Monday, February 15, 2016

Stop the Federal Reserve Charade…



Stop the Federal Reserve Charade…

Fischer: "There is not a lot of chance that monetary policy will fix inequality.”  Says education, state, local govt. etc. have that role.
Posted on Twitter: 2-1-2016  

Vonnie Quinn@VonnieQuinn of Bloomberg News

By J.M. Hamilton  (2-16-2016)

Some have argued the greatest lie ever told was Satan’s ability to convince the world that he did not exist.  If that’s so, the second greatest lie ever told was that the Federal Reserve’s (aka the Fed’s) mandate includes maximum employment.  Perhaps, the third greatest lie is that the Federal Reserve mitigates boom/bust cycles, and is often unaware of its role in bubble formation within the economy. 

As this blog has pointed out before, the Federal Reserve really serves two masters, the Wall Street banks, and the stock market.   Everything else is white noise.   A few years ago in acknowledgement of its failure to help everyday Americans, Fed members began donating to charities.   The estimable Vonnie Quinn (a Bloomberg news anchor), again, punctured the Fed’s dual mandate façade with a tweet quoting Mr. Stanley Fischer, the number two man at the Federal Reserve.

In the lead quote above, Mr. Fischer basically, acknowledges the obvious:  that monetary policy cannot fix the key economic problem of our times, (wage & wealth) inequality.  In fact, quite the opposite – as presently conducted – the Fed, and global Central Banks, are responsible for a tremendous amount of the wage & wealth inequality in the world.  The Fed by gunning the printing presses, post 2008 Crash, inflated asset prices and the stock market to extraordinary levels, and bailed out the Wall Street banking cartel and the establishment, via quantitative easing, interest rate suppression, transfering toxic assets onto public balance sheets, and a variety of other programs.  The rich grew wealthier, the middle class continued its downward spiral, and the poor became poorer.  And corporate America and multinational C-Suites… well they grew fat through financial engineering, not the least of which includes M&A activity, stock buybacks, and labor cuts.   Financial engineering was financed by the Fed, at record low interest rates.

Perhaps that too, belongs up their in the pantheon of Federal Reserve lies:  The Fed’s extraordinary actions, starting in 2008, were supposed to be temporary in nature; and in essence, were required to provide short term liquidity (aka bailouts) to markets, and a window of opportunity for businesses and individuals to pay down their debt.  Imagine Fed watchers and the business communities surprise when Bloomberg recently published a piece warning of a $29 trillion corporate debt bubble.  A bubble that didn’t go to finance higher employment, higher worker wages, CAPEX, or R&D… no, but a bubble that financed job killing M&A, the formation of opportunity crushing cartels and monopolies, and stock buybacks that merely boost EPS, ROE, and CEO pay.  Buybacks are now so ubiquitous that Bloomberg, via Goldman Sachs, reports that they make up 20% of all trading.

Which goes to my central point, the Fed doesn’t help the American public or the jobs market, instead it holds it back.  Financed by the Fed, M&A kills employment opportunity… and consolidation leads to layoffs, an employer’s job market, and lower pay (factor in globalization, automation, and evolving A.I. and you have a perfect storm against the 99%).  Interest rate suppression, robs retirees, pension funds, mutual funds, and investors of normal market yields and income (yet, one more hit to aggregate demand), and hands it over to the banks, in yet another bailout.  As for the Fed’s stated dual mandate: Rest in peace.

Yet another problem the Fed created in papering over the crisis with a mountain of debt and debt monetization …  both, Republicans and Dems, were let off the hook and not held accountable for their role in the crisis.  Major structural impediments within the economy, such the aforementioned cartels & monopolies, were not addressed (e.g. the Wall Street banking cartel).

So that’s at least four strikes against the Fed:  It aggravates wage & wealth inequality; the Fed creates bubbles and amplifies the boom/bust cycle; America’s Central Bank kills jobs and opportunity by providing highly inexpensive debt for financial engineering and M&A; and it lets our elected officials off the hook, from making hard fiscal and structural economic decisions.

All so that the Establishment can grow richer, Wall St continues its campaign of fraud & graft, and a ginned up stock market can soar. 

Thank you, Henry, Ben, Timmy, and Janet!  (And some wonder why Senator Sanders is in his ascendancy, and giving the Wall Street loving Clintons a run for their money.)

Had the Fed not bailed out the usual suspects, had the establishment landed on its @$$ in 2008, and Wall Street been allowed to fail…. There would have been real financial reform, real structural change, and real jail time for the CEO’s involved.  Without the Fed’s fire hose of liquidity and debt, business leaders would have had to earn income the old fashioned way, through top line growth and the creation of new businesses to compete against our cartel dominated economy (which means labor/the consumer and aggregate demand – aka 70% of the U.S. economy – would have finally, gotten the attention it justly deserves).

Instead, here and now, we are potentially faced with 2008 all over again.   Investors in search of yield loaded up on Co-Cos and junk debt w/ artificially low yields; a derivatives and swaps market that is grossly under-collateralized and remains backstopped by the American taxpayer, still exists and is as dangerous as ever; a Wall Street cartel that is more concentrated and presents an even greater risk management nightmare; and a corporate America that is loaded up to the gills on debt and debt service payments, that could prove crippling if interest rates rise and/or there’s a recession.


And now… are you ready for this, here comes the punch line, the newest financial craze:  Negative yields.  Brought to you by Central Banks around the globe and coming soon….  Yes, my crystal ball says, possibly, coming to America.  Bloomberg reports $7 trillion in government debt at negative yields, globally, is presently in circulation. The concept is simple, the Bank of Japan and other Central Banks, hope that negative yields will force banksters to stop hoarding reserves in, relatively speaking, risk free government debt, and instead loan the money out to businesses, entrepreneurs, and/or take greater risk through alternative financial instruments.

But what negative yields really amount to is yet another backdoor bailout for banks, who recklessly lent money – hand over fist – for corporate M&A, financial engineering, and went long on the oil patch.   There’s that $29 trillion corporate debt hangover, Bloomberg recently mentioned.  Central Banks, and possibly the Fed, may be preemptively attempting to head off the next financial crisis in advance - by running to negative yields.  Much commercial lending is a point or two above LIBOR or some other Central Bank benchmark.   If these benchmark rates sink into negative territory, by the hand of central banksters, the commercial lending rates – or service load on the $29 trillion  - will sink with those benchmarks.  Hence, possibly dissolving, or mitigating, yet another debt bubble created by Central Banks, globally. 

Don’t forget swaps and derivatives, w/ hundreds of trillions in notional value, utilized as insurance and mostly as gambling instruments, are also heavily tied to this corporate debt and wagers in stock indexes.  If the $29 trillion in corporate debt heads south, we could see a calamity unfold in the swaps and derivatives market…. A cascading effect, if you will.  An effect that would prove that Dodd Frank as a regulatory tool, written by Wall Street banks (and subsequently stripped down by Wall Street banks), is a complete and absolute failure.


(Negative yields would not be entirely bad.  With less free interest income from the Fed, Wall Street banks’ earnings would suffer.  With lower ROE and EPS, investors might finally insist upon what our crony government failed to do, and that is break up the Wall Street banking cartel.  Negative yields also means that the Federal government’s debt service load would evaporate on that portion of the debt financed by treasuries sold at negative interest rates; in the long run, negative yields mean more Federal spending, hopefully, to rebuild our infrastructure and to finance free education for our youth, instead of going to debt service payments.  Honestly, there are several positives associated with negative yields, IF channeled correctly.)

Of course, negative yields will harm the American people, namely: savers, pension funds, mutual funds, retirees, and insurance companies (who sometimes rely upon yield to keep insurance rates low and contained).  At negative yields, many Americans and institutions would flee to quality blue chip stocks, and precious metals…. Which conveniently, is whom the Fed really serves, the stock market.  With an election on the horizon, it’s important for the Fed to attempt to juice the markets one more time.  Alas, negative rates maybe too little too late:  China’s debt to GDP ratio is at basket case proportions; emerging markets are in the doldrums with slack demand and excess capacity in the commodities markets; the oil patch that generally generates obscene profits (global bourses are addicted to monopolistic profits) is in disarray; and worst of all, aggregate demand and worker pay were neglected for the last eight years – essentially stagnating, as they were for the proceeding decades. 

Central Banks instead played a game of beggar they neighbor - frequently dropping benchmark rates, in the hopes of stimulating exports, only to see other Central Banks follow suit.  And the result, yet another global debt bubble has arisen, as JMH foretold.  





Surprised(?)…. Given the Fed’s history, none of us should be.

The law of unintended consequences surrounds the United States…. We see it in U.S. foreign policy and with Federal Reserve monetary policy.  In the service of its true masters, Wall Street banks and the stock market…. Anything goes, often to calamitous effect upon the economy and the 99%. 

Had the Fed truly been looking to fulfill its alleged mandate, one of maximum employment back in ’08, it would have placed caveats and conditions on the Wall Street bank bailout(s).  Caveats and conditions like writing down home loans, debt restructuring for consumers, and the write down of interest rates and principal for student debt… all of which would have stimulated aggregate demand, job hiring, and top line growth for businesses. 

Instead, we got the same crony –grossly mismanaged - bailout, headed up by the likes of Mr. Tim Geithner, who just received payback from Wall Street. 


Alas, our Fed is myopic and blind just like its Master… that is to say, the Fed, much like Wall Street, crushes hopes, dreams and national economies - daily. 

The Fed needs very serious reform… and Banksters and insiders need not apply.

Copyright JM Hamilton Publishing 2016

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