Column by Tim Hartnett.
Exclusive to STR
Does anybody else ever feel phony in conversations that get preachy about the way they keep expanding the money supply? You don’t need a spreadsheet and algorithms to figure out printing the stuff up like toilet paper can’t have a good end. So it sounds kind of streetwise to see gloom and doom coming on. Secretly though, most of us know we don’t have the guts to want to find out what will happen if that $85 billion in fresh green stops coming through each month. Business is sluggish mostly as it is, and nobody is ready for the worse before it gets better. Didn’t some ancient African theologian say, “Lord give me sound monetary policy but not yet”? Well, it’s not yet, yet.
Let’s face facts: We tried the stuff one time too many and now can’t get off it. It’s Eve’s apple, smoking, crack, smack, Twinkies, video games and pornography combined. And it’s never enough. An economy that needs this much stimulating has a pencil that’s down to the eraser. A lot of people are looking but not buying, at least not anything that Joe Six-pack is selling. So you have to start and wonder where all that hot scratch off the presses ends up? Manufacturing pallets of pictures of dead presidents, even electronically, might make them worth less overall, but the stuff still spends. We know the ones holding the pots all that new jack lands in aren’t looking forward to a payday dinner with the wife at Olive Garden.
One clue about what the quantitative easing process is doing to the US economy over the long term may be in this MarketWatch article [8] about cash purchases of US homes. The rate has nearly doubled in the last few years up to 40% or more from 19% in 2005. At an average price of $300,000, that $85 billion the Feds have been conjuring up every 30 days represents the buying power for over a quarter million homes. Multiply that by 60 months and you get 15 million. At 4.1 people per household, that amounts to a roof over the head of every person in California and Texas.
Of course, all of that dough getting kneaded up for insiders isn’t going to buy real assets out from under the productive classes’ feet. Some of it pays the tuition at private schools phony enough to keep little Holden and Phoebe safe from a daily pummeling.
Financial author John Brooks said in his book about the great Wall Street Crash Once in Golconda:
“What did a New York banker have to do to make money in early 1929? Lend it in the call-money market at 10 or 12 per cent, at a time when he could, if he chose, borrow it from the Federal Reserve at 5 per cent. As simple as that; both transactions were cut and dried, requiring no business initiative and involving practically no risk, and although starting in early February the Federal Reserve Board officially disapproved of the practice, it continued to be done. Bankers, like royalty in a constitutional monarchy, were in the position of being handsomely paid simply for existing.”
Going by anything we’ve been reading on the financial pages recently, New York bankers and kinfolk at the brokerages haven’t gotten any more industrious over the last 84 years. If anything, they’ve been honing all those skills for parting squares from their grubstakes and are a long way from sated. They are not so lame as to depend on the Federal Reserve System for all their sources of Money for Nothing [9], which, by the way, is the title of a recent film about our central banking system. Suits in south Manhattan have a large arsenal of advantages over ordinary investors before they ever get to squeezing cheap money. If old reliable tactics like watered down IPOs, insider stock buybacks above book value, pump and dump schemes, deferred dividends, suppressed shareholder rights and other rip-offs the SEC is winking at don’t work for them, bailouts and government loans are always in the wings.
People selling “securities” are running tight with the ones in the business of “national security,” and that relationship always ends up spelling financial and physical insecurity for the rest of us. A Madoff scheme this big defies any record keeping system developed so far. So we have to go by crude raw data to keep a rough score in this class conflict. A report from 2011, Financialization and Its Entrepreneurial Consequences [10], includes a chart showing the financial sector doubling its take from the US economy since 1970 and quadrupling it since WWII. The larger point of the paper is the less than baffling detail that entrepreneurship has begun to wither accordingly as the “investment” business gouges the economy it finds itself indispensable to.
Investors in individual common stocks, mutual funds, derivatives [11] and even in the so-called zero sum game of commodities are reaching a position where anyone not working for the house is playing against it. This Bloomberg article [12] describes how Morgan Stanley customers in a futures fund gained substantially on paper but were left with losses after fees got deducted. The financial sector is all too comfortable living off clients’ capital rather than sharing a small percentage of the profit garnered through their expertise. The next major selloff will likely clarify this more painfully than all the other blatant demonstrations we’ve had over the last 25 years.
I suppose most are getting bored rehearing what G. William Domhoff tells us in Who Rules America [13] that the richest 1% control over 35% of national wealth, and combined with the 19% just below them, they’ve amassed 89%. But as it stands right now, there is 11% for 250 million to scrap over. One good push from market forces could easily wipe out asset inflation and add another 30, 40 or 50 million to that figure.
If it really is necessary for everyone to take some lumps on the road to economic recovery the best opportunity to bite that bullet is behind us. In the 2007-8 fiscal year, the word was that the players at Wall and Broad had leveraged and hedged themselves in a game of financial Twister as snarled up as the Gordian Knot. The solution looked classically simple: a no-nonsense guy with a sword. Somehow that obvious fix never occurred to media, experts or leadership in Washington, D.C. But in their defense, none of them ever said no one would end up getting cut.
Nothing since 9-11 was ever as dire and urgent to the politico-media complex as the prospect of un-slopped sties in the Hamptons and on Martha’s Vineyard. What happened next is still a blur of secretive events that goes by names like bailouts, bank loans and TARP. They were saving us, we were told, through arcane, high-level processes that looked exactly like covering the gambling debts of the filthy rich. There were trillions and hundreds of billions that went to insurance companies, banks and various ill-defined corporate entities that supposedly create the opportunities the rest of us desperate slobs depend upon. Then came QE3.
During this period of “quantitative easing,” untold numbers of ordinary people were eased out of over 16 million homes by foreclosure, according to this chart [14]. An amount that comes uncannily close to how many houses could have been purchased outright with all the play-doh the Fed has zapped into existence in the last half decade.
In an interview with The Wall Street Journal on Feb. 28, 2008, then-Treasury Secretary Henry Paulson tellingly admitted:
“I’m seeing a series of ideas suggested involving major government interventions in the housing market and these things are usually presented or sold as a way of helping homeowners stay in their homes. Then when you look at them what they really amount to is a bailout for financial institutions on Wall Street.”
Six months later, with bailout taps wide open, Steve Liesman of CNBC asked Paulson, “How much are you prepared to pay?” This was his answer:
“I don’t . . . there is no specific analysis. This was not--we didn’t sit there and figure this out with a calculator. This was about our financial markets, it was about confidence in our economy, and the validity of mortgage finance.”
It would be easy to see the Peter Principle at work here: This can’t be the way they did business at Goldman Sachs where Hank was once top dog. Under the circumstances, though, the idea he reached his level of incompetence doesn’t fit. Paulson never really left the august wealth management firm headquartered at 200 West St. He was simply demoted to US Treasury Secretary. The most complicated piece of machinery he’d have to operate there was a telephone, and all the right people would have his number.
Foreclosing on the cash-strapped while alms to finance institutions are coming in on rafts takes some cojones. A populace that accepts the results as water under the bridge must not have any. It’s a certainty that wired up elites won’t be letting loose of this pelf as easily as the people who created the wealth did.
Brooks’ book, published in 1970, describes a number of stock pools where a group of wealthy players would simulate activity in a particular issue to draw in common investors outside of the loop. Once the public had been sucked in and the thing had bubbled far beyond any realistic value, the little club would “pull the plug,” slicing off profits at peak prices. Then panic selling would occur, throwing common rubes for a loss. He tells us:
“In Wall Street in the later 1920s, where speculation in stocks reached a degree of intensity and subtlety and an extent of public participation probably not matched anywhere else before or since, it is doubtful that it occurred to any of the speculators that they were recapitulating the movement patterns of their subhuman ancestors swinging from tree to tree.”
In 2013, stock pools and arboreal allusions have gone the way of Afros and Nehru jackets. Once retirement tax deference legislation kicked in and boomers started earning, much of the population talked itself into parking savings in NYSE-type products. This had the effect of sending Main Street’s money Wall-way without any resort to deceptive activity. Perpetual opportunity in the NYSE is no myth as long as the US retirement system is bent on making prey of itself.
Whatever anyone thinks of “stimulating” the economy, doing it through the traditional financial sector will never work. It’s like the Johnny Carson sendup of John Houseman delivering the old Smith-Barney slogan: “They make money the old fashioned way: They steal it,” after waiting politely for the Federal Reserve to finish making it, of course. That isn’t to say that everyone on Wall Street is a crook; it’s just that capital requires the escape velocity of Jupiter to get out of South Manhattan’s gravitational pull.
Nobody can tell what real market values are anymore with tax laws that provide a steady flow of capital into financial markets and a central bank policy that artificially suppresses interest rates. Left to natural market forces, a selloff could last months or longer. In the meantime, 16 million families had their homes taken away by force and many more than that lost considerable amounts of equity.
If the economy must be “stimulated,” it makes more sense for the Fed to extend credit directly to carpenters who build houses than it does for them to buy mortgage-backed securities. Driving home prices far beyond their natural worth is a self-destructive method of creating financial “security.” Whoever said that new money must travel into the economy starting from Wall Street was representing a bunch of crooks.
Supposedly our quasi-governmental financiers must spend money that does not exist to keep the economy from shriveling up like a dead slug. We might as well admit that cold turkey is not an alternative, but that doesn’t mean the Fed can’t find a way to spread its business around. The fiscal consequences of the present system are worse than the sum of drugs, alcohol and gambling in any other five year period. If this buzzing material must be distributed, give someone else a piece of the action. The five families aren’t in charge of peddling dope anymore, and nobody is going through withdrawal.
