Cruz, Rubio, and Trump Turn to Monetary Policy

Is monetary policy the sleeper issue of 2016?  Two candidates, Senators Rand Paul and Ted Cruz, are already outspoken critics of the Federal Reserve, and Cruz appears to be doubling down in his criticism in an effort to undercut his rival.  “What the Fed is doing is dangerous,” he said at a rally over the weekend. “They are debasing the currency with QE1, QE2, QE infinity!”

Now, two more GOP candidates are finally taking an interest in monetary policy’s impact on the economy.  Richard Bove, writing for MSNBC, noted that Senator Marco Rubio went out of his way to address Dodd-Frank (a bill that massively increased Fed control of the U.S. banking system) in last weeks’ Republican primary debate:

During last week’s GOP debate, not one of the Fox moderators asked a question about the banking system and money flows through the system. They were far more interested in baiting Donald Trump.

Marco Rubio (R-Fla.) was the only one who addressed the banking system. He loudly and clearly said we must eliminate the Dodd-Frank Act. This is the act that gave the government total control over the banking system and money flows in the economy.

It’s appropriate that he mentioned Fox moderators were “far more interested in Trump,” however, because the only other Republican candidate talking about monetary policy was—you guessed it—none other than the Donald himself!

Republican presidential candidate Donald Trump on Tuesday said China’s devaluation of the yuan would be “devastating” for the United States.

“They’re just destroying us,” the billionaire businessman, a long-time critic of China’s currency policy, said in a CNN interview.

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Who’s Hot, Who’s Not: Fox News GOP Debate Edition

Iowa GOP/Fox News Debate, August 11, 2011 (photo credit: via Flickr, CC BY-SA 2.0)

Let’s do “Who’s Not” hot first, because it’s an easier call: Fox News and the RNC.  In a week dominated by the first Republican presidential debate, the biggest losers were the hosts of this missed opportunity of a debate.

How can you tell it was a bad debate? The name of Hillary Clinton was mentioned eleven times, and only four of those mentions included so much as a full sentence of criticism. Two hours of prime time television, and the presumptive Democratic nominee was unscathed (although I agree with Ben Carson that she probably will not be the nominee).

It wasn’t the Republican candidates’ fault (although, really, they should get in a dig at Mrs. Clinton at every opportunity, as Carly Fiorina generally does). The problem was the suffocating format devised by Fox and the RNC.  The moderating trio of Bret Baier, Megyn Kelly, and Chris Wallace got confused and thought they were the story. They strangled the discussion with ridiculous questioning intended not to inform voters, but to generate sound bites. It was an evening of playing gotcha.

Here’s an example: the number one issue on voters’ minds is the economy, right? As in, why isn’t it growing? Chris Wallace to Trump: “You’ve talked a lot about how you are the person on this stage to grow the economy. I want to ask you about your businesses. Trump corporations have declared bankruptcy four times over the last quarter century.” So instead of hearing how Donald Trump would stimulate economic growth – an issue voters actually care about – precious time was wasted on the circumstances of Trump availing himself of the bankruptcy law. Continue Reading

The Federal Reserve Will Be on the Ballot in 2016

The Federal Reserve headquarters in Washington, DC (photo credit: Dan Smith, CC BY-SA 2.5)

At last, a powerful critique of the economic harm caused by the Federal Reserve’s artificially low interest rate policy (brought to light by Judy Shelton in an excellent blog for The Hill).  “Financial Repression: the Unintended Consequences,” published by the Swiss Reinsurance Company, is must reading for the Republican presidential campaigns.

The ”financial repression” in the title refers to “the ability of policymakers to direct funds to themselves that would otherwise go elsewhere.”  The cost of the Fed’s policy of financial repression includes $470 billion in lost interest (net of lower debt costs), denied not only to household savers directly, but also to pension funds and insurers which indirectly benefit households.  And interestingly, Swiss Re reckons that financial repression results as much through regulatory actions as through monetary manipulation.

The policy is also cited for having fueled a bubble in asset prices.  But what is most disturbing is that financial repression “has induced a re-allocation of capital across markets and greatly enhanced the role of public markets at the detriment of private market activities.  Artificially low – or in some cases even negative – interest rates break the credit intermediation channel which can crowd out viable private investors. This lowers their ability to channel funds to the real economy.”

This is the quantitative explanation for why the Wall Street Journal thinks “the Fed should wonder if its policies haven’t become an impediment to faster growth.   Continue Reading

Elizabeth Warren’s Strange Journey

Sen. Elizabeth Warren (D-MA) (photo credit: AFGE via Flickr, CC BY 2.0)

A friend who was a student of Elizabeth Warren at the University of Pennsylvania Law School assures me that back then she was a Republican.  So she has some history of political mobility.  But even by Washington standards, her latest flip (or is it a flop?) is pretty astounding.

Back when Senator Rand Paul introduced his “Audit the Fed” bill — a mischaracterization, since the real significance of his proposal was the removal of a prohibition against the Government Accountability Office critiquing the monetary policy of the Federal Reserve — Senator Warren denounced it, telling the Huffington Post: “I oppose … this bill because it promotes congressional meddling in the Fed’s monetary policy decisions, which risks politicizing those decisions and may have dangerous implications for financial stability and the health of the global economy.”

These concerns have not prevented Senator Warren from teaming up with Senator Vitter to introduce the “Bailout Prevention Act,” which would — wait for it — subject Federal Reserve emergency lending facilities to Congressional scrutiny.  The purpose of Warren-Vitter is to discourage (but not prevent) the Fed from undertaking emergency lending in a financial crisis which is available to fewer than five companies and which does not charge punitive interest rates.

Senator Warren’s trope for the past several years has been that she is all about saving taxpayer money by preventing bank bailouts.  So her new legislation would prevent the Fed from bailing out an institution which is insolvent, thereby forcing it into bankruptcy.  Continue Reading

Perry on Why Your Paycheck is Shrinking (VIDEO)

This morning at an event at St. Anselm College in New Hampshire, Rick Perry called for robust new growth to address rising prices:

The President may be satisfied with 2 percent economic growth. I’m not. For the first time in American history, a generation of leaders are on the verge of breaking the social compact, if you will, with the next generation. That is that we leave a better country for them, than what we found ourselves. Fewer of us believe in the American dream now than in the last twenty years. For middle class Americans, opportunity and security have been replaced by worry and anxiety. Out-of-pocket healthcare costs, housing, college tuition. All of them have gone up faster than wages have. Student debt is at an all-time high, and this has to change. It’s time to restore hope and opportunity to middle class America.

He pointed to high taxes as part of the problem: “Economists will tell you that if you cut the corporate tax rate by 10 percent, it will lift the wages for the middle class worker by about 5 or 10 percent. That’s what we need to be focused on: helping raise those workers’ wages.”

And then Rick Perry pointed to the Washington-Wall Street complex—i.e. the way Dodd-Frank is starving Main Street of money:

We also need to tackle the inequities that are caused by this Dodd-Frank regulation. Dodd-Frank didn’t eliminate ‘too big to fail.’ As a matter of fact, it codified it. It gives preferential treatment to these large institutions on Wall Street, while restricting access to funds for Main Street.

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The Horrors of Dodd-Frank “Banking”

Photo via Wikimedia Commons (CC BY 2.5)

With “Audit the Fed” being described as the “direst threat” to the Fed since Dodd-Frank, it’s worth while noting the mounting number of horrid consequences to actual people who need to make a living, especially from the federalization of banks.

Today’s Wall Street Journal reports that J.P. Morgan Chase—which is a bank, by the way—plans to jettison $100 billion in deposits in order to comply with new federal banking regulations, devised under Dodd-Frank authority.

“Isn’t a bank,” you might muse, “in the business of receiving deposits and putting that money to productive use?”

Isn’t that how banks help the real economy grow?

Not in the brave new world of Dodd-Frank.  The Wall Street Journal predicted precisely this event in a December 9, 2014 report on new capital requirements.  The Fed and other banking regulators are, under Dodd-Frank, busily pursuing a “deleveraging” of the American banking industry, brilliantly characterized in an op-ed by Richard Farley on November 24, 2014, in—you guessed it—the Wall Street Journal.  There is simply too much risk in the banking sector for the tastes of the Fed.

So what is the response of banks to this new directive? It is to make “safe” loans to the U.S. government and corporate borrowers such as Apple, rather than to riskier, more economically productive, job-creating borrowers.

This campaign of deleverage obviously does not benefit Main Street, which remains credit starved.

The not-so-funny thing is the classic case for the “independence” of central banks is to prevent the politically powerful from manipulating money for the government’s benefit at the expense of the real economy. Continue Reading

Is the Fed Off-Limits?

The Marriner S. Eccles Federal Reserve Board Building – Washington, DC (photo via Wikimedia Commons)

The liberal economic elite is circling the wagons to preserve the Federal Reserve.  Alan Blinder denounces proposed laws which will “encourage congressional meddling with monetary policy.”  Catherine Rampell takes up the cudgel against legislation mandating an audit of the Fed, on the grounds that “monetary policy is a complex technical apparatus that not everyone (read Congress) is equipped to operate.”

What is raising the liberal establishment’s ire? Three modest bills authored by Representatives Scott Garrett and Thomas Massie, and Senator Rand Paul, which seek to remind the Federal Reserve for whom they work.

The Federal Reserve is as close to the realization of liberal fantasy as one can find in Washington:  an elite board of intellectuals able to raise and spend practically unlimited amounts of government money with no appropriations oversight.  Naturally Professor Blinder and Ms. Rampell want to keep that good thing going.

But greater congressional involvement in monetary policy is both inevitable and long overdue, for two reasons.  First, the number one complaint of American voters about the economy is not “inequality” nor the lack of job opportunities or even stagnant wages; it’s that their income doesn’t go as far as it once did, in terms of purchasing a quality of life.  Seemingly out of nowhere, voters picked “rising prices” as their number one economic problem in 2012 exit polls, co-equal with jobs. In my own focus group work, voters are complaining inflation is eating into their standard of living, inflation nobody in Washington even recognizes exists. Continue Reading

Elizabeth Warren’s Faux Populism

Sen. Elizabeth Warren (D-MA) (photo credit: Tim Pierce via Flickr, CC BY 2.0)

Elizabeth Warren wants to incarcerate banking executives.  She wants to insure former Wall Street executives don’t attain high government positions (recently claiming the scalp of Antonio Weiss).  Most of all she wants to prevent the repeal of any part of the Dodd-Frank regulatory monstrosity.

Senator Warren is correctly discerning the public’s economic discontent:  survey show large majorities of all parties believe the current economy favors the already-rich over the middle class, and even a majority of Democrats believe the economic policies of the U.S government are rigged against hard working middle class families. Senator Warren’s indignation is meant to pander to this discontent.  Unfortunately for those to whom she appeals, the policies she advocates will make things decidedly worse for Main Street and the American middle class.

We live in very peculiar economic times.  While the Department of Justice and bank regulators brag about the fines they have extracted from the banking industry for misdeeds during the Great Recession ($180 billion according to Market Watch), the Federal Reserve is coddling the big banks.  First the Fed overpaid banks for the government debt it purchased during “Quantitative Easing” to put downward pressure on interest rates; then it began to pay interest to the banks on the huge reserves created through QE–currently $2.5 trillion in idled funds, sitting at the Fed, doing nothing economically productive.  Paying interest on these deposits creates a disincentive for banks to loan out this money, and the Fed is preparing to increase the interest it pays, thereby increasing this disincentive. Continue Reading