for sometime. This is the locale where a company, who's motto is "do no evil," has colluded with the beloved Apple, et al., to suppress employee wages and not compete for each others engineering and IT talent. So if that's happening in Silicon Valley, which has also turned tax avoidance into an art form, can you just imagine the collusion that is going on in other sectors of the economy? One doesn't have to imagine of course, you can read about Wall Street collusion any day of the week: whether it be the LIBOR scandal, storing commodities to keep prices inflated, insider trading, FOREX manipulation, or private equity firms colluding amongst themselves to price fix LBOs, and now, even high frequency trading points to a rigged outcome.
The game/economy is rigged, so why would rates of employment or unemployment be any different? Labor being a key cost for nearly any enterprise. In forsaking the American worker, the elite have cut themselves off from top line growth; but thanks to the Fed, they can increase revenue and profits through speculation, and increase ROE, through stock buybacks, often times financed via the Fed’s fire hose of liquidity (i.e. historically inexpensive debt).
Perverse incentives not to hire are one thing, there is yet another way in which Fed policies disincent employment opportunities. But first a quick digression... Many knowledgeable persons will agree that many sectors of the American economy are now dominated by monopolies and cartels. Ironically, monopolies and cartels are creatures of the state, and protected by the state that fails to enforce anti-trust laws, rules and regs., and creates barriers to entry. Moreover, some of Wall Street's and Omaha's best and brightest have made billions investing in monopolies and cartels, because monopolies not only "short" the customer, and their employees, but they are magnificent at minting exceptional profits, especially for products and services with relatively inelastic demand.
Now your economics professor will tell you that monopolies should not exist in a free market economy because monopolistic profits will attract new entrants into the market place, which will increase competitiveness, enhance consumer services, aid or increase employment, and bring down the cost of goods and services.
However, arguably, we no longer live in a free market economy but rather, a crony economy (where collusion, regulatory capture, tax avoidance, and purchased politicians are the norm). And this economy is kept buoyant for the elite, and is financed by, exorbitant amounts of Fed liquidity.
So let's cut to the chase: Now if you are Mr. or Mrs. R. Barron and you have a lush and deep pool of capital to invest, do you place your equity into: Plan A) the stock market - juiced by the Federal Reserve - at limited costs and overhead to your hedge fund, a stock market which is now dominated by monopolies and cartels (hence minting profits); or, do you go with Plan B) and enter the time consuming process and aggravation of building a business (infrastructure, organization and staff) necessary to compete in a cartel driven market - possibly upsetting your elite friends in the process by eroding the profit making potential of the existing cartel or monopoly?
No mystery here. Thanks to a stock market on steroids, courtesy of the Fed, Mr. and Mrs. R. Barron goes with Plan A.
In short, The Fed, by juicing the stock market (and by providing cheap debt to sponsor stock buy backs, private equity, and M&A behavior) causes the wealthy to have zero incentive to invest, take risk, and most importantly, hire Americans in establishing start up businesses. Why would the plutocracy? When thanks to the Fed, they can all reap significant rewards in a ginned-up stock (and commodities market), dominated by cartel and monopoly driven stocks -at minimal cost or overhead. That's just naked self-interest.
And arguably, it's classic rent seeking behavior, speculation, and a tax on society, and it is sponsored and supported by the Fed's printing presses.
That is to say and just to belabor the point, by inflating asset classes, the Fed creates a powerful disincentive to invest in start up businesses, hire American, and repair the tax base.
(As an aside, I also believe the Fed couldn't give a "flip" about maximum employment because it would increase labor costs, erode marginally, profits for the wealthy, and set off perhaps record cost push and demand pull inflation. In fact, the Fed's policies are a disincentive for maximum employment for that very reason: The awesome specter of INFLATION. The Fed has printed trillions to reward idle speculation among the rich, and these monies are nearly “sanitized/sterilized,” as they are – for the most part – kept out of the hands of the American public by the Wall Street cartel's failure to lend, and American enterprise' refusal to hire.)
The bottom line in all this is: If America wants a traditional economy that creates new businesses, produces competitive goods and services, and most importantly, raises aggregate demand by hiring Americans, than the Fed needs to take away the asset bubble and the punch bowl of inexpensive debt, so that the banks and shadow banking resume their traditional role. The role of lending and investing in American new businesses, that actually produce something and compete against existing monopolies and cartels. Fed behavior may also explain why annual American GDP growth has stalled in recent years.
Who knows, perhaps under such a scenario, maybe some cartels and monopolies will actually face competition again? Good for the consumer. Good for the tax base. Good for American labor. Good for management and in the long run, good for stockholders.
But don't count on it. Yet another hallmark of a crony economy is an ocean of Fed liquidity keeping the insiders happy. To support this insanity, one can argue that the Fed must keep Americans misinformed about the true nature of The Bank's/Fed's work, and keep the charade about wanting maximum employment in the press and news media.
All of which brings us back to my college prof.... Economist often make terrific historians but often fail in real time forecasts. Both the current and prior Fed Chair appear to be no exception. As one pundit described her, the current Fed Chair is either the most naive academic the Fed has yet encountered, or the ultimate insider - cynically exploiting the Fed's mandate and the American dollar, for the enrichment of an elite few.
The Fed's policies play no small part in the Neo-Guilded age we are living through currently. An age that has renewed calls for even greater socialism and merited calls for a global tax on wealth and capital. Someone needs save capitalism from the crony system, and the monopolies and cartels, that wrap themselves in the cloak of the free market. A reconsideration of present Fed policies would be a great start.
P.S.
Please pray with me:
Please Dear Goddess… Do not present
this nation with another Bush/Clinton match up in 2016. Please provide for us a Warren/Paul
presidential match up, instead.
Amen.
Oh, and Dear Goddess… Please cast-out those evil doers, The FCC and the Federal Judge, who did Comcast’s bidding, and who struck down net neutrality. The
Internet is after all, a utility, and the cartel that makes billions off of it
should be regulated and their profits subject to windfall taxes. The NSA and the Net’s cartel have done so
much to destroy internet freedom, U.S. dominion over the world-wide-web, and commerce
over same. In short, these tribes
of inequity have collectively, sacrificed a huge cash-cow and a fountain of information and entertainment; please stop them before
they do more harm.
Selah.
Copyright JM Hamilton Publishing 2014
Copyright JM Hamilton Publishing 2014
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