Socialism For The Rich: The Biggest Names In Finance Are Stone, Cold Hypocrites
You can't help but laugh - or at least emit a despairing chuckle.
The discrepancy between, on one hand, headlines trumpeting further gains on US equity benchmarks, and, on the other, the tone of stories documenting economic despair, the disintegration of the country's social fabric, and the hideous perversion of American democracy, is nothing if not comedic. It's tragicomedy, to be sure - but it's comedy nevertheless.
That's not to say there's anything funny about mass joblessness, obscene ine
The Fed is not managing risk it is suppressing the cost risk premiums. To this point the Fed has been able to mask the significance of that difference, but at an enormous cost. Not sure that can be done forever because I seriously doubt enough corporations or governments (Illinois and NJ come first to mind) can pay the bills coming due.
NB: The Fed just extended its municipal lending program to include municipalities of any size and transit authorities among others (and, of course, Illinois was first in line). Very prescient. Very worrisome for what it portends.
No, it is not worrisome. What would be worrisome is the opposite (i.e., if you just left everyone to twist in the wind).
You cannot let borrowing costs for local governments go through the ceiling and you cannot let states go broke.
Everyone has seemingly gone crazy (likely from reading too much click bait from people like Minerd and Gundlach and Howard Marks).
It is incredible (absolutely incredible) that anyone believes that people like Powell, Lael Brainard and Mary Daly, are somehow the problem, while billionaires with Twitter accounts are the people who know what’s best.
It’s totally insane.
I wrote “prescient” as I believe the Fed has correctly anticipated the arena of real danger and is taking appropriate steps. Even more would be better. As for letting states go broke –Argentina does it all the time and in our own history Arkansas Maryland and, surprise, surprise Illinois (I guess old habits die hard) among others defaulted on huge tranches of foreign held (i.e. England) debt in the 1840s. They remain with us today. Is it a good thing? Quite right — no it is not. Personally, I believe that the assumption of state and municipal debt by the Federal government with a bond buying assist from the Fed would be a much better way to go –a Funding Act for our own “Revolution” –Alexander Hamilton can still teach us a thing or two about public finance.
I would want to give kudos to Summers too.I think Powell is to be admired for his own change of mind. After all, he was trying to unwind the balance sheet and raise rates the folly of which I believe you pointed out on numerous occasions which was only about 2 years ago. I suspect that his heart of hearts detests every single one of the facilities that he has seen to implementing up and running. His commitment to them should be the surest sign of how necessary they are and how dangerous the situation.
You are phrasing your argument better and better. You are the one who is doing the right nothing Mr. H. You are taking a look at the what is now without projecting your own economic “Truths” from yesterday.This has happened so fast in real time that theories that were argued were tested real time. Powell may have been avoiding the kind of supply chain disruption that would affect food and infrastructure. Winter no less.
Let us not kid ourselves. This has shown the system for what it has become. Built in tax system of rentier crony capitalism via Fed policy. If Americans are OK with that, fine. But it should be understood and explained for what has now been brought to a clear view. So yes, many economists are acting in bad faith because they think they own the truth. Being blind is not the same as taking in the view {doing nothing}
The lesson should not be my old truths hold. It is different now. The gold standard is over. Zero sum thinking must end.
I mean, I hope everyone understands how easy it would be for me to come on here everyday and write articles about how “crazy” it is that the Fed is doing this, or funding that, or buying this, etc. etc.
That is the cheapest of cheap financial content and nobody should take it seriously. I could churn out 25 articles like that every day without even thinking about it. That kind of stuff has been polluting the debate for a decade, and for what? Certainly not for everyday Joe to do any better, that’s for sure. And I can guarantee you that for all that kind of ominous rhetoric about “moral hazard,” all of the people writing it have been long everything for a long time, otherwise they’d have no clients left.
My whole thing is like: “Let’s have an intelligent discussion.” Let’s not just read the same narrative every, single day forever.
Thank you for the effort sir. At this point in our history I view your effort as being patriotic and appreciated.
“Lets not just read the same narrative every, single day forever”. Exactly why there’s 8,654 of us here H, there’s obviously an appetite out there for a quality alternative…that also happens to be unmatched in my opinion. Time and effort is much appreciated.
Thank you–this particular article is one of the best you have written in my time reading your stuff. It’s very accessible, and is calling out things that need to be called out..
Thank you salute
The problem is always how to make it happen. Human social systems are hard to change because they ultimately evolve to be controlled by the people that benefit. There are very few saints at the top who will sacrifice their good fortune and power to benefit others. Gun background checks are a less complex example that demonstrates the same principles. The vast majority of the voting US population want them but the powers that be aren’t delivering as they don’t see it in their interest. I’m fairly certain that this is the opposite of what the framers of the constitution had in mind. If MMT means a more equitable distribution of wealth, the wealthy 10% that also have the power are not going to be agents of change because they are mostly zero sum thinkers. We’ve been working on race relations for 400 years and still haven’t gotten many of the basic changes in place that we know are necessary. Bottom line, the high stakes game of chance known as the market may well continue flat or up as long as there isn’t something better for those that can afford to gamble.
I agree “human social systems are hard to change”. Often it takes a revolution or a war. The world is certainly on the brink of something. H summed up the situation above “When the pandemic hit, it disproportionately affected those in low-paying jobs. It hit minority communities hardest. It further exposed the nation’s broken healthcare system. It pushed America to the brink, and the death of George Floyd shoved the country over the edge.” People are scared and desperate, they are looking for a way out. Hopefully our govmt will provide a peaceful solution but i am not holding my breath.
…and thats why i subscribed.
Another great article.
This is asinine. The fed is just as complicit as El-Erian, Minerd, and anyone else you care to name.
You say the fed used the tools it had available but the fed used tools it did not have available as well.
Any tool the fed could have dreamed (including the one you so elegantly point out) was at their disposal at the height of the crisis. No politician, elected or appointed, would have denied them.
They went back to the well instead.
Do you suppose it’s because Powell and company have no imagination, or maybe because they don’t want to?
The last two days have brought a number of calls from friends who are not active in the markets but know of my involvement. The substance of each call involves anger over the market – the endless rallies in the face of their personal pain and fear for the future. I fear that at some point, this will be the mantra of the people and the popular press. And the Fed and the “wealthy” will be in their gun sights. Sometimes, the disconnect becomes the “catylyst”.
You go TRH! Clarity refuting half truths… Getting better and better with time. Thanks.
If the Federal government has to financially bail out the states that spent more than they collected- kind of calls into question why states even bother to collect taxes. Citizens could elect politicians to set the spending side of the state budget and then just have the Federal government fund all states.
(haha)
Although we gnash our teeth, corporate bondholders have been given the largest Mulligan in perhaps world financial history. But it had to be done as the alternatives are worse. Do we really want states defaulting on pension obligations? Or having to abandon necessary capital projects as the funding stream (i.e. a state gasoline tax) be abandoned? Letting state Medicaid programs go bankrupt? Less income, more job losses, and fewer services at a time of greater need do not seem like a good way to go right now. The same moral hazard problem that we complain about private bondholders would actually be less an issue if the Feds were to assume state and municipal debt. Special bonds and special Fed buying facilities could be created to quarantine the debt and permit the programs to be unwound if ever the day that it would become possible to do so.
For me the problem is not providing one time financial assistance to over-extended States related to covid costs and revenue hits, but rather the prescient we set if the Fed provides financial support for all manner of underfunded State programs. That is tantamount to giving States the green light for unchecked future spending as someone (the Fed) will always have their back. Totally unsustainable. It would unleash a competition by States to match the highest per capita spending… and why not? It removes the negative consequence feedback loop that limits over-promising.
But you do not have a problem with the Fed guaranteeing unlimited assistance to the “private” bond market? Why does “whatever it takes stop” at a PO Box in Delaware? Is the moral hazard problem different for state and local leaders than for corporations and investors? (And look at everyone taking on leverage –to do what? Front run the Fed)
Who is the largest employer in states? –far and away state and local governments. Who has the largest pension obligations? The most “safety net” obligations?
The Fed buying equities seems to be a viable proposal but as soon as you talk about bailing out “governments” it becomes unthinkable. Why is that?
What is going to happen when foreclosures start and commercial properties continue to stop performing? Is the Fed going to assume the worthless mortgage and continue to pay the property taxes as if nothing has changed? If not, who or what is going to replace the lost property tax revenue? States rely heavily upon excise taxes –and state budgets project revenue growth not just a steady state let alone a decline. Free money for corporations so its workers can come how to a community devoid schools, public safety officials and passable roads with working lights? Doesn’t make a whole lot of sense to me.
If the last 12 years has taught us nothing it is that the Fed believes we can never ever have a recession again. And now we have one because the Fed is not omniscient or omnipotent. Exogenous shocks happen and will happen again. The problem with GFC and the response is that that our economy cannot even tolerate a mild recession and so it is not a symmetrical choice between either an unprecedented recovery or a Depression –any prolonged downtown turn of even the mildest form will ignite a positive feedback loop that will require more and more debt to climb out of. And that will constrain future growth. We will be lucky if it is a lost decade followed by secular stagnation.
There is much debate about the benefits of QE, “emergency measures” etc. Many think they were a serious mistake. I believe they were the only credible option but it is important to remember that it is not a panacea or even a cure. Fed intervention is a therapeutic. When the Fed administers it, the patient is very very ill. Between the side effects of the therapy and the underlying condition of the patient, the recovery will be slow and incomplete. Disability rather than death is far and away the most frequent outcome of a trauma. We should insure ourselves accordingly.
I am very pleased to be a reader of this site. It has helped me see the world more clearly. I do appreciate the incredible effort you put into this work.
I will simply state that change occurs when the people who can enact that change are seriously hurt by the current situation. The “Austrian cure”–true capitalism for all, might well kill the patient. But on the other side, lies a lot more potential for a much fairer world as the wealthy have to react to a completely new dynamic (either a complete asset reset as mentioned or a revolution).
Rabobank was generous in their assessment. There is no “Austrian cure”. Austrian economics is a joke beyond its initial contributions. We got what we needed from it a long time ago and since then, it’s devolved into something that shouldn’t be taken seriously by anyone, anywhere. It’s not even really economics. It has no place in any academic institution and should be banished to the dustbin of history.
Just one man’s opinion. lol
As the debt load for a lot of countries rises to levels with so many zeroes that repayment is impossible, with economies in shambles, demonstrations and a pandemic at hand, I don’t have a clue as to what the answer is to “Where do we go from here?” I do see the humour though.
I have been trying like hell to believe all that is now occuring. Wampum or gold were the currencies of North America at one time. Gold is a hard money theory, wampum was a fiat currency. Politics determined which money predominated. They both worked. The body politics can use any money to facilitate an economy. It has intellectual ramification that now should be thought through before using the old tropes.
Gold is only valuable when people think it is. It, too is “fiat” currency. Try to buy a six-pack with gold.
Excellent article, truly. It’s absolutely right to suggest that this is not the time to talk about a trigger-happy Fed. That time was last year.
H, great stuff. I don’t know how you pump out so much quality content on a daily basis.
How’s your health holding up these days?
I agree that the Fed has a limited toolbox and that a fiscal response would have been much better to an extended monetary response during the GFC. Also the Fed had to open the taps on the repo market during the pandemic because the world depends on dollars. However the Fed did NOT have to buy junk bonds and with a coordinated response with the Treasury could have had the companies with a solid business but too much debt (Boeing, Delta, Ford, etc.) go through a controlled Chapter 11 to preserve the jobs and the vital industry while trimming the debt load (equity holders get wiped out and bond holders become the new equity holders). Or the government could have become the new equity holder and given the equity to people through Social Security or similar. But the present situation just makes the situation worse at a time when we have no real leadership.