February 14, 2016

From One Excess To Another

A weekend topic starting with Palo Alto Online. “Just after sunset in mid-January, my colleague and I were seated at a square, maple-colored table located near the entrance of the Starbucks on California Avenue, waiting to meet with a potential client. As we sipped bottled water and coffee, we prepared our talking points on recent market activity. Going through the colorful charts, graphs and comps before us, we tossed out market data. To that point, the statistics revealing the past three-year run-up of 51.2 percent for a median-priced Palo Alto single-family home left us both a bit stunned. Essentially, a home worth $2 million three years ago is now worth $3 million.”

This Kansas City Star article originally was published on Jan. 23, 2011. “Tom Hoenig waged the biggest battle of his career with the financial security of most Americans hanging in the balance. Last year the longtime Kansas City figure stepped reluctantly into a national spotlight that few Midwesterners find. He broke with others on the powerful Federal Reserve committee in Washington that sets interest rates to trumpet the populist voice of his region. Reinforced by lessons from 36 years at the Federal Reserve Bank of Kansas City, 19 of them as president, Hoenig spent all of 2010 fighting the Fed’s persistent easy-money policies.”

“His case was this: The Fed’s response to the subprime mortgage debacle and financial crisis was necessary but had gone on far too long. ‘Experience tells me and economics tells me … you may end up making things more difficult later on,’ he said in a recent interview.”

“Each time the Fed committee met last year, Hoenig voted against the policy its members agreed on. Unable to persuade any other voting members to join him, Hoenig’s eight consecutive dissents put him further out on a limb than any member of that exclusive group had gone alone. Along with his unflinching policy dissents, Hoenig has spent nearly two years criticizing how the Fed helped bail out banks and other financial institutions deemed ‘too big to fail’ by merging them into even larger financial behemoths.”

“A determined Hoenig voted against all eight of the Fed’s policy statements in 2010, including its November decision to spend $600 billion on government bonds to help lower long-term interest rates.
Hoenig defends his stand by telling audiences that the Fed’s tools are the wrong ones to help unemployment at this point. He reminds them that the jobless rate was 6.5 percent eight years ago when the Fed drove interest rates down to 1 percent. But the consequences – the housing bubble and financial collapse – drove unemployment higher still.”

“Hoenig’s other battle with the Fed focuses on how it bailed out banks and other financial institutions deemed too big to fail during the financial crisis. Nearly all were merged into other large rivals, making them even bigger. He believed instead that the failing banks’ management and owners should be wiped out and their lenders lose part of their investments. Hoenig delivered his March 2009 ‘Too Big Has Failed’ speech in Omaha, Neb.: ‘Why would anyone assume we are better off leaving an institution under the control of failing managers, dealing with the large volume of ‘toxic’ assets they created.’”

This Sri Lanka Guardian editorial was written by Ismael Hossein-zadeh, Professor Emeritus of Economics, Drake University and Anthony A. Gabb is Associate Professor of Economics at St. John’s University in New York City. Titled, “Financial Oligarchy vs. Feudal Aristocracy”.

“Like the feudal rent, the hidden tribute to the financial sector, the nearly 40 percent of consumer spending that is appropriated by the financial sector, helps explain how wealth is systematically transferred from Main Street to Wall Street. The rich get increasingly richer at the expense of the poor—not just because of greed or the blind forces of the market mechanism but, more importantly, because of deliberate monetary/economic policies, which have steadily come under effective control of the financial oligarchy. Indeed, the very mechanism of money creation and/or monetary policy itself exacerbates inequality.”

“The insidious mechanism of redistribution in favor of the financial oligarchy is expertly sanitized and benignly called monetary policy. Private central banks (such as the Federal Reserve Bank in the U.S.) are usually the main institutional vehicles that carry out the monetary policy of redistribution. Central banks’ polices of cheap or easy money benefits, first and foremost, the big banks and other major financial players that can outbid small borrowers who must borrow at much higher rates than the near-zero rates guaranteed to the big borrowers.”

“By thus gaining privileged access to nearly interest-free money, the financial elites can enrich themselves in a number of ways. For one thing, they can snap-up income-producing assets at the expense of small borrowers who lack access to cheap money. For another, they can boost the value of their wealth by creating an artificial demand (such as stock buybacks) for those ill-begotten assets with the cheaply borrowed money. In addition, they can skim vast wealth by loaning out the cheap they obtain from central banks to everyone below the top of the wealth/income pyramid—at near four percent (mortgages), at seven or eight percent (auto, student and other loans), and above 15 percent (credit cards). Obviously, this would funnel much of the national income stream to those who can borrow cheap and lend at much higher rate [4].”

“Instead of regulating or containing the disruptive speculative activities of the financial sector, economic policy makers, spearheaded by central banks, have in recent years been actively promoting asset-price bubbles—in effect, further exacerbating inequality.”

“Proxies of the financial oligarchy at the helm of monetary/economic policy making apparatus seem to believe that they have discovered an insurance policy for bubbles that burst by blowing new ones: ‘Both the Washington regulators and Wall Street evidently believed that together they could manage bursts. This meant that there was no need to prevent such bubbles from occurring: on the contrary, it is patently obvious that both regulators and operators actively generated them, no doubt believing that one of the ways of managing bursts was to blow another dynamic bubble in another sector: after dot-com, the housing bubble; after that, an energy-price or emerging market bubble, and so on’ [5].”

“It is obvious that this policy of effectively insuring financial bubbles would make financial speculation a win-win proposition, a proposition that is aptly called ‘moral hazard,’ as it encourages risk-taking at the expense of others—in this case of the 99%, since the costs of bailing out the ‘too-big-to-fail’ gamblers are paid through austerity cuts. Knowing that the central bank/monetary policy would bail them out after any bust, they go from one excess to another.”

“This shows how the proxies of the financial oligarchy, ensconced at the helm of central banks and their shareholders (commercial banks), serve as agents of subtlety funneling economic resources from the public to the financial oligarchy—just as did the rent/tax collectors and bailiffs of feudal lords collected and transferred economic surplus from the peasants/serfs to the landed aristocracy.”

Bits Bucket for February 14, 2016

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