Federal Reserve

The Fed got it wrong

Posted on by j.giglio

The job market received a jolt last week when the Labor Department reported that just 38,000 jobs were added in May, the fewest for any month in more than five years. The experts expected a gain of 150,000 jobs and had included an estimated decrease of about 35,000 striking Verizon workers.

Equally disturbing, the job numbers for the two previous months were revised downward. In total, there were 59,000 fewer jobs in March and April than had previously been reported. This suggests the May numbers will be revised downward next month.

But it gets worse. Of the 38,000 new jobs, only 25,000 were in the private sector. Yet even as job growth stalled, the headline unemployment rate fell to 4.7 percent from 5 percent, in large part due to a drop in the labor force participation rate as many frustrated Americans stopped looking for jobs, meaning they are not counted in the unemployment rate. It’s an ominous sign that suggests the economy may be slowing.

Since the end of the recession, economic growth has been lackluster despite the Federal Reserve putting the pedal to the metal by pursuing zero interest rates and engaging in bond purchases known as quantitative easing. The rationale for this policy is that artificially suppressed interest rates and easy money are required for the Fed to fulfill its full-employment mandate. They assume that low rates stimulate business investment and make it easier for consumers to finance big-ticket purchases such as housing and automobiles.

The May employment numbers are just the latest evidence that it isn’t working. This should come as no surprise, since the Fed high priests’ failure to prophesize the 2008 crisis has been well documented.

President Truman once famously asked for a one-armed economist because his economic advisers kept telling him “on the one hand this, and on the other hand that.” For sure, there are pros and cons to the Fed’s monetary policy. Low interest rates have contributed to a partial recovery and growth may be stronger than it would otherwise have been. The rationale was to lower interest rates to encourage movement into riskier assets with higher yields, including stocks, junk bonds, real estate and commodities. The Fed has privileged Wall Street over Main Street in the belief that the wealth effect will trickle down to the ordinary American worker.

Lower rates would encourage greater leverage, i.e., borrowing to invest and boost asset prices. This pseudo “wealth effect” would then stimulate consumption, economic growth, and job creation. Such monetary policy raises the question of whether the Fed should be promoting risk and inflated asset prices that outpace real economic growth.

On the other hand, zero interest rates have created problems for savers, retirees and those on the other side of the velvet rope. Savers get virtually no return on their money market funds and saving accounts. Indeed, after inflation and taxes, real rates on these instruments are negative, promoting inequality and resulting in declining purchasing power. With so many Americans living paycheck to paycheck, is it any wonder that payday lenders are doing record business?

Lost interest is a permanent loss of wealth. Very low interest rates force retirees, who rely on interest income, to reduce their spending. Workers contemplating retirement will stay in the labor force longer to save more, blocking access for younger workers.

More importantly, low interest rates play havoc with retirement planning for both individuals and pension plans. Pension funds face increasing unfunded liabilities. Without adequate future income streams, retirement as Americans have known it is off the table.

Fed policy can’t overcome structural weakness in the job market that results from the twin challenges of globalization and rapid technological change. Continuing the policy of cheap credit is reminiscent of the old lesson about looking for a lost item under a lamppost at night because that’s where the light is. It’s time to look elsewhere for answers.

Originally Published: Jun 11, 2016

Negative interest rates are on the table

Posted on by j.giglio

Just two months ago the Federal Reserve (the Fed) hiked the short-term interest rate it controls. The quarter-point increase was the first in nine years after efforts to pump up economic growth by keeping the rate close to zero. Now several members of the Fed are talking about reversing themselves and moving interest rates into negative territory.

It’s not such a far-fetched idea. Sweden, Denmark, Switzerland, Japan and the European Central Bank have introduced negative interest rates. It’s the latest toy in the world of monetary policy, where the economy is seen as an automobile and interest rates are the gas pedal.

When Fed Chair Janet Yellen delivered her semiannual testimony before Congress last week, she said the Fed has not fully researched the issue of charging banks to hold their excess reserves. But the plot took a sinister twist when it was disclosed that the Fed asked banks to consider the impact of negative interest rates during the latest round of bank stress tests.

Under a negative interest rate policy, banks are charged to park their cash with the central bank. The hope is that this will encourage banks to stop hoarding money and instead lend to consumers and businesses to accelerate economic growth.

No one knows if negative interest rates would work in the U.S.; the Fed has never tried them. Fully identifying their impact is very complicated, but we know how the story will play out for the average Joe. If the Fed charges banks for excess deposits, the banks will in turn charge customers for depositing money.

Still further, just because the interest rate is negative does not mean a bank will pay you interest (rather than the other way around) when you pay back a loan. The average customer will not get paid to take out a loan, not now, not ever, never.

Negative interest rates effectively charge the customer for deposits, discourage saving and encourage spending. Forget about saving for retirement and a child’s education; this policy is designed to grow the economy by coercing people to spend. Of course, the customer can at least be held harmless by holding cash and earning a zero percent nominal return.

The Fed has effectively punished the millions of American who rely on their savings to get by. Safe options such as savings accounts, certificates of deposit and treasury bonds offer pitiful returns forcing many people to dig into their principle to make ends meet. Under negative interest rates, the longer funds are on deposit the less money is available for withdrawal as banks charge to hold the money. Also, if people are unable to retire, many will either remain in or re-enter the labor force, thereby competing with younger workers for jobs or risk their savings by putting money in risky investments.

Crazy as it sounds, this may be the new normal. Remember that when the Fed thought they could not cut the interest rate any more, they engaged in quantitative easing: basically creating money out of thin air and releasing it into the economy, mainly by buying bank debt securities.

Bargain-basement interest rates and flooding the system with trillions of dollars in cheap money has produced sharp stock market gains -though even that has ended in recent months – and enabled corporations to buy back their own shares and pursue mergers and acquisitions instead of expanding production and creating jobs. It’s time for the public to ask what we have to show for these aggressive and addictive monetary policies that are a misallocation of resources and contribute to income inequality by shifting wealth to asset owners.

Monetary policy does not make for good presidential debate sound bites, but the time is long overdue for candidates to engage on the issue of federal monetary policy and how it has contributed to income inequality.

originally published: February 20, 2016

Fed’s ‘hard cheese’ for the average American

Posted on by j.giglio

The Federal Reserve’s long-awaited September meeting ended with the Fed once again deciding not to raise interest rates. We have seen this movie before.

Consider a society in which government has been traditionally run by the Old Guys political party. They are great believers in “prudent government,” and their definition of prudence includes balanced budgets; having the government spend no more than it collects.

But along come the ambitious New Guys. They form their own political party with the goal of winning control of the government in the next election and begin campaigning aggressively on a platform that discredits the competence of the Old Guys.

“Look at our unpaved roads,” the New Guys thunder in their campaign speeches. “The people deserve paved roads so they can travel more safely and easily. But the incompetent Old Guys who run our government won’t give us the roads we need.”

To which the Old Guys calmly respond, “If the people really want paved roads, then the government should certainly provide them. But paving our roads will cost money, which would necessitate a tax increase.”

“Nonsense,” the New Guys shoot back. “Everybody knows the government is riddled with waste, fraud, and abuse. We’ll get rid of it all, which will free up more than enough money to pave our roads without raising taxes.”

Needless to say, the voters are drawn to the New Guys’ message of having the government pave the roads without making people pay more taxes. Getting something for nothing is very hard to resist in a society that lives beyond its means and wants political leaders who make certain the good times never end.

On Election Day, voters hand the government to the New Guys with a solid majority. But not long after they take over, the New Guys come face to face with two awkward realities.

First, there is not nearly as much waste, fraud, and abuse in government as they expected, and it doesn’t come close to adding up to the cost of paving the roads. In fact, the administrative cost of eliminating waste, fraud, and abuse is going to be more than the savings from doing so.

These all-too common realities put the New Guys in a real bind. The savings with which they planned to cover the cost of paving the roads turned out to be illusory.

They respond by punting on the use of fiscal policy to raise the funds necessary to pave the roads and deliver on their campaign promise before the next election.

Let’s get our “independent” central bank to pursue a policy of easy money and near-zero interest rates. That way, government will pay increasing portions of their ongoing expenses by simply “printing more money.” After all, the government has a monopoly on money as a commodity.

Equally important, Wall Street, which helps fund our campaigns, loves low rates and cheap money. Banks will pay almost no interest on savings, lending the savers’ money out to businesses, private equity funds, and hedge funds. Low rates also help companies that export goods.

Variations of this scenario have long played out in governments and it just happened again with the Federal Reserve’s decision not to raise interest rates. It’s a good deal for financial institutions that can play games with the cheap money they have been given without investing in the real economy.

As for the savers, including those who thought they had enough put aside for retirement, they will just have to learn to take more risks to achieve higher returns. As the Brits would say that’s “hard cheese” for the average American.

More evil has been carried out in the name of central banking than by any other force in human history, including religion.

Originally Published: September 26, 2015

Will Fed finally raise interest rates?

Posted on by j.giglio

Investors are trying to figure out whether the Federal Reserve will increase interest rates for the first time in nine years at its Sept. 16-17 policy meetings. The guessing game is complicated by recent stock market volatility amid concerns about China’s economy, but it is unlikely the Fed would delay its rate hike solely because of the China effect.

The timing of the Fed’s decision to reverse its near-zero interest rate policy is further complicated by conflicting economic signals that emerged from the last major data point before the Fed meets to discuss a rate increase. The Labor Department reported that the U.S. economy created 173,000 new jobs in August, less than expected, but the headline unemployment rate dropped to 5.1 percent, the lowest since April2008 and a level the Fed considers to be full employment.

Weekly earnings increased to a 2.4 percent annual rate in August and average number of hours worked also rose; all good for increased consumer spending.

Wages and GDP from the second quarter that showed a 3.7 percent annualized growth rate may keep rate increase prospects alive. Moreover, a tightening labor market and decisions by several state and local governments to raise the minimum wage might give the Fed confidence that the inflation rate, which collapsed with oil prices, will move closer to their 2 percent target.

On the other hand, the broader measure of unemployment, including those stuck in part-time jobs and discouraged workers who have stopped looking for work, remains at 10.4 percent. The labor participation rate remains low at 62.6 percent.

And just to make things more complicated, the reported jobs and GDP numbers are far from certain. As always, you can expect revisions in the coming months.

In an effort to induce growth during the financial crisis and subsequent Great Recession, the Fed aggressively eased monetary policy in the final months of 2008, slashing short-term interest rates.

The Fed used additional tools to stimulate the economy by easing credit and keeping interest rates low. Making housing more affordable and enabling households to refinance their mortgages at lower interest rates would free up income for consumer spending. For corporations, reducing the cost of capital would promote investment. Commentators routinely argue whether QE has improved the real economy. Critics contend that reliance on ultra-low interest rates is insufficient to accelerate economic growth. The policies may support economic activity, but can’t take the place of fiscal policies such as addressing mounting debt, rising entitlement program costs, the need for infrastructure investment, repairing the tax code, and trade policies that advantage the American worker.

These critics argue that the Fed’s policies transfer wealth away from savers and force savers and pensioners to take on more credit risk in an effort to boost returns in an era of low rates. Corporations use cheap money to engage in stock buyback programs rather than capital investment.

Put another way, the Fed pushed trillions of dollars of new money into banks, but too little trickled down to the real economy and job creation. According to this crowd, the Fed has been fighting for the one percenters.

John Stuart Mill said, “He who only knows his side of the case knows little of that.” It will be very interesting to see what the Federal Reserve does when it meets later this month to sort out piles of conflicting data and decides whether it’s finally time to raise interest rates.

Originally Published: September 12, 2015

Is China in a currency war with U.S.?

Posted on by j.giglio

China’s recent surprise decision to devalue its currency, the renminbi (also known as the yuan), versus the dollar sent shock waves through financial markets. It could trigger a race to the bottom to gain an export price advantage, which would have a major impact on the U.S. economy and on looming decisions by the Federal Reserve.

Many believe China’s move was an effort to gain a trade advantage. A drop in the yuan’s value makes Chinese products cheaper, costing thousands of jobs by forcing factories outside China to close.

China said the devaluation was a one-off event, but the move could set off a currency war, which is when two or more countries engage in currency devaluations to improve the competitiveness of their products in global markets.

Over 35 years, China has developed from abject poverty into an economic giant. It is the world’s second largest economy and accounts for about 12 percent of global exports. A country so reliant on trade must maintain the growth of exports, which have been the most important driver of China’s growth since liberalizing its economy in 1978. The U.S. is their biggest customer.

Chinese farmers continuously leave the countryside for higher paying jobs in urban areas. Robust economic growth is needed to absorb this workforce and maintain social stability and the existing political order, which is a top priority. If the economy worsens, China may further devaluate its currency to export its way out of the decline. Chinese exports were down 8.3 percent in July compared to 2014.

More importantly, China’s economic growth has slowed to an annual rate of 7 percent. That’s healthy for most countries- the U.S. struggles to keep annual gross domestic product growth above 2 percent­ but far below the previous decade’s double-digit growth.

Even though its GDP remains smaller than that of the United States, China is the world’s largest trading nation and is many countries’ most important bilateral trade partner. In the future, the yuan may well eclipse the dollar as the preferred currency of trade.

Some believe the devaluation may cause other countries’ central banks to respond, triggering a currency war. Both Japan and the European Union have repeatedly depressed their currencies in the past two years to promote exports. The U.S. certainly does it. The dollar took a deep dive after the Federal Reserve cut interest rates to near zero and flooded the world with cheap money through its quantitative easing initiative.

The devaluation engineered by Beijing also complicates the Federal Reserve’s September decision about whether to raise interest rates, which have been near zero since the 2008 financial meltdown. A weaker yuan would reduce the price of Chinese goods in the U.S. This would further depress the 1.3 percent inflation rate, which is below the Fed’s target of 2 percent.

Last month, the U.S. government reported that the economy added 215,000 jobs and the headline unemployment rate remained at a low 5.3 percent. That could support a Fed decision to raise its key interest rate.

But low inflation, weak increases in hourly wages and continued low labor-force participation could be reasons to delay their planned 0.25 percent increase until early next year. A rate hike would increase the dollar’s value, which would cause even more angst for American exporters, kill manufacturing jobs and sales of American goods; and slow economic growth.

To further complicate the situation, China has stockpiled more than $1.2 trillion in U.S. bonds, which help finance wars and huge budget and trade deficits. If foreign countries stop buying treasury bonds, rising debt would mean higher interest rates because investors would insist on higher returns.

The bottom line is that while there are a number of incentives for countries to devalue their currencies, every effort should be made to avoid the kind of competitive devaluations that exacerbated the Great Depression in the 1930s.

Originally Published: August 22, 2015

Dancing on the edge of absurdity

Posted on by j.giglio

There can be little doubt that one of the causes of the 2008 financial crisis was diminished regulatory control , the seeds of which were sown during the three preceding decades.

Recent legislation re-regulates financial markets, but attracting the best and brightest to regulatory jobs is proving to be a major challenge. The congressionally authorized Financial Industry Regulatory Authority, a not-for-profit self-regulator,,  may offer a solution to the problem.

Beginning with the Carter administration and accelerating during Reagan’s presidency, the banking industry,  among others, was steadily deregulated. Not only were leveraging requirements continually lowered but watchdog organizations such as the Securities and Exchange Commission were weakened both by legislation and the appointment of free-market advocates.

Successive administrations were enthusiastic advocates of deregulation. The dominant economic paradigm was that markets are efficient and inherently maximize welfare and work best when managed least. Moreover, with free-market advocates in charge of regulatory agencies such as the SEC, many existing laws were ignored or rarely enforced.

For example, observers repeatedly warned the Securities and Exchange Commission about suspected irregularities at Bernard Madoff’s investment firm, which was later revealed to be a multi-billion dollar Ponzi scheme. In spite of several warnings, no serious investigation was undertaken until after the firm’s spectacular collapse.

One reason offered for poor financial regulation is that government agencies are seriously disadvantaged when it comes to attracting the best and the brightest. The salaries of elected officials tend to impose an artificial ceiling on how much public employees can be paid. Even though these ceilings ignore marketplace realities, elected officials are reluctant to raise them by advocating higher salaries for themselves because it looks bad to voters.

Consequently,   Americans are told that many government regulatory agencies lack the talent to regulate financial markets because they can’t pay the going rate for good people. Thus, the regulatory agencies best and the brightest flock to higher-paying jobs with firms they regulate. This leaves the public to complain that our regulatory agencies are less effective than they need to be.

But not all regulators are underpaid. According to the Bond Buyer ‘s annual salary survey of 21 industry regulatory groups, compensation for the chairman and CEO of Financial Industry Regulatory Authority , which oversees the 4,100 securities firms and over 636,000 stockbrokers in the United States, was $2.63 million in 2013.

The perks aren’t bad either, he receives $20,000 annually for admission fees, dues, and house charges to one club each in the Big Apple and Washington, and up to $20,000 annually for personal finance and tax counseling, as well as spousal travel for certain business-related events. Financial Industry Regulatory Authority also paid four of its top executives more than $1 million in 2013. These folks can spend more for one dinner than the average American -whose wages have been flat for decades – spends on a vacation.

Let’s put these salaries in perspective: The President earns $400,000 annually. Janet Yellen, the chair of the Federal Reserve who has sway over the entire world economy as opposed to just American stockbrokers, earns $201,700. Securities and Exchange Commission Chair Mary Jo White makes $165,300. White’s predecessor at the SEC, Mary Shapiro, was fresh from running Financial Industry Regulatory Authority, which gave her a $9 million severance to ease the pain of a low government salary.

These are clearly difficult times for national financial regulators. They are challenged with implementing hideously complicated Dodd-Frank legislation that is supposed to safeguard and stabilize the financial system to avoid another financial crisis.

At 2,319 pages, the Dodd-Frank Act is the most far-reaching financial regulatory undertaking since the 1930s, requiring regulatory agencies that had been withering to enact 447 rules and complete 63 reports and 59 studies within tight congressional deadlines.

It may be at the edge of absurdity, but just maybe the best way to attract the best and the brightest would be to expand the number of one-percenters by outsourcing all regulation to not-for-profit entities such as Financial Industry Regulatory Authority.

originally published: October 25, 2014

Federal Reserve, Americans must listen to Carmen Segarra

Posted on by j.giglio

To most people, the name Carmen Segarra means nothing. But to a few, her fate validates their worst suspicions about regulators who exist to protect the interests of the regulated.

Segarra is a former bank examiner whose job was to be the Goldman Sachs’ watchdog for the Federal Reserve Bank of New York, which regulates many large New York banks and is the Federal Reserve System’s primary connection to financial and credit markets. She secretly recorded 46 hours of conversations inside the Federal Reserve and Goldman Sachs and released the tapes to Pro-Publica and the radio show, “This American Life.” You can listen to the episode online at ThisAmericanLife.org.

Segarra was fired by the Federal Reserve after seven months, apparently because she refused to budge on her findings that Reserve officials on numerous occasions seemed to treat Goldman Sachs with too much deference. In particular, she insisted based on her fact-finding that the company did not have a policy on conflicts of interest that met regulatory standards.

Her story underscores how regulators have become too cozy with the industry they are charged with policing. Academics call it “regulatory capture.”

This is hardly breaking news. Lax external oversight was among the chief reasons the world’s biggest economy was brought to the brink of depression in 2008. Put bluntly, regulators have to shoulder some of the blame for the financial apocalypse that unleashed the worst economic crisis since the Great Depression of 1929, at a galactic cost to the American taxpayer, and threw millions of Americans out of their jobs and homes. The economy still bears deep scars.

The 2008 financial crisis demonstrated more than ever that the self-regulating financial system was pure myth.

The public has come to catch the joke that on Wall Street, if you represent everyone there is no conflict of interest. Transparency and the financial services industry don’t exactly waltz around arm in arm. In fact, for some bankers transparency is an occupational hazard.

The coverage in the media since the Sept. 26 release of Carmen Segarra’s recordings of Federal Reserve officials not doing their jobs has been minimal. Hers is not a household name like Edward Snowden, who leaked classified information from the National Security Agency that advertised security vulnerabilities and spying on Americans and international leaders.

It may be that the public’s default mode is indifference; they would like to care but there’s just too much going on at the moment. The average American is too busy worrying about making ends meet. And after all, they already knew that banks hold regulators hostage.

Sure, Sens. Elizabeth Warren, D-Mass., and Sherrod Brown, D-Ohio, both members of the Senate Banking Committee, want Congress to investigate Goldman Sachs’ relationship with the Federal Reserve, but it’s more likely that the issue will quietly disappear.

Wall Street makes generous campaign contributions to the guardians of democracy in Washington and spends big on lobbyists to communicate their policy preferences to government apparatchiks. Despite the rosy rhetoric, that makes it highly unlikely that Congress will hold hearings.

Another problem is that many people see government regulatory jobs as stepping stones to lucrative private-sector careers. They develop useful contacts with key employees in the private-sector firms whose behavior they are supposed to regulate and quietly impress these contacts that their “hearts are in the right place.” In this culture of coziness, nothing should be taken at face value.

In the final analysis you can write all the tough regulations you want to regulate the financial system and its participants to prevent future financial debacles. But for those regulations to have any teeth, they must be accompanied by closing the revolving door between lavish private-sector executive suites and the basic steel-desk offices of government agencies.

originally published: October 11, 2014

The mean teeth of he Great Depression still have bite

Posted on by j.giglio

To paraphrase T.S. Eliot, the only major British poet born in St. Louis, September 2008 was the cruelest month. As America marks the sixth anniversary of the financial meltdown which began that month and drove the global economy off the cliff and into the worst economic crisis since the 1930s, the damage it did is still being felt. Last year, middle-income families earned 8 percent less, adjusted for inflation, than they did in 2007.

But not everyone was so profoundly affected. Commuter helicopter traffic at the East Hampton airport this summer increased by close to 40 percent over last year. Yet while there is a pretense of recovery and conditions are marginally better, most Americans are still living in the mean teeth of the Great Recession. The U.S. economy is facing many challenges, especially the rising financial inequality between the top 1 percent and everybody else.

You would be right to conclude that the fed’s attempts to deal with the Financial Apocalypse of 2008, reminded you of the note your grade school teacher scrawled on too many report cards: “Could have done better.” To help put this in perspective, here’s a chronology of key events in September 2008.

On Sept. 7, the Federal Housing Finance Agency, backstopped by the Treasury Department, placed Fannie Mae and Freddie Mac into conservatorship. A week later, Merrill Lynch avoided oblivion by hastily selling itself to Bank of America. In the early hours of Sept. 15, Lehman Brothers CEO Dick Fuld, aka the gorilla of Wall Street, announced that his firm was seeking bankruptcy protection after the feds refused to step in and provide financial assistance.

Within hours of the Lehman bankruptcy, the feds rushed forward with an initial $85 billion in taxpayer cash to bail out the giant insurance company American International Group (AIG), essentially nationalizing the firm. AIG had mismanaged itself to the verge of bankruptcy by stuffing its portfolio full of derivative products whose value had collapsed.

Then on Sept. 16, the shares in the world’s oldest money market fund fell below $1 because of losses incurred on the fund’s holdings of Lehman commercial paper and medium-term notes.

To help stabilize the financial system, on Sept. 21 the feds declared Morgan Stanley and Goldman Sachs to be bank holding companies. Five days letter, in the biggest bank failure in American history, the government seized the assets of Washington Mutual, the nation’s sixth largest bank, and its banking operations were sold to JP Morgan Chase.

As the month mercifully wound down, the House of Representatives on the 29th voted down the Bush administration’s Troubled Assets Relief Program (TARP), which would have invested 700 billion taxpayer dollars in troubled banks by purchasing their distressed assets. Needless to say, the stock market reacted with panic to this “failure of democratic government” and suffered one of its worst single-day price declines, with the S&P 500 Index plunging a horrendous 8.8 percent.

Finally, rattled by the market’s obvious panic, Congress passed the Emergency Economic Stabilization Act of 2008 on Oct. 3, which included a cosmetically revamped version of TARP.

The financial markets were still in turmoil over the ensuing weeks. In terms of sheer dollar losses, the “fall of 2008” (along with the fall of many other illusions) was probably the greatest financial disaster in world history. Throughout the world, its cost in terms of shattered wealth and wrecked lives is still being calculated.

The fallout even reached Iceland. The country’s entire banking system collapsed in October when it became apparent that its bank portfolios were stuffed full of American-made toxic derivatives that had little value.

The collapse led to the following exchange on a late-night TV talk show: “What is the capital of Iceland? About $25, give or take.”

Sadly, Iceland was hardly alone.

originally published: September 27, 2014

Alan Greenspan’s downfall

Posted on by j.giglio

In the wake of the 2008 global economic crash, the once-esteemed name of Alan Greenspan doesn’t carry much weight. In the final analysis, his downfall came because he just couldn’t bear to close down the party.

Greenspan was appointed Federal Reserve chair by President Reagan in 1987. He succeeded the legendary Paul Volker, who is credited with having broken the back of virulent 1970s inflation by choking off growth in the money supply.

Because of his business background and admitted “Libertarian Republican” ideology , Greenspan was expected to continue emphasizing his predecessor’s low-inflation policies.

By any objective measure, Greenspan merited the title “History’s most qualified central banker.” He was, after all, no ivory tower academic lost in the stacks of some dusty library without hands-on experience in the real world. In fact, his vast and varied range of life experiences truly made him a quintessential man of the world.

As an undergraduate during the 1940s, he studied clarinet at the Julliard School of Music. He then toured the country as a saxophonist in a popular jazz band.

During this time he developed a sideline preparing income tax returns for fellow musicians. He then enrolled at New York University to study economics and became a member of an informal discussion group led by Ayn Rand, the famous libertarian philosopher who, through her best-selling novels “The Fountainhead” and “Atlas Shrugged,” was instrumental in resurrecting free market economic theory.

After NYU, he went to work for an economics consulting firm whose clients included Fortune 500 companies. He eventually became the firm’s owner and CEO (so he knew what it was like to have to meet payroll) and made himself a nice fortune in the process, earning an honorable discharge from the financial wars.

He had his first federal government experience during the Ford administration, when he chaired the President’s Council of Economic Advisors. After that, he returned to his consulting firm.

Almost immediately after being named Fed chair, Greenspan was confronted by the massive October 1987 stock market crash. He responded by flooding the financial markets with liquidity, which prevented a Wall Street bloodbath from laying a glove on Main Street.

During all these years, he led an exceedingly full life as an active pursuer of interesting women. His romantic targets included celebrities like Barbara Walters and NBC’s Andrea Mitchell, who became his second wife while he was Fed chair.

When a 1998 hedge fund meltdown triggered concerns that sizable losses to the firm’s creditors (mainly large Wall Street banks) would cause credit markets to freeze up, Greenspan worked behind the scenes to have the Federal Reserve Bank of New York orchestrate a bailout of the hedge fund by these banks. The Fed pumped up the money supply to depress interest rates, thereby making life easier for the banks.

Then the dot-com bubble burst, wiping out more than $5 trillion (that’s “t” as in “trauma”) in stock market value among tech companies by the end of 2002, helped along by the 9/11 terrorist attacks.

These events and others gave Greenspan plenty of excuses to keep interest rates low by pumping up the money supply, to oppose financial regulation, and arrange bailouts when banks got into trouble. All of which he repeated to the point where they opened wide the door for the housing and derivative booms.

He largely ignored the ruling guideline expressed by former Fed Chair William McChesney Martin, who supposedly said, “The Fed’s job is to take the punch bowl away just when the party’s going good.”

So when it comes to managing the money supply, the Fed should presumably grow it more slowly during good economic times and more rapidly during recessions.

But Greenspan’s guideline was to keep the party going full blast with generous bowls of vodka-spiked punch until the guests were staggering around the room, stumbling into the furniture, singing bawdy songs, knocking over floor lamps and throwing up on the carpet.

And then bring in the Fed to clean up the mess.

originally published: April 26, 2014

The Fed takes middle-class to the cleaners

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Despite all the talk about the progress made over the last four years, the jobless recovery is eating away at the American economy like a swarm of termites invisibly consuming a house from the inside out, widening income inequality and undermining Americans’ belief in upward mobility.

The economic growth rate has fallen to less than 2 percent and the only reason the headline unemployment rate has declined to 7.3 percent is because so many people – especially middle and lower class Americans- have stopped looking for work or are working part-time. Job creation can’t even keep up with population-related growth in the labor force.

It is anticipated that under Janet Yellen, the likely successor to Federal Reserve Chair Ben Bernanke, current monetary policy will remain in place and the government will continue to pump trillions into the financial system, keeping interests rates near zero to offset the drag of current fiscal policy. When considering the feasibility of any future quantitative easing, government speak for printing money, the Fed would be wise to consider the policy’s adverse effects on savers and retirees and their interest income.

According to economics textbooks, reducing interest rates and the cost of credit is supposed to spur lending; encourage spending on big ticket items like cars and houses; and boost business investment in inventories, plant, equipment and hiring.

Sure, credit is the most important and most direct channel through which the Fed’s polices affect the economy, but the transmission lines through which cheap money flows are clogged. Despite sitting on an astonishing $2.3 trillion in capital available for lending, banks remain reluctant to extend credit to all but households with the highest credit scores. If you don’t need money, you can get all you want. And by dropping its short-term lending rate to near zero, the Fed allows banks to borrow, for example at 0.10 percent and invest the proceeds in Treasury bonds. Nobody in their right minds wants to own the 10- year Treasury bond at a 2.5 percent interest rate, but banks are doing it because they can borrow at nearly interest-free and earn a spread of 2.40 percent.

The good news is that the Fed’s policies have boosted the stock market. Chairman Bemanke has said that “higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

But while a rising stock market has helped market participants like financial institutions and large firms, it has done little to improve economic growth and reduce unemployment. The median amount of wealth middle-income families have is about $20,000. By contrast, the family that earns $90-$100,000 annually has about $424,000 in financial wealth.

The spoils of the recovery have not been equally shared. The boost in asset prices is likely to disproportionately benefit the wealthy and increase income inequality. Unemployment is still high by historical standards, economic growth is anemic, and real wages adjusted for inflation have not improved.

One of the overlooked consequences of the Fed’s rounds of monetary stimulus and reducing interest rates is to rob hardworking, average American savers and retirees of income and spending power, because the interest they earn on their savings isn’t enough to keep up with inflation. This dramatically reduces their spending, which hurts businesses, leaving them unable to hire. Consumer spending is critically important because it accounts for more than 60 percent of the nation’s gross domestic product.

But then who said the Fed was responsible for the equitable distribution of wealth, income or credit? After all, they have their hands full minimizing unemployment and inflation. Nowadays the average American doesn’t have much carry with a Fed whose policies are taking the middle class to the cleaners.

originally published: October 19, 2013