The View From 1776
Tuesday, November 26, 2013
Obama’s Appeasement Of Iran
The Obama-Kerry deal reduces sanctions on Iran without meaningfully curtailing its continuing buildup of enriched uranium or its ability unilaterally to return to full-bore production of nuclear weapons. The deal, from Caroline Glick’s viewpoint, makes sense only as a means further to distance the United States from Israel and to weaken Israel’s defensive posture.
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Tuesday, November 19, 2013
Pretensions of The Liberal-Progressive Elite
Do we really need Obama, Nancy Pelosi, Harry Reid, and Mayor Bloomberg to run our daily lives? Is ObamaCare evidence of superior intellect to be found only among the scientistic, self-appointed gods of liberal-progressive-socialism?
Read ‘Nothing Is so Galling to a People as a Meddling Government’, on the Mises Institute’s blog, The Circle Bastiat.
Constitutional Principles • Political Theory • Welfare-State Socialism • (3) Comments
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Tuesday, November 12, 2013
Democrat/Socialist Party Radicals Oppose Both Hillary And The Party’s “Wall Street” Wing
Katrina vanden Heuvel, editor and publisher of The Nation magazine, in her Washington Post opinion column, lays out the radical, left-wing view point:
The ‘Democratic wing’ of the Democratic Party wakes up.
Founded in 1865, The Nation is this country’s oldest, still-running far-left, liberal-socialist publication.
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Monday, November 11, 2013
A Wall Street insider provides support for the message of my earlier post, The Greenspan Put Survives.
The following opinion piece appeared in the website of today’s Wall Street Journal.
Andrew Huszar: Confessions of a Quantitative Easer
We went on a bond-buying spree that was supposed to help Main Street. Instead, it was a feast for Wall Street.
By ANDREW HUSZAR
Nov. 11, 2013 7:00 p.m. ET
I can only say: I’m sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed’s first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.
Five years ago this month, on Black Friday, the Fed launched an unprecedented shopping spree. By that point in the financial crisis, Congress had already passed legislation, the Troubled Asset Relief Program, to halt the U.S. banking system’s free fall. Beyond Wall Street, though, the economic pain was still soaring. In the last three months of 2008 alone, almost two million Americans would lose their jobs.
The Fed said it wanted to help—through a new program of massive bond purchases. There were secondary goals, but Chairman Ben Bernanke made clear that the Fed’s central motivation was to “affect credit conditions for households and businesses”: to drive down the cost of credit so that more Americans hurting from the tanking economy could use it to weather the downturn. For this reason, he originally called the initiative “credit easing.”
My part of the story began a few months later. Having been at the Fed for seven years, until early 2008, I was working on Wall Street in spring 2009 when I got an unexpected phone call. Would I come back to work on the Fed’s trading floor? The job: managing what was at the heart of QE’s bond-buying spree—a wild attempt to buy $1.25 trillion in mortgage bonds in 12 months. Incredibly, the Fed was calling to ask if I wanted to quarterback the largest economic stimulus in U.S. history.
This was a dream job, but I hesitated. And it wasn’t just nervousness about taking on such responsibility. I had left the Fed out of frustration, having witnessed the institution deferring more and more to Wall Street. Independence is at the heart of any central bank’s credibility, and I had come to believe that the Fed’s independence was eroding. Senior Fed officials, though, were publicly acknowledging mistakes and several of those officials emphasized to me how committed they were to a major Wall Street revamp. I could also see that they desperately needed reinforcements. I took a leap of faith.
In its almost 100-year history, the Fed had never bought one mortgage bond. Now my program was buying so many each day through active, unscripted trading that we constantly risked driving bond prices too high and crashing global confidence in key financial markets. We were working feverishly to preserve the impression that the Fed knew what it was doing.
It wasn’t long before my old doubts resurfaced. Despite the Fed’s rhetoric, my program wasn’t helping to make credit any more accessible for the average American. The banks were only issuing fewer and fewer loans. More insidiously, whatever credit they were extending wasn’t getting much cheaper. QE may have been driving down the wholesale cost for banks to make loans, but Wall Street was pocketing most of the extra cash.
From the trenches, several other Fed managers also began voicing the concern that QE wasn’t working as planned. Our warnings fell on deaf ears. In the past, Fed leaders—even if they ultimately erred—would have worried obsessively about the costs versus the benefits of any major initiative. Now the only obsession seemed to be with the newest survey of financial-market expectations or the latest in-person feedback from Wall Street’s leading bankers and hedge-fund managers. Sorry, U.S. taxpayer.
Trading for the first round of QE ended on March 31, 2010. The final results confirmed that, while there had been only trivial relief for Main Street, the U.S. central bank’s bond purchases had been an absolute coup for Wall Street. The banks hadn’t just benefited from the lower cost of making loans. They’d also enjoyed huge capital gains on the rising values of their securities holdings and fat commissions from brokering most of the Fed’s QE transactions. Wall Street had experienced its most profitable year ever in 2009, and 2010 was starting off in much the same way.
You’d think the Fed would have finally stopped to question the wisdom of QE. Think again. Only a few months later—after a 14% drop in the U.S. stock market and renewed weakening in the banking sector—the Fed announced a new round of bond buying: QE2. Germany’s finance minister, Wolfgang Schäuble, immediately called the decision “clueless.”
That was when I realized the Fed had lost any remaining ability to think independently from Wall Street. Demoralized, I returned to the private sector.
Where are we today? The Fed keeps buying roughly $85 billion in bonds a month, chronically delaying so much as a minor QE taper. Over five years, its bond purchases have come to more than $4 trillion. Amazingly, in a supposedly free-market nation, QE has become the largest financial-markets intervention by any government in world history.
And the impact? Even by the Fed’s sunniest calculations, aggressive QE over five years has generated only a few percentage points of U.S. growth. By contrast, experts outside the Fed, such as Mohammed El Erian at the Pimco investment firm, suggest that the Fed may have created and spent over $4 trillion for a total return of as little as 0.25% of GDP (i.e., a mere $40 billion bump in U.S. economic output). Both of those estimates indicate that QE isn’t really working.
Unless you’re Wall Street. Having racked up hundreds of billions of dollars in opaque Fed subsidies, U.S. banks have seen their collective stock price triple since March 2009. The biggest ones have only become more of a cartel: 0.2% of them now control more than 70% of the U.S. bank assets.
As for the rest of America, good luck. Because QE was relentlessly pumping money into the financial markets during the past five years, it killed the urgency for Washington to confront a real crisis: that of a structurally unsound U.S. economy. Yes, those financial markets have rallied spectacularly, breathing much-needed life back into 401(k)s, but for how long? Experts like Larry Fink at the BlackRock investment firm are suggesting that conditions are again “bubble-like.” Meanwhile, the country remains overly dependent on Wall Street to drive economic growth.
Even when acknowledging QE’s shortcomings, Chairman Bernanke argues that some action by the Fed is better than none (a position that his likely successor, Fed Vice Chairwoman Janet Yellen, also embraces). The implication is that the Fed is dutifully compensating for the rest of Washington’s dysfunction. But the Fed is at the center of that dysfunction. Case in point: It has allowed QE to become Wall Street’s new “too big to fail” policy.
Mr. Huszar, a senior fellow at Rutgers Business School, is a former Morgan Stanley managing director. In 2009-10, he managed the Federal Reserve’s $1.25 trillion agency mortgage-backed security purchase program.
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Thursday, November 07, 2013
The Greenspan Put Survives
Obama’s nomination of Janet Yellen to succeed Ben Bernanke as chairman of the Federal Reserve was joyously received in Wall Street. Reassured that the “Greenspan put” (the readiness of the Federal Reserve to pump fiat dollars into the financial system to shore up stock and bond prices) remains in force, stock and bond market speculators turned on a dime and pumped the markets back up after word of Yellen’s nomination. Financial market speculation will remain a no-risk game as long as the Greenspan put survives; speculators can be confident that they can borrow whatever amounts they need, at far-below-real-market interest rates.
Even more than current Fed chairman Ben Bernanke, Yellen has been an aggressive supporter of flooding the financial markets with trillions of phony, fiat dollars. Bernanke and Yellen both believe that the continuing inflation of stock market and bond prices will create a “wealth effect” that will fully revive the economy. So far, their expectations, to put it kindly, have not been met by economic performance. We continue to endure the slowest economic recovery since that of the the 1930s socialistic New Deal.
Main Street America will just have to keep scavenging for crumbs, while Wall Street speculators rake in huge trading profits, courtesy of the Fed.
In a free-market economy, little of which remains today, investors would focus on real, underlying economic factors such as the growth outlook for corporate sales and profits, along with increases in the numbers of well-paying, full-time jobs. Stock market prices would reflect that sort of fundamental analysis. More importantly, the stock and bond markets would be funded by individuals’ savings, not by the expectation that banks and hedge funds could continue indefinitely to borrow unlimited amounts of short term money at near zero rates of interest.
In a free-market economy, with a stable currency, bank lending would be for the purpose of financing production of real goods and services, not to fund leveraged buyouts or stock repurchases by corporations to pump up earnings per share artificially. Long-term investors such as insurance companies and pension funds would use the savings of individuals to fund expansion of corporations’ plant and equipment, based on rational expectations of long-term profit generation.
Of critical importance, in a free-market economy individual and corporate debt would be limited by the borrower’s actual, not imagined, ability to repay the debt.
Increasingly since the October 19, 1987, Black Monday stock market crash, the stock market has become a forum for rampant speculation and imprudence on a massive scale. That turn away from fundamentals is the direct product of the Federal Reserve’s flooding the financial markets with liquidity to buoy the stock market averages. Since then, in the 1990s dot.com speculative boom-and-bust and the Long Term Capital Management collapse in 1998, through the implosion of the housing bubble and the bankruptcies of Bear Stearns and Lehman Brothers in 2007-2008, the pattern has been the same: whenever the stock market dives or financial institutions waver, the Fed immediately endeavors to rescue them with massive infusions of monetary liquidity through book entries on the Fed’s books of account, i.e., via creation of money out of thin air. Needless to say, the Fed’s money creation vastly outstrips the growth of America’s real production of goods and services.
Today, even after the cold-water bath of 2007-2008, individuals, financial markets speculators, and especially the Federal government, continue to live on borrowed money, in amounts that far exceed their capacity to support the prodigious amounts of debt. Before the 2007-2008 economic crash, the Fed held a bit less than $800 billion in Treasury securities. Through artificial creation of dollars, the Fed today holds more than $3.2 trillion of Treasuries and mortgage-backed securities, a four-fold expansion, with little to show for it outside Wall Street.
Evidencing the stock market’s dependence on the Fed’s loose money policy, today’s Wall Street Journal notes that, “Stocks were dragged down by concerns over what stronger-than-expected U.S. growth might mean for Federal Reserve policy…” In other words, improvement in the real economy is a negative factor for stock and bond market speculators. At today’s market close, the S&P 500 index was 1747.15, a 132% increase from its 2008 low of 752.44. Wall Street speculators have been well rewarded by the Fed, but inflation-adjusted income of Main Street workers has risen hardly at all. In the case of retirees living on fixed-income investments, incomes have dropped sharply because the Fed is suppressing interest rates far below real market levels.
In all the events answered since 1987 with the Greenspan put, the Fed appears to have assumed that the stock market is the same thing as the underlying real economy. Little attention was paid to what was happening in the latter, as skyrocketing debt financed huge imports of cheap merchandise from China and Southeast Asia, driving non-government employment and real (inflation-adjusted) wages down in the United States. Market analyst Jim Grant noted during the last Bush administration that annual increases in consumer goods imports from China were financed by the boom in home equity loans, which in turn were fueled by the Fed-created housing price bubble.
Meanwhile in the real world, as inflation-adjusted family income declined, we became less able to support mounting personal, corporate, and government debt.
Fed chairman Alan Greenspan, during the dot-com stock market run up, did caution Wall Street against “irrational exuberance,” but quickly backed off when the stock market averages declined. Similarly, in May of this year, Fed chairman Bernanke hinted that the outlook for then-anticipated improvement in the real economy might lead to tapering off the Fed’s monetary policy of quantitative easement (QE3). When long-term interest rates jumped sharply and the stock market cratered, Bernanke too backed off, and the Fed Board voted to continue inflationary monetary expansion indefinitely. The stock market, of course, responded with a resumed upsurge.
Highly-regarded market strategist Byron Wien recently, in Barron’s website, wrote, “…unemployment is likely to remain high and capital spending, ordinarily contributing importantly to growth at this stage in the cycle, will remain low. Operating rates in the U.S. are below 79%; capital spending picks up when they are in the mid-80%–90% range. Consumer sentiment is likely to remain unenthusiastic in this environment, preventing retail sales from reaching a robust level.” He expects, nonetheless, that the Fed’s continued market support will lead to higher stock market averages.
Today, irrational exuberance is again abroad in the land. The Wall Street Journal reported, in its October 10th website edition, that two-thirds of initial public stock offerings (IPOs) of companies this year have been for companies with no earnings. That, it should be recalled, was the hallmark of the 1990s dot.com boom, which collapsed with monumental losses to speculators who believed that prices of tech stocks could only go up. Barron’s reports (10/23/13) that, “The New York Stock Exchange recently reported that the margin debt used by various hedge funds and other speculators has reached a new all-time-high record of $401.24 billion.”
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Sunday, November 03, 2013
Janet Yellen, recently nominated to succeed Ben Bernanke as Chairman of the Federal Reserve, is credited with establishing the Fed’s official policy target of 2% annual inflation.
Inflation, which is defined as the growth in money supply exceeding the growth of real goods and services, leads over time to a general increase in prices that makes payment of government debt service easier. But this convenience is at the expense of taxpayers, whose incomes and savings are being whittled away by the steady loss of purchasing power.
Theft of taxpayers’ incomes and savings is rationalized by the Fed’s Keynesian economic doctrine of collectivized, socialistic government as necessary to promote growth in business activity and employment.
What, in fact, has happened is that the Fed’s loose money policy, which results in drastic lowering of interest rates, has curtailed personal savings, the essential foundation of sound business growth via investment in new plant and equipment. Meanwhile, adjusted for inflation, people’s incomes are less than they were a decade ago.
Gene Epstein, in the Barron’s article below. delivers another body blow to the Fed’s Keynesian theorists.
| SATURDAY, NOVEMBER 2, 2013
Deflating the Inflation Myth
By GENE EPSTEIN
Contrary to recent assertions, rising prices don’t help profits or encourage people to spend quickly.
Desperate times can breed ideas born of desperation. The sluggish rate of economic growth is getting blamed on a new scapegoat, the tame rate of price inflation. The consumer price index ran just 1.2% higher in September than the same month a year ago, the Bureau of Labor Statistics reported last week, a rate of increase that falls noticeably short of the 2% target set by the Federal Reserve. And according to simplistic logic, economic growth would get a shot of adrenaline if only prices would rise a lot faster.
“Rising prices help companies increase profits; rising wages help borrowers repay debts,” opined the New York Times last week (“In Fed and Out, Many Now Think Inflation Helps,” Oct. 26). “Inflation also encourages people and business to borrow money and spend it more quickly.”
Somehow that prescription didn’t work out so well in recession year 1974, when the CPI jumped 12.3%, while the economy shrank. And as the chart on this page shows, despite the claim that profits benefit from rising prices, actual profit rates were much lower in 1974 than they have been over the recent expansion.
To focus on prices as the driver of profits is reminiscent of the old joke about selling at a loss and making it up on volume. Business activity is motivated by profit, not prices. The price of the output matters for profits, but the cost of the inputs—principally, labor—matters just as much. What really matters for profits, then, is the spread between the cost of the inputs and the prices of the outputs. Before we decide that the slow rise in prices is significantly impairing business activity, we should find out if profitability is suffering.
The chart tracks rates of profit, or profit margins, beginning in 1950 for the domestic output of nonfinancial corporations. Profits are taken as a percentage of “gross value added,” the economist’s measure of the contribution this sector makes to gross domestic product. We exclude corporate profits from overseas operations and from the financial sector, both of which have grown since 1950 and would have made the recent period look even higher in historic terms.
The chart does show that even for domestic nonfinancial corporations, the rate of profit has been higher than usual, even higher than during the late-1990s, when GDP growth ran an enviable 4% per year. The chart also indicates that profit rates over the decades have been unrelated to rates of inflation: highest in the relatively low-inflation decades of the 1950s and 1960s, and then moving lower in the high-inflation 1970s and 1980s; moderate in the low-inflation period of the 1990s, and then moving higher after 2000.
The recent pattern of relatively high profitability is consistent with record earnings per share in the third quarter of this year in Standard & Poor’s 500 stocks. It is also confirmed by the cost of the key input, labor. Labor costs incurred by business are best measured by labor compensation adjusted for labor productivity, called “unit labor costs.” And since labor productivity has been increasing almost as fast as labor compensation, unit labor costs in the nonfarm business sector through the first half of the year have run less than 1% higher than in 2008. By contrast, over the same period since 2008, the increase in the CPI has run more than 10%.
As for the notion that “rising wages help borrowers repay debts,” that tendency can be undermined by rising prices. If the cost of living leaps ahead faster than the rise in wages, that could mean less left over to repay debts. And as for whether inflation encourages businesses to “borrow money and spend it more quickly,” that mainly depends on business profitability—which, as we have seen, has been healthy over the recent expansion, and is unrelated to rates of inflation.
THE SIMPLE INSIGHT that business focuses on the spread between the cost of the inputs and the price of the outputs helps explain how business activity can flourish even when prices are falling—normally called “deflation,” which happened in the U.S. in the late 19th century. A study published by the mainstream American Economic Review called “Deflation and Depression: Is There an Empirical Link?” concludes, “A broad historical look finds many more periods of deflation with reasonable growth than with depression, and many more periods of depression with inflation than with deflation.”
So even the idea that deflation is to be feared is at least open to question. It’s a lot more interesting than the hoary notion that inflation is somehow our newfound friend.
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Friday, November 01, 2013
C.S. Lewis and ObamaCare
The Wall Street Journal’s October 31, 2013, Quote of the Day:
From C.S. Lewis’s essay anthology “God in the Dock” (1948):
My contention is that good men (not bad men) consistently acting upon that position would act as cruelly and unjustly as the greatest tyrants. They might in some respects act even worse. Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive. It would be better to live under robber barons than under omnipotent moral busybodies. The robber baron’s cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end for they do so with the approval of their own conscience. They may be more likely to go to Heaven yet at the same time likelier to make a Hell of earth. This very kindness stings with intolerable insult. To be ‘cured’ against one’s will and cured of states which we may not regard as disease is to be put on a level of those who have not yet reached the age of reason or those who never will; to be classed with infants, imbeciles, and domestic animals.