Strange Bedfellows
“The
pen is mightier than the sword.”
- Edward Bulwer-Lytton
"I believe that banking institutions are more dangerous to our liberties than standing armies."
- Thomas Jefferson
By J.M. Hamilton 10-3-15
There’s nothing boring about the Fed and
Janet &Co. Between the charts,
graphs, moving economic targets, and promises to – maybe someday – wind down of
the Fed’s extraordinary efforts, as a result of the 2008 Wall Street crisis….
lies a highly volatile stock market and American politics. It seems that every time the Fed Chair speaks, or proceeding her speech, the market either experiences a taper tantrum,
or spikes up in delight, post-speech, that the banker gravy train (i.e. free money
at near zero percent interest) will continue.
Any talk of taking away the punch bowl and the market turns surly, and
the VIX soars. Apparently, Wall Street,
bankers, and shadow banking like their money free and easy, not that this
translates into easier lending terms, write downs, or debt restructuring for
the 99%. Nice. (Ms. Yellen’s latest speech appears to be the
exception to the rule, when the stock market continued its recent descent,
unabated, from Denali like valuations.)
Politicians too, particularly the party
in power, like a stock market with an upward trajectory, keeps the big name
donors and the plutocracy happy; and if the economy is less than stellar, and
unemployment is high, an ascending stock market is a pleasant distraction. But nearly a decade into the Fed’s easy money
policies, a rather nasty habit is developing, not unlike an addiction. Interest rates have been down for so long,
nobody truly knows what the ramifications will be when the Fed starts raising interest rates again.
One thing we
do know: there will be consequences, both intended and unintended. However, we can glean
some information from history and by observing the factions for and against a
rate hike.
All of which brings us to the
premise of today’s piece: Politics,
economics, and finance make for strange bedfellows. We don’t see it too often in American
politics, and perhaps less in economics and finance, but every now and then,
when the moon is full and the stars are aligned, two diametrically opposed
camps come together. Political camps
that generally loathe each other – economic schools of thought that generally
agree to disagree – on occasion are united by a similar theme. We can see this now, particularly in
politics, with the wave of outsider populist rising in the 2016 POTUS campaign
polls. Messrs.
Sanders and Trump immediately come to mind.
A couple of iconoclasts have tapped into a nerve, often written about on
this web site, a populist revolt against the crony economy, and an
establishment that has neglected the country and the American people.
Political alignment is unusual, but rarer
still, how often does one see Keynesians/liberals, or salt water economist,
aligned with the Wall Street banker crowd, in support of the continuation of
the Fed’s easy money policies? And yet,
that’s exactly what we have today…. Liberals and more than a few bankers and
corporate executives, aligned and praying that the Fed keeps the pedal to the
metal just a little while longer (Their Augustian prayer: Please Lord make me chaste, but several decades from now, and preferably when I'm dead). As alluded to above, we can learn a great
deal from the arguments/motives put forth by both camps as to the pending
fallout, and also get some sense of the tremendous pressure that the Federal
Reserve is under.
Let’s start with the Liberals,
whose arguments some of us are generally sympathetic too. Here goes:
·
The poor and the middle class, what remains of it, will
bear the brunt of a rate hike.
·
State and Federal government borrowing costs will rise, as
will the debt service load, which mean less revenue to be redistributed to
those in need and still struggling, in a sub-par economy.
·
The majority of mortgages are, to this very day, adjustable,
so a rate hike means higher monthly mortgage payments; add in adjustable
subprime automobile notes (currently in vogue), and the lower middle class
stands to be hit by rising interest rates, particularly folks who are still
upside down on their mortgages.
·
Higher monthly interest payments for mortgages, car loans,
and student loans, means less discretionary income and less aggregate demand,
which may create headwinds for the economy.
In short, more money going to those – least in need – bankers, shadow
banking, and private equity firms (Many of these financial entities, hedge funds and private equity, have waded into the housing market, post crisis, and
bought up much of the distressed property at fire side sales prices, courtesy of GSEs, and turned said properties into rental units – so expect rents to
climb too).
·
The U.S. economy is not fully healed, and with slowdowns
in China and in emerging markets, now is not the time to raise rates. This point touches upon an argument currently
making the rounds, that the world economy is now so interconnected that the
Federal Reserve is, and should be, the world’s central bank (here, look to the IMF’s counsel to the Fed and repeated warnings).
·
Let’s face it, egos and politics play a role in all this
too. If the Fed does hike rates, and
there is a subsequent economic down turn, members of the Fed will be blamed as
will Fed policy; and such a down turn, could possibly cost the Democratic
Party, particularly one Bernie Sanders, a trip to the White House. Alas, for liberals, there will never be a
convenient time to raise interest rates.
These are all legitimate arguments and
rational concerns.
And now, the Wall Street, and
corporate suite, arguments for the continuation of the Fed’s easy money
policies. Some of these are
arguments you aren’t likely to hear every day in the financial press or main
stream news media, but then, one does not read JMH to hear mainstream arguments. So here goes:
·
Our economy is debt fueled, and the less expensive the
debt, the lower the cost of doing business for banks and corporations.
·
Private Equity, Wall Street, shadow banking, and M&A
are fueled by inexpensive debt…. Raise interests rates, and profit margins for
all debt fueled business takes a hit, particularly for those businesses already
carrying a significant amount of debt (observe: businesses that are highly
leveraged are particularly prone to rate hikes).
·
During these uncertain times, and with employment and the
consumer not fully recovered, translating into lower top line growth than what
we would expect at this stage in the recovery, many corporations have turned to
financial engineering to raise stock valuations. A great deal of this financial engineering
(i.e. stock buyback, M&A, corporate restructuring – layoffs, and
regulatory, labor, and tax arbitrage) and globalization was, and is, financed by the
Fed’s easy money policies.
·
When the Fed raises interest rates, the dollar will rise
versus foreign currencies, which means foreign multinational earnings –
reported back in dollars – will slump and take a hit.
·
Globally, nearly all central banks are engaged in the
currency devaluation game. Therefore, America/The
Fed must play the same game, so that the U.S. can continue to remain export competitive.
Ironic isn’t it? Two worlds, one liberal – striving to look
out for the poor, and another - monopolist and pro-Street - solely interested in
profit taking, making the same case, albeit by differing logic and circuitous argumentation
(that the Fed – nearly a decade into this fiasco - should not prematurely hike
interest rates). Again, all legitimate arguments and rational concerns, given the grave problems this nation faces. And just to be clear, there are many liberals
and banker/raider/corporate types, who do not agree with the Fed’s dovish policies.
So what are the counterarguments? And why are some of the aforementioned
arguments problematic?
·
Probably the greatest fable told about the ’08 financial
crisis was that the Fed’s extraordinary efforts would be a temporary measure to
address the withdrawal of liquidity from markets, and to allow time for both
the consumer and the government to pay down their debt.
·
Now, seven to eight years later (and with the Fed
expanding its own balance sheet by 4 to 5 trillion dollars), public and private
sector debt, combined, has risen in China, across the E.U., Japan, and in
America – to unsustainable sums, well past the 200% threshold. And collectively, globally, central banks are
still doing back flips, in an attempt to keep their respective economies and
stock markets afloat.
·
In essence, Fed policy, long known to be a tool of the
plutocracy and the financial elite, was used to paper over a financial crisis,
and bailout the plutocracy and Wall Street on the backs of the poor and the
middle class, who were faced with austerity.
In essence, Messrs. Bernanke, Geithner, Paulson, and Mme. Yellen kept
the pitch forks at bay, and in the process created trillions of taxpayer backed
liabilities out of thin air.
·
One of the greatest crimes perpetrated by Federal Reserve
policies is that none of the lessons from the crisis were learned, so quick was
the Fed to rush in, and provide a smoke screen.
In short the very structural problems the nation faced in 2008 have only
exacerbated over the following years:
the crony economy; a morally bankrupt political system that is for sale to the highest bidder; monopolies and cartels in nearly every sector of the
economy, preying upon the public; wars w/out end financed by the Fed & a
credit card empire – funded by you guessed it, the Fed; and a political party –
dominated by billionaires - that still
believes in fairy tales, like laissez faire and trickle down economics, and "free trade." And we wonder why U.S. economic mobility
is in decline, and wage and wealth inequality are on the rise.
·
Indeed, a crisis is a terrible thing to waste, because –
thanks to the Fed - rather than address the structural issues that ordinary
American’s face daily, eight years later the same problems exist, only worse:
the poor have become poorer; the middle class - that made this country great –
is beset on all sides by the malefactors of privilege & wealth; and the uber
wealthy – in a perpetual game of chance called Wall Street speculation –
continue to grossly mismanage the country. Why start up a new business and create jobs,
when the Robber Barons are allowed, by our government, to run money printing and job killing
monopolies and cartels?
·
As if the printing up of trillions of dollars in debt to
bailout the elite wasn’t enough, the Federal Reserve also shafted the middle
and upper middle class by artificially suppressing interest rates, in one of
the greatest transfers of wealth, and crime sprees, known. In short, the Robber Barons of Wall Street, Banks,
Hedge Funds, and Private Equity, all received free money via Fed suppressed interest
rates, a secondary bailout that exists to this very day. Conversely, the Fed took away legitimate
interest income from: savers, retirees, the elderly, people who do not want to
gamble in a corrupt and manipulated stock market, and pension funds and 401Ks. This interest income was effectively
transferred to the aforementioned usual suspects. Which brings up a legitimate question: At the
end of the day, has the Federal Reserve any conscience or sense of decency? Thanks to the Fed’s revolving door and the
riches Wall Street has to offer, apparently not.
·
As for the diminishment in government services, as a
result of a prospective Fed rate hike, well that would actually force the
Congress of the United States to govern and be held accountable. The Fed has enabled the world’s greatest
deliberative body, so that it can campaign 24/7, instead of making very hard
choices. How much longer will a
Republican Party last, which is already staring into the precipice, when it
starts cutting social services – like social security and Medicare, so that the
nation can continue to finance foreign wars, its empire, the private
contractors at the MIC/surveillance state, and tax cuts for the wealthy? Thanks to the Fed, the GOP doesn’t have to
make those choices; thanks to the Fed, a dying political party rages on. Ironically, the biggest welfare states are Red states.
·
Moreover, how much longer can the Fed, or global central
banks, continue to finance, by printing money, a national debt that has spun
out of control and is essentially a Ponzi scheme? Write downs and haircuts are in order for
irresponsible lenders, and have been for a long time…. As they say on the farm, "It’s nut cutting time." And woe be unto
the bond/debt holders.
·
As for the corporations and financial engineering, their
focus – thanks to Fed largess – has been myopic.
Short term fixes like stock buybacks and M&A - financed by debt - rarely if ever address
real macro and micro problems, like inadequate wages – resulting in low aggregate demand,
raging income and wealthy inequality, upgrades in consumer service/CAPEX, a
dearth of R&D spending, and the lack of top line growth. These are all heady issues that will require
thinking, and government intervention into the market place: like mandating the
payment of a living wage; caps on profit taking, like a windfall profits tax;
regulations to save capitalism from predatory monopolies and cartels; the breakup
of said monopolies and cartels; and the establishment of global labor,
regulatory, and tax equilibrium (so as to eliminate arbitrage and nation states
being played off of one another in a race to the bottom).
·
My guess is once the Fed raises interest rates, if ever,
global central banks will be forced to do the same, in varying degrees, to
eliminate capital flows out of their respective countries, which should help to
restore some semblance of equilibrium in exports and imports.
The bottom line, the U.S. central bank
has a lot to answer for (unlike every other Federal branch of government, there are no checks and balances), and it too, needs to be reformed. As with any political institution, without
oversight and control, it becomes corrupt.
The Fed, perhaps, is the most powerful branch of government in these
United States, and few Americans understand it, and it is not subject to the
democratic process. And the fat cats on
Wall Street, and in multinational suites, like it that way.
Most economist – especially Keynes –
recognize that monetary policy is a very crude substitute for well-managed
fiscal policies’ ability to address economic crisis, and smooth out the bumps
in the road created by capitalism.
P.S.
J.M.H. has warned about a
potential bond/debt bubble created by the Fed and global central banks, where
yields – for a tsunami of debt - inadequately reflect the risk involved, and
fail to accurately account for the underlying risk/reward. By raising interest rates gradually, the Fed
may be able to take some of the pressure off this bubble, or it may find itself
wading into another illiquid market and providing yet another massive bailout.
Whatever the Fed does with
interest rates, in terms of debt bubble creation and the inevitable collapse,
it may be too late. As such, the Fed may
decide “damn the torpedoes – full steam ahead” is the best policy, leaving
desperately needed political reform, and economic restructuring unaddressed and
for another crisis. After all, under current campaign finance law, a crisis may lead the
Congress to reform, but only the plutocracy can make the Congress enact reform.
Finally, once again, we saw this
week that it wasn’t ninja jihadis Americans have to fear, but yet another Caucasian
mental defective with a damaged Y chromosome.
Let us pray that the next narcissist/nihilist with a pathological sense
of entitlement - to mete out death to the general public - takes his own life
before he can harm others. It’s a shame
these losers aren’t educated, or stable, enough to realize that the pen is mightier
than the sword; and that everyone remembers Christ, Gandhi, and MLK, but nobody
remembers the malcontents who killed them.
(Correction: CNN reports the assailant was of mixed race, with a Caucasian father, and a Republican.)
Copyright JM Hamilton
Publishing 2015
