Ian Welsh

The horizon is not so far as we can see, but as far as we can imagine

Tag: federal reserve

Trump’s Continued Collision with the Federal Reserve

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On October 22, 2018

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Back around Trump’s election, I said that there would be a collision between him and the Federal Reserve. At the time, it was run by Yellen.

The fact is that the people who elected Trump aren’t feeling good. To make them feel good, Trump is going to have get the official unemployment rate lower than it is now, at least under four percent, and hopefully to three percent or lower and hold it there for some time, at least two or three years.

This stuff takes time to ripple through the economy, and it takes time for a tight labor market to push employers to both raise wages and to hire people who they consider marginal.

If the Federal Reserve raises rates if/when Trump’s policies (“fiscal,” in the above) start to work, they will be making sure he can’t deliver to his constituency.

This is a direct collision course.

Now let me say something simple. The Federal Reserve, for over 30 years, has deliberately crushed wages. This was policy. Policy.

So, Trump hired Powell, and Powell is doing what Yellen would have done. Trump, on October 11th, said that he wouldn’t fire Powell, but was only disappointed.

It’s unclear whether or not Trump can fire Powell, however he can fire all other members of the Federal Reserve board for non-performance of duties. The case isn’t as clear as back in, say, 2009, but the economy still isn’t good for large parts of America, a case can certainly be made.

More to the point, Trump should.

Yes, Trump is the source of all evil and anything and everything he does should be opposed, I know, but bear with me: The Federal Reserve should not be insulated from pressure from elected officials.

I know that orthodoxy says it should, but the fact is that, since 1979, the Federal Reserve has raised interest rates whenever it looked like wages were going to rise faster than inflation. The Federal Reserve, in other words, has crushed wages.

This is bad. It is at the heart of why we have the rise of the right, and so many other problems. Vast inequality, in democracies, always leads to political instability, and in democracies the purpose of the economy should be to create a good life for everyone, anyway.

Trump ain’t a good guy, but wages aren’t increasing for ordinary people. That means that whatever the nominal unemployment rate is, the US isn’t actually at full employment. If it was, there would be rising wages. It is that simple. To raise interest rates before there are even significant wage increases is malpractice, even by the usual standards of monetary policy–and the usual standards are already malpractice.

Just because one despises Trump, one should not allow the major part of economic management be run by people who despise ordinary people receiving wage increases, or, indeed, by “independent bodies.” Democracy means elected officials having control over real policy.

So, I hope Trump fires a bunch of Federal reserve members, I hope it goes to the Supreme Court, and I hope that those firings are upheld.

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Yellen’s Legacy Is Doing Nothing that Mattered

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On November 3, 2017

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So, Janet Yellen has been replaced as Fed chair.

Her reign was meaningless, she just kept the trends moving as they were, and was essentially no help to ordinary Americans. Yes, she kept interest rates low, but that meant little; all that money flooded into corporate bank accounts.

I don’t want to slam Yellen particularly hard. The person who was in place at the time when a real change could have easily been made was Bernanke, and he decided to bail out rich people and let ordinary people sink. He is responsible, with Bush, Obama, and Geithner, for the continued decline and stagnation of the US economy, and for the damage to much of the world’s economy.

If Bernanke had done nothing but allow banks to go bankrupt and the government to take them over, with appropriate support, we would be in far better shape now, though the couple years after the financial crisis would have been worse.

Yellen? Yellen is a drone. She had no idea what to do, so she froze for years in the headlights.

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The Fed Hikes

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On March 16, 2017

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So, the Fed has raised its rate by .25 percent. This is bad policy, and it is bad politics.

Employment Population Ratio

Employment Population Ratio

The unemployment rate is at 4.7 percent. As I have discussed before, the primary use for the unemployment rate is to determine wage push pressure, not whether people can get jobs (they can’t, and have given up).

Even by that policy, whose intention and largely successful result has been to keep employees from getting raises much higher than inflation, thus flushing money to the rich, 4.7 percent is not full employment. This raise is early.

That leads us to the politics. Yellen has been quite clear in her opposition to Trump’s avowed economic policies and that she intends to use Federal Reserve policy to neuter them. Given Trump hasn’t done anything yet but make promises he may well break, this seems premature, but the perception on the right will be, and possibly accurately, that Yellen, who barely raised at all in eight years of Obama’s economy, is suddenly raising when a Republican is President.

It’s not a good look, and I don’t see any reason to give Yellen the benefit of the doubt. Americans have only barely begun to get raises that put their income higher than before the financial collapse, with millions still unable to find work, and she raises rates?

The Federal Reserve is both irredeemably corrupt and anti-democratic, as well as an incompetent tool of the rich. At the least it needs to be brought back under Democratic control, a wing of the Treasury department, as it was before 1951.

In the meantime, this is another spike in Trump’s chances of a good Presidency, another spike in the jobless coffins of too many Americans, and another way of making sure that the rich get all the gains while everyone else eats their scraps.

(See Also: Trump’s Coming War With the Fed.)

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The War with the Fed Begins

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On February 3, 2017

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As I predicted, the Fed / Trump war has begun (Pdf). (Letter from House Rep. McHenry)

I am writing regarding the Federal Reserve’s continued participation in internal forums on financial regulation. Despite the clear Message delivered by President Donal Trump in prioritizing America’s interests in international negotiations, it appears the Federal Reserve continues negotiating international regulatory standards for financial institutions among global bureaucrats in foreign lands without transparency, accountability or the authority to do so.

This is unacceptable.

…

The secretive structures of these international forums must also be reevaluated. Agreements like the Basel III Accords were negotiated and agreed to by the Federal Reserve with little notice to the American public, and were the result of an opaque decision-making process.

I have exactly zero sympathy for the Federal Reserve. They have spent 40 years sandbagging US wages and pretending that high unemployment was full employment; deliberately fueling the stock market when it would have fallen otherwise, and when elected parts of the government tried to improve the wages of ordinary people beyond what the Fed thought was acceptable, the Fed would undo what they had done.

Trump and Republicans are not the ones I’d want taking on the Fed, but the Democrats refused to do it. Nor do I agree with McHenry on what the Fed has done wrong (higher capital requirements are good), but I do agree that the Fed has repeatedly overstepped itself and needs to be brought to heel. It’s a pity it will be done by these people for these reasons, but c’est la vie.

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The Continued Collision Between Trump and the Fed

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On January 10, 2017

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As I noted before, the Fed and the Trump admin are on a collision course. More evidence:

The Fed’s argument is that the unemployment rate is low enough that it is at the natural rate of employment which doesn’t cause wage-push inflation. As of December, that was 4.7 percent. (There are tons of problems with this, but we’ll ignore most of them, what matters here is what the Fed thinks.)

I am old enough to remember when an unemployment rate of five percent was considered a scandal, but no matter.

The fact is that the people who elected Trump aren’t feeling good. To make them feel good, Trump is going to have get the official unemployment rate lower than it is now, at least under four percent, and hopefully to three percent or lower and hold it there for some time, at least two or three years.

This stuff takes time to ripple through the economy, and it takes time for a tight labor market to push employers to both raise wages and to hire people who they consider marginal.

If the Federal Reserve raises rates if/when Trump’s policies (“fiscal,” in the above) start to work, they will be making sure he can’t deliver to his constituency.

This is a direct collision course.

Now let me say something simple. The Federal Reserve, for over 30 years, has deliberately crushed wages. This was policy. Policy.

The idea that the Federal Reserve should be able to sandbag the policy (“fiscal”) of elected representatives has always been anti-democratic and bogus. They work fastidiously to make sure the rich get richer, to bail out banks, and ensure their profits. Despite “full employment” supposedly being part of their charter, they have defined full employment to mean “employment pressure which doesn’t lead to general increases in wages faster than inflation.”

That is, they have deliberately set out to create stagnation and decline of general wages, while deliberately also ensuring that the rich get richer.

That’s what the Federal Reserve does in practice, and has done since the early 80s.

And that’s why, as with many of Trump’s other targets, I have no intention of defending the Federal Reserve. Yes, Trump is bad, etc. But the Federal Reserve needs to be broken to the will of government, and thus to democracy.

Since none of the “non-bad” or “not so bad” presidents did it, it will fall to Trump to do it. This will probably be the worst way to do something necessary, but so be it; none of the so-called “reasonable” people will do it, so it will be done by someone unreasonable (if Trump does it, this is not a fait accompli.)

Along with breaking the intelligence community (which could lead the world into an even worse situation, but a task that also falls into “needs to be done” category), Trump may well wind up being the most transformative President since Reagan, or even FDR.

This is what happens when the necessary actions which are not taken by “reasonable” people. They wind up being done by unreasonable people, and those unreasonable people may not be “unreasonable” in the way you like.

Keep an eye on this: If the Fed doesn’t blink and Trump doesn’t break them, he’s probably a one-termer.

The results of the work I do, like this article, are free, but food isn’t, so if you value my work, please DONATE or SUBSCRIBE.

Federal Reserve Seal

Trump’s Coming Confrontation with Yellen and the Federal Reserve

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On December 15, 2016

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Okay, so the Federal Reserve, coincidentally, now that Trump has been elected, has decided that the economy is at full employment and they’ve raised rates.

The funny thing is, it’s true. Sort of. The unemployment rate (u-1) is low enough to be considered “full employment.” What that means is that the labor market is tight enough that, for the first time in Obama’s reign, workers actually got raises in 2015.

According to the economic policy regime which has run the Federal Reserve, and the US, since Greenspan, that can’t be allowed. The moment employment starts causing “wage push inflation” (wage increases faster than the general rate of inflation) it must be stopped.

Of course, out of Obama’s era, there has been only one good year so far (though 2016 will probably come in as decent), and the only reason the unemployment rate has improved is because millions of Americans gave up on finding a job. As a percentage of the population, there are about as many jobs as there were at the bottom of the last recession.

There was quite a bit of growth, but it didn’t make it into wages. The only way it will do so is if the labor market stays tight for years, because there are years (decades, really) to make up for almost all the gains going to the top few percent.

So, Yellen probably “should” have raised rates six months or so ago. She didn’t, probably because she’s Obama’s appointee–the same way that Bernanke didn’t when he “should” have because he was Bush’s appointee, and wanted a Republican to replace Bush.

Under Barack Obama, the deficit (how much the US pays on its debt) dropped, but the debt increased by $7.917 trillion (not including the first year, which he didn’t control). The deficit dropped because the Federal Reserve kept interests rates extremely low for years and years and bought up a pile of debt as well.

But the debt is higher than it has been, in relative terms, since the WWII debt splurge. And if Yellen raises rates, debt service charges will start to increase (not immediately, much of it is in longer term instruments).

More to the point, higher interest rates are meant to make sure that wages increases stop, the unemployment rate increases, and that (in effect) the economy never actually recovers from the financial crisis.

So Trump has a problem. He needs cheap money if he’s to have a good economy, and Yellen is ending the cheap money era–just as he’s been elected.

It’s not completely a coincidence, but it’s not entirely not a coincidence, and if I were Trump or his team, I’d be livid, and it looks like they are.

Worse, Trump has a big stimulus plan. It’s a bad plan, but it’ll still create some jobs, and Yellen has said:

“I would say at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment,” Yellen said.

That’s Fed speak for “spend the money if you want, but we’ll neutralize every dollar you spend.” Which, by the way, has been orthodox Fed policy since Greenspan and arguably Volcker–almost 40 years.

So, Trump (and Bannon) if they want a good economy and their stimulus to work, have a problem: Yellen and the Federal Reserve Board. And Yellen has stated she won’t step down till her term ends, in 2024.

They can do two things. The first is to wait, not for Yellen, but for the terms of other Federal Reserve members, to expire. Two slots of the six (seven with Yellen) are currently empty, he can fill those. That gives him two. One, Powell, is a Republican and may be amenable; and Fischer’s term expires June 2018. So by late 2018, Trump might have a Fed willing to cooperate with him–or at least not sandbag him.

BUT that’s quite a while, and assumes that Powell is amenable. It gives Trump only two years to make the economy work how he needs it to work, and means his first two years will be sandbagged by the Fed. Trump’s followers are not going to care what the reason is, they expect results.

The other option is hardball. Governors can be removed for cause. Trump can say they have performed badly (it’s not a hard case, and people who voted Trump and many others will agree) and remove them. This can then go to the Supreme Court, which, if Trump is smart, will then be firmly in Republican hands.

I will be frank: I would absolutely do this. I would have done it as Obama to Bernanke (if Obama had actually wanted a good economy, or to have banks go under) and I would do it as Trump. For four decades, the Federal Reserve has sandbagged wages and made sure the rich got richer. This is not even in question, and the financial crisis was only the largest proof of it, not nearly the only one.

I think this is coming. The Federal Reserve bows (and Yellen has been very clear she won’t) or the resisting Governors get booted.

There will be screams from Democrats and “liberals” and I will ignore most of them. As with ending the Trans-Pacific Partnership, this is the right thing to do, and it’s something that should have been done decades ago. Appointed technocrats sandbagging Congress’s fiscal policy and deliberately crushing wages was always evil.

Get out your popcorn, folks.

Oh, and these sort of stakes are why there is such a huge effort, abetted by the CIA (and opposed by the FBI) to make sure that Trump doesn’t take office.

Like it or hate it, he’s going to have to destroy much of how DC has done business for the last 40 years, and many people in power really, really don’t want this.

Don’t defend the Federal Reserve if you claim to care about workers, the middle class, or anyone under the top 10 percent or so. They have acted unutterably evil for decades, and if it takes another evil person to destroy their power, I’m fine with it. Frankly, the Federal Reserve should be placed under direct control of Congress with four year terms at most, and every central bank in the world should lose its “independence.” They have misused that independence to do little more than make the rich richer for decades and they are profoundly anti-democratic.

It’s a pity so much that has to be done will likely be done by someone like Trump, and that he’ll do much of it the wrong way to support terrible policies like tax cuts, but that’s what happens when the Left allows the Right to be the populist party, and chooses to be the party of bailouts and technocrats.

The results of the work I do, like this article, are free, but food isn’t, so if you value my work, please DONATE or SUBSCRIBE.

No Banks Means No Banking Crisis

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On August 29, 2009

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Joseph Stiglitz, the Nobel Prize-winning economist, is suggesting we let banks fail.

This is a slightly more radical version of what I’ve been saying* for some time:

  • We don’t need the current banks.
  • If they won’t lend, let them go under.
  • If the Fed can lend to banks, it can lend directly to banks and consumers.

The following article was originally published Feb 2, 2009.  I am reprising it here because the reminder seems necessary.

No Banks Means No Banking Crisis

Banks exist to act as intermediaries between central banks and those who need credit.  Banks are given the ability to create (yes, create) money through fractional reserve money, and they also have the right to borrow money at rates that no one else can receive.

Image by Twolf

Image by Twolf

If you could take your money, multiply it by 10 (that’s not the exact number, but as an example) and lend it out, do you think you could make a profit?  If you could borrow money at 1- 5% and then lend it out for more than that, in some cases 15% more, do you think you could make money? That’s how banks operate.

Banks are thus given an incredibly valuable privilege by governments.  It’s really hard to overstate how easy it is to make steady returns as a bank as long as you don’t get greedy.

In exchange for the right to create money and borrow it at rates no one else gets, banks are expected to add some value to the equation.  Specifically, banks are expected to figure out who is a good credit risk, and where money should best be loaned and used.  There are two sides of this arrangement:

  1. Money should be loaned where it has a high return.
  2. It should also be loaned to people who can pay it back.  And it should be invested in the same way, return averaged with risk.

Banks have not been doing this.

Banks have been seeking out the highest return without taking risk into account .  Instead, they have been seeking out high risk for high returns.  They haven’t been adding value.  They also haven’t been performing the taks of getting money to the people who can use it best.  Banks took the money and invested in securities which were essentially fraudulent, in a bubble that any idiot could see would not last, in non-productive financial industries.  They didn’t invest in manufacturing, by and large, or new technologies or alternative energy, or anything particularly useful.  They didn’t use money to actually grow the economy—GDP was going up, and profits were going up, but the illusion of growth was based on multiple financial bubbles that weren’t sustainable and didn’t indicate any real prosperity underneath.

And when it came to loaning to ordinary people, in many cases, they were lending at usurious interest rates.  (What’s your credit card’s interest rate?)

In exchange for the very valuable privilege of creating money and borrowing at lower rates than anyone else get, banks weren’t creating value for the economy; they were destroying value.

Stiglitz is right.  There’s no reason to keep banks around, at least not this bunch of banks.  Let private investors take their losses, guarantee deposits, do a clean up as best you can and create new banks.  Or in the case of the US, maybe not…

Instead, what needs to be done is to just have the Fed lend directly to consumers and businesses.  Let everyone switch their credit card to a Fed card, and as a one time thing everyone can switch over up to a $10,000 balance.  The interest rate?  How about the top end of the Fed Funds rate +4%?  Right now, that would mean a 4.25% interest rate.  If people default, well, garnish their wages.  You’re the government.

Start lending to businesses.  Base lending it off credit ratings after you take over the ratings agencies, or force reform, because the rating agencies demonstrated they are worthless when they rated much of the junk that’s now imploded as great credit risks.

In time the central bank makes these loans conditional—you can borrow money from the Fed only for certain things:

  • Want to buy a house to live in?  Sure, you can borrow the money in one of 5 standard mortgage styles.
  • Want a vacation home or an investment home?  Go to a commercial lender.
  • On your credit card, want to buy food?  Great.
  • Want to put a vacation on your card?  Forget it.
  • Want to buy a fuel efficient car?  Sure.
  • Want to buy a gas guzzler? Get your financing somewhere else. (Not that this is much of an issue, given the low rates car companies give.)

Of course, the Fed may not want to be in the business of looking into too many things too deeply.  So something like banks is useful for when folks do want that vacation, or that second home, or to borrow money to start a business as opposed to just a credit line for one that’s ongoing.

Fortunately there is one group of financial institutions in the economy which has done a good job as banks, even though they aren’t called banks: America’s credit unions.

Help credit unions expand, offer them better credit, get them together to set up wide ranging ATMs so folks can get their money anywhere.  Use the one part of the system which, because they aren’t stock companies driven by quarterly results and don’t expect multi-million dollar bonuses, didn’t get involved very much in the greed driven stupidity of the last few decades.

As for the banks, if they can survive on their own, great.  If they can’t, nationalize the banks and slowly wind them down.  It may take years, but so be it.  Wipe out the shareholders completely (they took the money in the good years).  Give the creditors what they deserve, if there’s anything left for them.  Move the deposits over to healthy banks or credit unions.

Stop throwing good money after bad.  Something like $8 trillion has been spent, loaned and guaranteed so far and it hasn’t stopped the crisis.  Take the losses, find out where the bottom is and build a new system.

This will also lead to a more vibrant society in the long run.  Banks have been abusing the privileges they received and as a result credit for the things America really needs has dried up.  Wanted a loan for a hedge fund?  No problem.  Wanted a loan for a new company employing hundreds that would only make 5% to 8% a year?  Probably not.

But it was the hedge funds returns that were fake.  And it was the small businesses that never started because they could only make 5% a year which could have produced real value and lasting jobs.  If you want people to start new businesses, if you want consumers to spend, then giving them credit at reasonable rates, and making that credit available, is what has to be done.

At the same time, due diligence has to come back into the equation.  Everyone in America needs a credit card.  Might as well just give them one.  Without it you can’t rent a car, stay in a hotel or really interact in a modern society. But eveyone doesn’t need or deserve the same credit limit.  And everyone doesn’t need a home equity loan, in fact very few people do.  Let the Fed do the drop dead easy lending “you have an income of $50,000 a year, you want a mortgage where you will pay $10,000 a year, that’s under 30%, you can have it”.  Have the credit unions and the few remaining banks do the more speculative lending, but watch them like hawks.  And take the credit bureaus and the ratings agencies under government sway, and either nationalize them or regulate the heck out of them, so that the ratings they give mean something.

Add in some federal anti-usury laws (no interest rates above fed funds + 15%, on anything, including fees) and you’ve got yourself a full new banking system where credit is available to those who need it at reasonable rates, while reasonable oversight is occuring.  And because so many investors and lenders were wiped out, well, the lesson will have been learned, for a couple generations, that if you do really really stupid things, the government won’t just bail you out.

No more privatizing profits and socializing losses.

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