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For years critics of U.S. central-bank policy have been dismissed as Negative Nellies, but the ugly truth is staring us in the face: Stock-market advances remain a game of artificial liquidity and central-bank jawboning, not organic growth. And now the jig is up.
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What’s the larger message here? Free-market price discovery would require a full accounting of market bubbles and the realities of structural problems, which remain unresolved. Central banks exist to prevent the consequences of excess to come to fruition and give license to politicians to avoid addressing structural problems. And by preventing these market forces from playing out at each sign of trouble, the can gets kicked further and further down the road. Each successive recovery keeps the illusion alive, but “accommodation” requires ever-lower rates before the monsters return. In the meantime, debt keeps expanding, while each recovery produces less and less organically driven growth, and ever-higher wealth inequality. This is what this system produces.
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The Fed earns interest income on the huge pile of securities it holds. After covering operating expenses, interest expenses, and some other items, it is required to remit the rest to the Treasury Department – to the taxpayer.
Therefore, the amounts in interest expense the Fed pays the banks on their “Excess Reserves” and “Required Reserves” comes out of the taxpayer’s pocket and its transferred to the banks to become bank profits, and thereby bank executive bonuses and stock holder dividends, funded by the dear taxpayers. And this amount was huge in 2018: $38.5 billion!
Here is what the Fed reported: ...
Ron Paul said:President Trump’s frustration with the Federal Reserve’s (minuscule) interest rate increases that he blames for the downturn in the stock market has reportedly led him to inquire if he has the authority to remove Fed Chairman Jerome Powell. Chairman Powell has stated that he would not comply with a presidential request for his resignation, meaning President Trump would have to fire Powell if Trump was serious about removing him.
The law creating the Federal Reserve gives the president power to remove members of the Federal Reserve Board — including the chairman — “for cause.” The law is silent on what does, and does not, constitute a justifiable cause for removal. So, President Trump may be able to fire Powell for not tailoring monetary policy to the president’s liking.
By firing Powell, President Trump would once and for all dispel the myth that the Federal Reserve is free from political interference. All modern presidents have tried to influence the Federal Reserve’s policies. Is Trump’s threatening to fire Powell worse than President Lyndon Johnson shoving a Fed chairman against a wall after the Federal Reserve increased interest rates? Or worse than President Carter “promoting” an uncooperative Fed chairman to Treasury secretary?
Yet, until President Trump began attacking the Fed on Twitter, the only individuals expressing concerns about political interference with the Federal Reserve in recent years were those claiming the Audit the Fed bill politicizes monetary policy. The truth is that the audit bill, which was recently reintroduced in the House of Representatives by Rep. Thomas Massie (R-KY) and will soon be reintroduced in the Senate by Sen. Rand Paul (R-KY), does not in any way expand Congress’ authority over the Fed. The bill simply authorizes the General Accountability Office to perform a full audit of the Fed’s conduct of monetary policy, including the Fed’s dealings with Wall Street and foreign central banks and governments.
Many Audit he Fed supporters have no desire to give Congress or the president authority over any aspect of monetary policy, including the ability to set interest rates. Interest rates are the price of money. Like all prices, interest rates should be set by the market, not by central planners. It is amazing that even many economists who generally support free markets and oppose central planning support allowing a government-created central bank to influence something as fundamental as the price of money.
Those who claim that auditing the Fed will jeopardize the economy are implicitly saying that the current system is flawed. After all, how stable can a system be if it is threatened by transparency?
Auditing the Fed is supported by nearly 75 percent of Americans. In Congress, the bill has been supported not just by conservatives and libertarians, but by progressives in Congress like Dennis Kucinich, Bernie Sanders, and Peter DeFazio. President Trump championed auditing the Federal Reserve during his 2016 campaign. But, despite his recent criticism of the Fed, he has not promoted the legislation since his election.
As the US economy falls into another Federal Reserve-caused economic downturn, support for auditing the Fed will grow among Americans of all political ideologies. Congress and the president can and must come together to tear down the wall of secrecy around the central bank. Auditing the Fed is the first step in changing the monetary policy that has created a debt-and-bubble-based economy; facilitated the rise of the welfare-warfare state; and burdened Americans with a hidden, constantly increasing, and regressive inflation tax.
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Since the global financial crisis, the business cycle has been suspended, and replaced by only a credit cycle. Credit, credit and more credit crowded out productivity and inflated asset prices while doing little for the real economy and driving the worst inequality in generations. The mis-pricing of money and credit has also driven a terrible misallocation of capital and kept unproductive zombie debtors alive for too long.
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Harvard’s recent two-day conference, “Money as a Democratic Medium,” challenged its participants to re-examine the history of money in America, and to redefine its future. The event was jointly sponsored by the Harvard Program on the Study of Capitalism, the Murphy Institute at Tulane University, the Harvard Law Forum and Harvard Law School, bringing a diverse group of lawyers, economists, academics and scholars to the HLS campus.
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Gerald Epstein, of the University of Massachusetts—Amherst, said that the rise of finance coincided with that of inequality, creating a system that favors some citizens over others. “Underlying all of this is a process by which wealth generates political power, to further this wealth and equality.” The country, he said, is now run by a “bankers’ club” that includes elected officials who get campaign contributions from banks, central banks that make decisions on whom to bail out, and regulatory authorities and lawyers “who do the bidding of these elites to try and rewrite rules.” ...
Judy Shelton said:... it is wholly legitimate, and entirely prudent, to question the infallibility of the Federal Reserve in calibrating the money supply to the needs of the economy. No other government institution had more influence over the creation of money and credit in the lead-up to the devastating 2008 global meltdown. And the Fed's response to the meltdown may have exacerbated the damage by lowering the incentive for banks to fund private-sector growth.
What began as an emergency decision in the wake of the financial crisis to pay interest to commercial banks on excess reserves has become the Fed's main mechanism for conducting monetary policy. To raise interest rates, the Fed increases the rate it pays banks to keep their $1.5 trillion in excess reserves -- eight times what is required—parked in accounts at Federal Reserve district banks. Rewarding banks for holding excess reserves in sterile depository accounts at the Fed rather than making loans to the public does not help create business or spur job creation.
Meanwhile, for all the talk of a "rules-based" system for international trade, there are no rules when it comes to ensuring a level monetary playing field. The classical gold standard established an international benchmark for currency values, consistent with free-trade principles. Today's arrangements permit governments to manipulate their currencies to gain an export advantage.
No wonder advocates of pro-growth economic policies feel compelled to question the vaunted status of central bankers, even as currency speculators track their every utterance. Stable money is a prerequisite for genuine economic growth and shared prosperity. The increasing financialization of gross domestic product is unhealthy because the growing size and profitability of the finance sector come at the expense of the rest of the economy and increase income inequality. When the value of money is fixed, as under a gold standard, economic growth reflects higher levels of productive output.
Fed Gov. Lael Brainard, who was appointed by President Obama, told Bloomberg Television last week that new Trump administration nominees will be expected to put forward "fact-based, intellectually coherent arguments that are based on evidence, that are consistent over time" if they would participate meaningfully in the Fed's deliberations.
She's certainly right that the Fed should act based on the best studies and evidence. It could start with the 2011 paper "Reform of the International Monetary and Financial System," published by the Bank of England, which analyzed the performance of the gold standard (1870-1913) and the Bretton Woods gold-exchange system (1948-72) relative to current monetary practices. The report concludes that today's system has performed poorly relative to prior monetary regimes, "with the key failure being the system's inability to maintain financial stability and minimise the incidence of disruptive sudden changes in global capital flows." Trade and investment flows are distorted as the world's major central banks engage in subtle exchange-rate competition.
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I want to see Herman Caine on the Fed Board.
... as JPM puts it, the liquidity conditions in the US banking system are perhaps close to their tightest in a decade. ...
... I want to make two points. First, I say sometimes that banking is a public-private partnership, and that banks are not pure private companies competing in the free market. This Fed notice is a particularly clear illustration of that: The Fed just gets to decide who gets to compete in the banking business, and how that competition will work, and what their business models can be, by virtue of its control of access to reserve accounts. I don’t mean that one decision (allowing narrow banks, or not allowing them) would be pro-competitive and free-market-y while the opposite decision wouldn’t be; I mean that, either way, the central fact of that competition is about access to government money accounts. There is no modern banking that is independent of the sovereign’s power to control money, 6 and the question is just who the sovereign shares that power with.
Second, I say sometimes that banking rests on an illusion, in which banks transform risky assets (loans, securities trading) into risk-free liabilities (deposits, repo): People give money to banks expecting the money to be absolutely safe, and then the banks go and do risky things with it. There are really good arguments that this is good, essential even, that it is how a society can take risks and build things while people still feel confident in their savings. But there are arguments the other way, that illusions are bad, that this system is unnecessarily crisis-prone and that we should only fund risky activities with risky investments and keep the safe investments truly safe. Narrow banking is an attempt to do that, to offer safe investments that don’t fund risky activities, to separate pure money accounts from loans and trading and the rest of the asset side of the bank balance sheet. And the Fed says: No thanks; sure that would be safer for depositors, but it would make the risky banks riskier. People who deposit their money with banks because that’s the closest they can get to a risk-free money account would no longer think that, and might move their money to narrow banks because those are risk-free money accounts. The illusion would be punctured, and the Fed, at some level, likes the illusion.
The Netherlands Central Bank has just published a fascinating new paper, titled "Monetary policy and the top one percent: Evidence from a century of modern economic history". Authored by Mehdi El Herradi and Aurélien Leroy, (Working Paper No. 632, De Nederlandsche Bank NV: https://www.dnb.nl/en/binaries/Working paper No. 632_tcm47-383633.pdf ), the paper "examines the distributional implications of monetary policy from a long-run perspective with data spanning a century of modern economic history in 12 advanced economies between 1920 and 2015, ...estimating the dynamic responses of the top 1% income share to a monetary policy shock." ...
They find that "loose monetary conditions strongly increase the top one percent’s income ...
In other words, accommodative monetary policies accommodate primarily those with significant starting wealth, and they do so via asset price inflation. ...
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Having backed themselves into a corner — flooding the world with debt to solve a series of crises caused by debt — our leaders now are preparing to jettison almost every rule in the economics texts.
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A radical world of “helicopter money” - where central banks fund government spending - is “inevitable” as policymakers run out of ammunition ahead of the next recession, top economists have warned.
Central banks are likely to “explore more unconventional policies” in the next downturn and blur the lines between fiscal and monetary policy with radical new tools, such as monetary financing, Deutsche Bank argued.
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The Federal Reserve’s low interest rates, the perception that there is a high bar to future increases and expansion of its balance sheet are helping to lift asset prices, Federal Reserve Bank of Dallas President Robert Kaplan said.
“All three of those actions are contributing to elevated risk-asset valuations,” Kaplan told Michael McKee in an interview Wednesday on Bloomberg Television. “And I think we ought to be sensitive to that.”
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“My own view is it’s having some effect on risk assets,” Kaplan said. “It’s a derivative of QE when we buy bills and we inject more liquidity; it affects risk assets. This is why I say growth in the balance sheet is not free. There is a cost to it.”
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... "Americans need cash now," Mnuchin said during a White House press briefing on the administration's latest efforts to combat the disease. ...
In an attempt to help ease the burden of the coronavirus pandemic on Americans, Rep. Rashida Tlaib, D-Mich., released a plan last week for what is essentially a temporary universal basic income (UBI) that would be distributed to all individuals in the United States, including illegal immigrants, and be funded by the printing of two $1 trillion coins.
"Hey @realdonaldTrump, let's provide relief from this crisis for people by giving pre-loaded debit cards to every person in America," Tlaib tweeted over the weekend. "No additional debt -- we'll just mint two coins."
The plan, outlined on Tlaib's website, would send a debit card with $2,000 pre-loaded on it to every person in the U.S. and reload it with $1,000 every month "until one year after the end of the Coronavirus crisis."
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The FDIC insists that there’s nothing to worry about.
That’s ridiculous. The FDIC only has $109 billion to insure the entire $13 trillion US banking system. That’s less than 1%!
The FDIC also insists that they’ve always been able to prevent depositors from losing money. “Not a single depositor has lost money since 1933.” And that’s true.
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What, meanwhile, does gold tell us about the stock market? I am not a fan of returning to the gold standard, but it is undeniable that the decision by President Richard Nixon to break that link in 1971 had a profound effect on what followed. If we regard gold as the continuing true measure of monetary stability, it suggests that stock markets’ gains in the almost 50 years since are almost entirely due to “money illusion,” or the erosion of the dollar’s buying power. The following chart shows the value of the S&P 500 in dollar terms, and the ratio of the S&P 500 to the gold price, both set to 100 when Nixon left the post-war Bretton Woods agreement:
In gold terms, the stock market was higher than in 1971 for a few years around the top of the dot-com bubble, and again for a few months at the top of the latest bull market. It is now almost 30% below where it was in 1971.
To be clear, stocks would still have been a better investment than gold in 1971, because these numbers don't include reinvested dividends. But this exercise suggests that stocks’ function as a store of value is largely an artifact of the dollar. The higher gold price also suggests that confidence in the dollar is waning.
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... Thomas Piketty. His chart 9.8 shows a sudden and staggering take off in the inequality rate, first in America, then in Europe. Yet it wasn’t the rejection of socialism that swept the world at that juncture. Socialism was rejected after World War II. What happened in the 1970s was the advent of fiat money — money with no legal attachment to any standard of value.
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“COVID-19 is now inversely related to the markets. The worse that COVID-19 gets, the better the markets do because the Fed will bring in stimulus. That is what has been driving markets,” said Andrew Brenner, head of international fixed income at NatAlliance.
Here are some of the market bubbles that investors are attributing to the Federal Reserve’s intervention.
STOCK MARKET BONANZA
The Federal Reserve has not bought stocks as part of its financial stimulus programs. But its near-zero interest rates and credit support for large swathes of Corporate America have driven yield-hungry investors back to the equity market.
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IPO FRENZY
The stock market euphoria has spilled over into initial public offerings (IPOs) and other stock sales to investors.
A record $184 billion was raised in U.S. equity capital markets in the second quarter, according to Refinitiv IFR data. Over $8.9 billion worth of IPOs in the second quarter priced above the target range, the highest amount since the third quarter of 2014, according to Dealogic.
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DEBT BINGE
The Fed’s bond-buying programs encouraged companies to tap credit markets and made the second quarter the busiest ever for debt issuance.
Some $1.2 trillion of investment-grade paper was sold in the first half of the year, the highest issuance volume recorded by the Securities Industry and Financial Markets Association. Even though the Fed refrained from buying most junk-rated bonds, issuance was at $200 billion through June, more than double last year’s rate.
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... We're less confident that the Republican majority in the House is going to address the most important issue before the new Congress: monetary reform.
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... questions like, say, the debt ceiling, the failures of the Federal Reserve, and inflationary overspending. Why hasn't the leading candidate for speaker addressed those strategic questions? The Biden economy -- inflation, overspending, over-regulation, debt forgiveness -- is by far the biggest issue for Americans. This cataract of error is the fruit of the Age of Fiat Money. Yet no one in the Republican Party articulates a strategic vision.
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Yes, our monetary system depends on an illusion for it to exist at all.Does our monetary system depend upon an illusion?
Quoted because it is factually true.The only thing that really underwrites modern money is that its rigidly enforced as the only lawful form of payment, so ultimately an illusion that is backed up by a man with a gun.
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Why can't we have a monetary system run in such a way as to cause people to voluntarily want to use it instead of one where people are forced to use it?
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The Federal Reserve is in the unenviable position of achieving its mandate by crashing the economy. It's not something it wants to do, as Fed Chair Jerome Powell meekly admitted in his exchange with Sen. Elizabeth Warren (D–Mass.) last week. But it's something that happens as an unavoidable outcome of slowing down an economy littered with excess money and inflation. Broad money growth has been negative since late November, and interest rate expenses on everything from corporate borrowing to credit cards to the government's own debt have been rising fast.
This hiking cycle, the fastest that the Fed has embarked upon in a generation, was always likely to break something. ...
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Because Treasuries are "risk-free" and therefore carry lower capital requirements for banks to hold against them, banks allocate more of their funds to them. This concentrates banking system risk in a single interest-sensitive security. SVB is just the most extreme and reckless version of a risk present in most American banks. For reference, the rest of the U.S. banking system has unrealized losses amounting to more than $600 billion, some 25 times more than the losses that just brought down SVB.
There's no shortage of blame to place on regulators for having engineered such an unnatural banking market. Far from making banks "safe," the regulatory system concentrates risks, with the alphabet soup of Fed liquidity facilities standing ready to money-print their way out of any trouble.
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