Of the Federal Reserve and Taking from Savers

Ben Bernanke has a blog. You can find it here, courtesy of the Brookings Institution. Of course, what would the former Chairman of the Federal Reserve Board write about, other than decisions he made as Chairman, and why people who take issue with them are wrong? One would expect no less, and reading the light he sheds on previous decisions—offered in Fedspspeak at the time that they were made—is surely the chief lure of Ben Bernanke’s blog. Allowed to communicate in regular English, not worried about how Fed Watchers might construe or misconstrue everything he says and does not say, Ben is more able to speak his mind clearly.

The former Fed Head chose for his first blog post a vigorous defense of price controls on interest rates. In the process Bernanke demonstrates the assumption that we are safe letting government economists control the economy—an assumption continually disproven by real-world experience.

In fact, as a result of entrusting much of our economic freedom in the United States to government economists, we do not have a free market for interest rates, at least not short term rates, and we pay for that every day. The Federal Reserve sets short term rates in this country, and so far the market has had zero success in moving rates from the near zero interest rate range that the Federal Reserve has decreed and maintained for some years. Keep that in mind the next time you wonder why you earned $1.73 in interest on your savings account last year.

If you borrow money—when you can get a loan—then you might consider yourself lucky. The biggest borrower of all, in the whole world, is the United States Government. Uncle Sam must be feeling very lucky, because he is paying comparatively little on the $18 trillion of U.S. Government debt, increased by another half trillion dollars last year.

If you save money, though, especially for your retirement—and if you have to live off of those savings in retirement—you might not feel so fortunate. By keeping interest rates lower than the market would set them, the Federal Reserve is daily transferring many billions of dollars from savers to the Federal Government. And you thought that only the IRS takes your money.

Let me illustrate with an example. For the last three months of 2014, all of the banks in the United States, all of them together, paid no more than $11 billion to people who had their money in banks. Is that a lot of money? It depends. When that is the interest paid on nearly $12 trillion in deposits, the answer is, no, that is not very much money at all.

Do not blame the banks, though. They are in the saving and lending business, too. Try as they might, with the Federal Reserve controlling interest rates, banks could not pay any more interest to depositors. If a bank did, it would have more money than it could lend as people shifted their deposits where they could get a better return. To pay interest on deposits, banks cannot get much more interest from the loans they make than the Federal Reserve price controls allow, and many relatively good loans present more repayment risk (banks do need to be paid back) than those low interest rates would cover. Low interest earned means low interest paid.

All the banks in the nation have a little over $15 trillion in loans and other assets, on which they earned last year about the same amount as they did five years ago, when they had $2 trillion less in loans and other assets. In an environment of low interest rates, banks have to concentrate their lending on the safest borrowers.

That is how the low interest rates controlled by the Federal Reserve are oppressing the economy. When savers and lenders can only get a few cents on a hundred dollars lent, they place their money with the very safest of borrowers, since they cannot afford to take any losses. Someone who has a really good idea—which like all good ideas may or may not succeed the first time—has trouble getting the money to give his idea a go and hire people to help him try.

Ben Bernanke claims that the Federal Reserve’s near zero interest rate policy—called ZIRP—has been stimulating the economy. If so, where is the stimulation? Why has the recovery been so weak? There has been stimulus, but it has gone primarily to support Federal Government spending and to pay down the debt of the largest and healthiest businesses that can trade in their higher cost loans for the Federal Reserve’s lending bargains. The biggest increases in bank loans have been in Treasury debt and deposits at the Federal Reserve.

Ben Bernanke, in his blog, reminds me of the story of the lawyer representing a client charged with stealing a car and returning it damaged. The lawyer says, first, that his client never had the car; second, that he returned it in perfect condition; and, third, that it was already irreparably damaged when his client took it.

Bernanke begins by explaining that the Federal Reserve does not set interest rates, or that at most its ability to do so is only “transitory and limited.” He pleads that the Fed can only affect short term rates “in the short run.” He does not explain how seven years of ZIRP can be considered the short run. Then he progresses in his blog to describe how the Federal Reserve “influences” interest rates and then how the “Fed’s actions determine” interest rates. His argument, after denying that the Fed can set rates, is that the economy has been so weak that the Fed has had to lower interest rates for the nation’s own good. Bernanke next argues that the economy has remained so troubled (he does not say, despite ZIRP) that the Federal Reserve has had no choice but to continue with ZIRP, concluding that it is the economy after all the forces the Fed to do what it does. Do not blame the Fed Governors, they had no choice but to continue doing what they cannot do because it has not done any good so far. I think you need to have a Ph.D. in economics to make such an argument.

We cannot do it, we did what we had to do, and since it has not helped we cannot stop. I wonder how he reacted to those kind of explanations from his teenagers. Any responsible parent would reply, no, you cannot have the car, give me back the keys.

Of Presidents and Training for the Job, 2015

More and more I have been struggling for the words to express my concern over the frightening incompetence of the current President of the United States. Barack Obama’s economic blunders deepened and prolonged the recession and bequeathed to us the most anemic recovery of modern times. Most of us have been seriously harmed by those policies, some more than others. Unfortunately, the extent of his economic errors are obscured by the benighted economic management in Europe, which amazingly is managing even to underperform ours.

President Obama’s politics have yielded the opposite of what he publicly promised: division in place of unity, secrecy and deception in place of open government, exclusion of those who disagree with him in place of inclusive embrace of open debate, privilege for the few in place of opportunity for the many, racial bigotry for political gain in place of a “post racial” society, rule by breaking laws and ignoring the Constitution in place of rule of law. I am sure that you could easily lengthen the list. Again, these perfidies have been to some degree obscured by congressional Democrat leaders far too willing to compromise their duties of office and the rights of the legislative branch of government, all to cover up and support the Obama Administration’s outrages on the nation and the political institutions of the Republic.

Most frightful of all, however, is President Obama’s dangerously bungling foreign policy. No friend of the United States is safe from this Administration’s blunders. Vladimir Putin, the boss of a second rate economic and military power—albeit one with a formidable nuclear arsenal—has been able to engage in 19th Century military adventures of invasion, conquest, and territorial acquisition against little more than vacuous bully talk from Obama, the emptiness of which has produced similarly pitiful responses from the leading Powers of Western Europe, derision from Moscow, and fear among America’s friends only recently escaped from the Soviet Union. China commits aggression against India and the Philippines, threatens Japan, and toys with close relations with Russia to isolate the United States, while openly engaging in cyber attacks on the U.S. government and American industry. Islamist barbarians increasingly brutalize Muslims, Jews, Christians, and humanists alike, undeterred by inchoate responses from Obama, who asserts leadership while failing to lead, other than with his transparent policies of pusillanimity and indecision. American allies in the Middle East feel abandoned or betrayed, while enemies are emboldened; the best counter strategy that Barack Obama is able to envision is a plan that might delay but will not prevent the nuclear arming of the mullahs of Iran—committed to the incineration of Israel, the more Jews killed the better. Each day seems to extend the list of foreign policy failures.

While considering the consequences of an amateur in the Oval Office, I came across a brief note I wrote during the 2008 presidential campaign. It might be immodest for me to point out how correct my warnings proved. I can make no claims to perspicacity, as all of this was rather obvious. No self congratulations are in order. It is too dangerous a world to trust the Presidency of the United States to one whose inexperience is only matched by his hubris. This is what I penned August 25, 2008, just before Barack Obama received the nomination of the Democrats:

There are some jobs you just cannot safely do without proper training and experience. Flying an airplane is one that comes to mind. Driving a bus is another. I would put being President of the United States in the Twenty-First Century on the list, too.

President of the United States was a tough job in the days of George Washington. It was even a challenge in the days of Millard Fillmore. It has not become any easier in recent years, and next year it will be a very big job. Considering the global responsibilities of the United States, with several irresponsible oil-drunk regimes threatening peace and freedom (ours and other’s) around the world, can we afford to enroll our new President in a foreign policy on-the-job-training program?

Economically as well, there is little room for error. So far we have gone through a year and a half of the housing market bust without falling into a recession. But our economic growth is anemic. A small false step or two can put us into a full-blown economic decline, exploding banking and financial markets that will then take years to recover. It is important that economic policy next year be led by someone who understands economic growth and how to promote it. The formula for growth—low taxes and steady prices—is well known to those who have learned the lesson; we do not need a novice who does not have enough experience to know that you cannot tax and spend your way to prosperity. We cannot afford his experiments with our jobs and livelihood.

That is why it is breathtaking that a major political party is on the verge of nominating for President someone so inexperienced as Barack Obama. I am unable to recall a single nominee for President, by any major party, less prepared for the office than Barack Obama. Really, there is the challenge for you. Name a nominee—Republican, Democrat, Whig, Federalist—less prepared than Obama.

Barack Obama likes to liken himself to Abraham Lincoln. I cannot claim to have known Abraham Lincoln or assert that he was a friend of mine, but I do say, Barack Obama is no Abraham Lincoln. Even liberal exaggerations of Obama’s undistinguished career cannot make it compare favorably with the long and grueling life experiences that schooled Lincoln for the White House.

In short, Obama does not have the training for the job. It may be that the Democrats’ talent pool is so thin that he will be nominated. But the job of President is too important—to all of us—to be extended to someone so unready.

Of Unbanked and “Underbanked”

Speaking of banks, as I did on this page a short time ago, there are those who are concerned that too many people in the United States are “unbanked” or “underbanked.” By the former they seem to mean those who do not use any banking services, particularly who do not have any bank accounts. By the former, they mean those who obtain some banking services from businesses that are not banks. The very existence of the terms, and the way that they are used by those who use them, implies that being “unbanked” or “underbanked” is a bad thing.

I will here disclose that I have worked for banks for nearly 10 years and for all I know may continue to do so for some time into the future. Whatever bias or color to my views that this condition provides I will nevertheless try to comment from a fair and factual point of view.

My first point, therefore, is that I am not prepared to assert that absolutely everyone should have a bank account. I can easily envision the value of a bank account for most if not all people, but I concede that they should be allowed to choose for themselves and that it would be terribly wrong to force people into banks. I acknowledge that there are some alternative providers of financial services who seem to please their customers, and I do not deny that banks can benefit from good competition. Banks have a long history of drawing upon the ideas and innovations of non-banks, just as non-banks have been eager to try their hand at successful new products and services that banks have pioneered. Bank customers have benefited the most from that process, as the variety and value of financial products have expanded, and the United States has led the world in the discovery of new and useful financial services.

Having said that, the nation cannot do well without a strong, vibrant, and prosperous banking industry. Our nation and people grow as we save financial resources and invest them in improvements for the future, whether new homes, new factories, or new ideas of how to do and make things better, faster, and cheaper. That is a major part of what banks do and are all about.

Moreover, there are a lot of things we do and a lot of places we go because we know that our ability to pay and get paid—to exchange things we value less for things that we value more (the reason we buy and sell things and use money to do it)—is secure, reliable, accurate, and relatively quick. That is our payments system, and banks created it and are at the center of it.

Americans also like the idea of becoming wealthier and expect to do so. If that seems a commonplace to you, recognize that it is not so in all parts of the world, where getting by from day to day is about the most to which people can aspire, for whom poverty is a way of life that they expect to bequeath to their children. To the extent that this miserable condition is becoming less the case in much of the world, that more people are beginning to believe that they can build and improve their wellbeing for themselves and their posterity, this new-found hope for accumulating wealth is attributable to the dispersion of principles of freedom and prosperity that Americans take for granted but which are new to much of the world. The global adoption of many American principles of prosperity has been a major contribution of the New World to the Old World and to all mankind.

Now get ready for the bold but true statement: you cannot get there and stay there without banks and the services that banks provide. Banks gather wealth, safeguard wealth, allow it to be used efficiently, and apply it to building the future. That is why governments pay so much attention to banks, and also why it is so harmful when governments try to capture banks and channel their services to the personal gain of themselves and their cronies. That is also why misguided bank regulations are harmful—even if in subtle but powerful ways—to the nation and its people.

Which brings us back to the agenda of the “unbanked” and the “underbanked.” In the United States, chief causes for people remaining “unbanked” are regulations that make banking more difficult and services more expensive; cultural barriers for people who come from societies where personal banking is either unknown or where the experience has been one of banks used by local governments to harvest wealth from people to enrich the governing elites and their cronies (much of Latin America, for example); and people who for whatever reason just do not prefer to use banks. The first cause regulators can solve but have largely been resistant to solving; the second can be overcome by time and experience and is showing signs of that; and the third cause is no more of a problem than people who prefer to rent rather than own their home, to eat eggs without grits, or who do not like the New York Yankees. I do not have to understand the personal preference to acknowledge it.

The concept of “underbanked” (that government needs to help banks figure out how to serve people who may get some banking services outside of banks) I fear may be a political device to harness American banks to serve the cronies of the “underbanked” advocates. We have already seen this game with the Community Reinvestment Act (CRA) regulations, adopted ostensibly to ensure that banks lend to their local communities (as if bankers, unlike other businessmen, need government regulation to notice business opportunities right under their own nose). In practice, CRA has been used to coerce banks into providing loans and even grants to and through poverty advocacy agencies that tend to prosper more than the people whom they claim to be helping. The folks who fret about the “underbanked” have marvelous formulas and plans for other people’s money to solve problems about which the people to be helped seem little concerned. I have never heard of any truly “underbanked” people themselves calling for the firm hand of government to get them into the banking system; if they want banking services, they just go and get them.

I have the haunting suspicion that the “underbanked” advocates would if they could use banks the same way found in the abandoned societies of the “unbanked,” where banking services came through the hands of people who knew better than others and always made sure to get their cut for their benevolence. That is not really banking, and that is symptomatic of why people flee those lands. The wealth creation of such captive banks seems to be for someone else. If it happens in America, where will the people go?

Of Banks and Over Taxed Regulators

Banks, who needs them? A quick question and a quick answer: a thriving, prospering banking system is essential for a thriving, prospering modern economy. Banks bring together the resources of savers and the needs of borrowers, particularly borrowers who seek funds to establish or expand businesses or families and individuals who use occasional borrowing to smooth out their income (good banking principles penalize people who would borrow in order to live beyond their means, but more on that at another time).

Banks also created and maintain the payments system, the means by which money is transferred quickly and accurately throughout the nation and even internationally. Bank services include as well a variety of wealth management tools by which individuals, families, businesses, and governments can store, grow, and make best use of their financial wealth.

Without banks, almost none of these services would be available. Many non-banks provide bank-like services, but they all come to find the need to rest their own services at some point on a bank.

Banking in the United States has grown with the nation, from very simple institutions in the eighteenth and early nineteenth centuries, to a wide variety of bank types, charters, and business models, as diverse as the financial demands of the customers of the largest and most diverse economy in the world. I once presented at a meeting in Chicago a list of about two-dozen different types of banks in the United States. We have national banks, state chartered banks, small community banks, larger regional banks, and very large banks with extensive national and international business products and services. All of these operate and compete together, with a body of customers behind each one who think that their bank offers the best available choice of services that they want. No other nation in the world has a banking industry like ours.

The recent recession and financial panic—and the inevitable politicizing of finance that came in its wake—have thrown much into confusion and imposed upon sound and prudent bank supervision harmful ideas born of reckless sloganeering and hubristic financial engineering. The complexity of banking—no more complex than information technology, communications systems, or modern manufacturing—has been superseded by even more complex bank regulation.

The rules governing banking are too much and too many to function reasonably. They have become more than the very human people in the multitude of bank regulatory agencies can manage. The disciplining role of markets and the valuable service of banker judgment have in large measure been replaced by bureaucratic procedures and the judgments of government officials. These officials have had little if any practical experience making loans, taking deposits and putting them to work, building financial wealth, or otherwise providing products to customers. Government officials cannot run businesses. Now, their government jobs have become so demanding and complex, that they will not be able to do their own jobs, either. Too much has been placed upon them.

Those most harmed by all of this are bank customers. For the moment, bank profits are up, but that is because their losses are down as they recover from the recession, not because services to customers are expanding. As a result of government interest rate policies, depositors earn almost nothing on the money that they place in banks. The expanding oversight involvement of bank regulators makes it dangerous for banks to offer new services to customers; the risk of breaking any of thousands of pages of regulations has become too great. It takes almost half an hour to open a new bank account, something that used to take minutes. Fewer credit-worthy borrowers today qualify for mortgages than just a year ago, before new regulations went into effect. The number of banks has been declining in recent years, dropping at the rate of nearly one for every business day, week in and week out. Only one new bank has been opened since 2010. We have fewer banks today than the nation had in 1893. A stagnant industry is less able to evolve to meet changing customer needs and preferences.

For the good of all of us who rely upon banking services, and for the sanity of financial regulators, we need to return to the principles of good banking. We need to restore a system of supervision that is measured, not by how much banker judgment it takes over, but by how it adds value to the ability of banks to serve customers. Government agencies—and the laws that they administer—that are derived from a founding document that begins with the words, “We the People,” should do nothing less, and nothing more.

On another day I would like to share some thoughts about how banks are being goaded to become their own enemies.