Of Stagflation and Recovery

April 28, 2022 Leave a comment

Photo by FortyTwo on Unsplash

Governments create inflation.  Since governments maintain a monopoly on money creation and exercise it constantly, the results of their policies are their own, whether they wish to own them or not.  Having said that, though government got us into this inflationary mess, more government is not going to get us out.  Yet, less government might.

The current administration—including the Federal Reserve—is in a tight spot.  Many repeatedly predicted that the unwholesome monetary and fiscal policies to respond to the equally unwholesome policies of dramatic economic shutdown of the 2020 Great Cessation would eventually lead to inflation.  So they have, even worse than what we saw in the 1970s.  The incoming Biden Administration persisted in blowing air into the inflationary balloon distended the year before.

This is not a partisan statement.  We have seen two Republican administrations doom themselves at the polls by engaging in ruinous economic policies because it was an election year.  Within memory of 2020 policymakers, the outgoing Bush Administration in 2008 mishandled the sure-to-be recession coming from the bursting of the housing bubble by panicking Congress into passing the TARP legislation, which fright drove investors to the sidelines.

True, the price rise from the 2020 massive fiscal and monetary stimulus did not appear as quickly as worriers, like me, expected.  Recipients of government largesse were not spurred to spend it as spontaneously as predicted.  Neither did negative real interest rates prod much borrowing, but it did punish savers.  While economic activity remained suppressed, people for a time sat on their money with little to do.  Eventually, puzzles all finished, people started coming out as 2021 wore on.  Congressional leadership called for more stimulus whilst the flood of funds from earlier stimulus at last began to flow.

The tight spot for the current administration is how to bring down inflation without bringing down the economy.  Of course, the economy will come down if they do not, because inflation eats away at the insides of economic activity.  Current White House leaders are sensitive about comparisons with the Carter Administration, yet there is talk of following the failed Carter example of trying to drive the economic car with one foot on the brake and the other on the accelerator.  That is the program for Carteresque stagflation, a stalled economy wrapped in continued high prices.

What we should have learned—and many have—is that the way to end inflation without getting into stagflation is not more government stimulus.  It is to end disincentives to business activity.  Reduce regulatory burdens and people will find ways to solve problems and get things done.  Inflation is caused by too much money chasing too few goods and services, stagflation impeding production of goods and services.  Reducing regulatory burdens and barriers to business activity addresses both problems by promoting productivity, innovation, and expansion, which increase supply at lower costs, reward creativity, and encourage new ideas in a virtuous economic circle.  It worked in the 1980s.  It can work 40 years later.

Filed under creativity, economic growth, Federal Reserve, Great Cessation, inflation, markets, money, productivity, recession, stagflation Tagged with , , , , , , , , ,

Of Majority Rule and Minority Freedom

November 23, 2021 1 Comment

Photo by Davide Ragusa on Unsplash

The majority rules, the minority be damned.  That is the heart of a democracy.  The Founders of the United States wisely chose a different course.  They recognized that popular majorities are inherently unstable, ever shifting, never constant, with little patience for the minority.  Each of us, however, is always and ever part of some minority.  The Founders sought a durable nation that would accommodate variety, so they established a republic.  More precisely, they established a democratic republic, where representatives are chosen by democratic action.

A republic works, and can only work, by respecting and accommodating one another sufficient to find agreement, which is often elusive.  A representative legislature by definition gathers delegates who have their own minds, who carry with them divergent views and interests, and who cherish rights to be respected.  From my personal experience I have observed that no one in Washington is your ally or your opponent all the time.  I find that reassuring, and occasionally surprising.

This structure accommodates several things that we hold dear.  Our republic accommodates differences of opinion, or even better said, varieties of opinion.  I have rarely been in a conversation with more than two people where all were in agreement on every point raised.  I have similarly rarely been in such a conversation where I did not benefit from the interplay of ideas.  We often can reach a consensus, but it is not consensus on all things.  A republic embraces this. 

In a republic no majority mandates our tastes.  Our republic, for example, allows for an assortment of cultures.  It had to or would never have been created.  I like to bring flags to our family reunions, symbolizing our cultural heritages, from my parents’ families to those of the new in-laws as our children have married.  With preeminence for the Stars and Stripes—reminding us of the attraction of this nation—our family unity makes enjoyment of those cultural influences an enrichment, in our clothes, in our menus, in our games and sports, in our traditions.  I see that in other families.  In much the same way, the constitutional foundation of our republic fosters a commonality upon which a cornucopia of good things thrives.

A republic requires several things that we find necessary, embedded in our Constitution.  It requires freedom of religion, free speech, private property, a market economy, separation of powers, a federal system of government, among other things.  God Himself implores freedom of religion on His earth, free hearts with devotion to be freely extended to Him and expressed in love to His children.  A market economy means that we are free to exchange our time, talents, and resources with one another, without being limited to choices that only the majority favors, hence the incredible selection of goods and services, often some only favored by a few (like my argyle socks).

The Founders understood a principle of governance also articulated in scripture:

“We have learned by sad experience that it is the nature and disposition of almost all men, as soon as they get a little authority, as they suppose, they will immediately begin to exercise unrighteous dominion.” (Doctrine and Covenants 121:39)

Best to reduce the chance, especially should one profess to represent the majority of the people.  Safer, as in our federalized republic, to divide such power.  I recall Senator Phil Gramm, for whom I worked for many years, saying how frustrated he was when first elected to Congress at how little one person could accomplish in Washington.  He added that after a while that gave him great comfort.

Filed under Congress, Constitution, democracy, federalism, free speech, God, government, markets, religious freedom, republics Tagged with , , , , , , , , ,

Of Burgers-Fries and Excellence

February 12, 2021 Leave a comment

Photo by Peter Dawn on Unsplash

My favorite local hamburger joint is the simply named “Burger Shack.”  The hamburgers are good, made to order, with an option for a gluten-free bun; prices are decent.  Where this joint completely outshines the crowded competition is that the fries are far and away the best around.

One might think that with a commonplace menu centered on burgers, fries, and milkshakes the fare could easily become mediocre.  There is plenty of that available in the surrounding culinary community.  The national mass-production chains cater to the market for mediocre.  They had occupied the so-so field for so long that it appeared that all the burger rivalry was solely among the giant mediocrities, working hard to find new ways to repackage and remarket the same thing, becoming more alike in their efforts to appear different.

Who knew that people—lots of people—could be attracted to excellence in burgers and fries?  A few daring souls made a go at the chance that there may be customer demand for more than mediocre.  The market allowed it and rewarded it.  Competition to rise above mediocre has become fierce, with customers benefitting from the choices offered.    

Not that I would forbid mediocrity.  Mediocrity is O.K., as far as it goes, but only O.K.  I am happy that there can be more.

Enjoying better burgers, pleased with better shoes, and glad for better dentists, I find the insistence on mediocrity and the outcry against excellence astonishing.  How frequently we encounter voices decrying competition, seeking to standardize everything by treating everything and everyone the same!  Is that what people really want?  We used to have a shelf full of trophies “won” by our children just for showing up.  We failed to convince the kids to take them to their own homes for display.

More astonishing is the assertion that celebration of mediocrity and condemnation of competition promote diversity.  The theory is that diversity cannot compete in a system that rewards excellence.  What is the alternative prescription for diversity from these levelers?  They demand removal of standards that applaud excellence in achievement or that recognize merit in performance.

Reality reveals opposite results.  This leveler ethic promotes either or both of two outcomes.  First, things tend toward the same as differences are discouraged; efforts that improve performance are placed at risk of suppression.  Second—alternatively or concomitantly—the levelers who rise above to be in charge of administering this doctrine decide recognition and advancement, and they do so based on whatever standard suits their fancy or is then in vogue.  Such standards tend to be unmeasurable, subject to whim, suiting the arbitrary caprice of the chief levelers.

In short, diversity is always in danger in the tyranny of mediocrity.  No one must be more beautiful, according to the day’s definition of beauty.

For a time the big burger chains, which initially arose by offering a better, excellent idea (until the idea became standardized) put the local mom and pop joints out of business.  Markets, though, have allowed competition to work its magic, tolerating room for some intrepid innovators to test customer interest in burger excellence.  Some succeed.

There comes the levelers’ claim that competition is inhuman, or at least unkind.  It supposedly disadvantages those who are not excellent, who are only mediocre.  Since not everyone can excel, this competition must be stopped.

That claim is inhuman and unkind.  People everywhere are mediocre or less than mediocre at some things, but each can do something better than someone else can.  The variety of talents and gifts is constantly amazing (and sometimes amusing).

If mediocrity standards are imposed, however will we discern the excellence that each has to offer?  Each person may be stymied from discovering what he or she is best at doing.  How does one find the divinity in his or her humanity, embedded in the unique gifts from God awaiting to be developed?  How many advances will be lost? We will be poorer for the loss.

I do not know how long it took the owners of Burger Shack to find out that they could offer an excellent product.  Perhaps they are still finding out.  While the year’s virus restrictions play to the advantages of the big, national firms, the last time I was at Burger Shack it was booming, even under the restrictions.  If allowed, people find a way.

Filed under choice, competition, diversity, excellence, individual worth, kindness, markets, mediocrity, productivity, work Tagged with , , , , , , , , ,

Of Good Banking and the New Year

January 9, 2021 Leave a comment

Photo by bamagai at Unsplash

A year in retirement can give you perspective, particularly a year fraught with ample opportunity to do some good amidst challenge, risk, and danger of various flavors.  Such was the year behind us.  Does the year ahead offer any less?

Many such thoughts were brought to mind in a recent conversation with the chief financial officer of a community bank.  As you would guess, we discussed the outlook for banking.  I observed that the condition of the industry reminded me of the dot-com bust of 2000.  While the economy was in decline, hit a second time by the terrorist attacks of September 2001, the banking industry was thankfully in strong financial condition.  The dot-com bust had a securities market and Silicon Valley locus.

As in 2001, so also today, the banking industry is strongly capitalized, liquid with financial resources, well positioned to fund economic recovery.  Fortuitously, that position is matched by a host of potential customers, especially entrepreneurs eager to start up new businesses or expand ones that survived the government-led shutdowns.  Among those entrepreneurs are many people whose businesses closed not from bad business plans, but due to the Great Cessation of 2020.  That is to say, there are people who want to start new businesses who know how to run businesses, if government strictures will let them.

Their problem is one of resources exhausted by trying to keep their businesses floating as the tide went out.  As the tide is coming back in, there is a ready supply of people who would like to have a go with a new boat.  Good bankers have always been in the business of finding and funding good risks. 

Banks grow as their customers and communities grow.  Good banking fosters and facilitates the generation, management, preservation, and application of wealth. 

Bad banking bleeds wealth, which is why failed banks should be allowed to fail, to end the drain on the economy and to make room for the productive work of good banks, new and old.  Good bankers do their work by insightful weighing of opportunities and risks, tailoring terms and conditions to such opportunities and risks.  Bad banking either mistakes opportunities, or it miscalculates or ignores risk, or both.  Which, by the way, is why governments should stay out of the business of banking (other than as prudential supervisors), as the history of government shows an atrocious record of missing opportunities and miscalculating risk, sometimes for the short-term benefit of government’s associates.

The other day I saw a happy video from the chief executive officer of a southwestern bank.  Her timely message was of gratitude to the bank’s customers for constant communication and support.  In return, she offered a reaffirmed invitation apropos to serving in a way tailored to customers’ financial needs.  Reach out to the bank, including its CEO, 24-7 for financial service.  In conclusion, she pledged the bank to “connect you with others in our community who can serve you best.”  Now, that is good banking.

Filed under banking, economic growth, Great Cessation, markets, prosperity, retirement, statism, wealth Tagged with , , , , , , ,

Of Platitudes and Political Attitudes

October 17, 2020 Leave a comment

Photo by Tim Mossholder on Unsplash

I am naturally optimistic.  So you will understand that I rejoiced to see several of my friendly neighbors, who sometimes disagree with me politically, place signs in their yards supporting positions consistent with the views of free market liberty-loving constitutionalists like myself.  That would appear to bode well for candidates in this election who also tend to trust markets, liberty, and constitutional rights.

I will confess that to some the signs might read like a public creed of platitudes.  Perhaps they are intended to present an impressionist attitude of some kind.  Here are the phrases, written in bumper sticker style.  See what you think.

To begin with, who could argue with the obvious truth that “Black Lives Matter”?  I personally know no one who does not naturally embrace the idea.  I do notice that those who in published media lionize the eponymous organization laying claim to the title reveal little material interest in the lives of black police officers, black small business owners, or unborn black children.  That may be why the lady running for Congress in Baltimore’s 7th Congressional District emphasizes that “all black lives matter.”

Next on the signs is the phrase, “No Human Is Illegal.”  That is surely the case in the United States as long as it remains a nation of law and order.  Things that some people do are illegal, but enshrined in the Declaration of Independence and the Constitution is the concept of individual worth.  The notion that people themselves can be illegal is reserved for socialist governments and monarchies, where large portions of the population can find themselves illegal.  That is a crucial reason why the American founders broke from the monarchy and why applying socialism here terrorizes lovers of liberty.

Third on the signs is the bromide, “Love Is Love.”  Surely it is.  Perhaps it appears because love is the core principle of many religions, such as Christianity, which rests on two commandments (also taught in the Old Testament):  Love God, and love your neighbor as yourself.  As Jesus taught, on these rest “all the law and the prophets.” (Matthew 22:40)  Jesus also taught that with the breakdown of law and order, “the love of many shall wax cold.” (Matthew 24:12)  I am thrilled that churches are being allowed to open again so that they might continue to teach their doctrine of love.

The phrase, “Women’s Rights Are Human Rights,” is given fourth billing on the signs.  That is absolutely true, even if it is violated in many parts of the world.  I am reminded, by my neighbors who have come to the United States from such nations where women’s rights are routinely violated, why I am grateful that my daughters and granddaughters live in a country where their rights are real and protected.

I am grateful that the signs include what is in danger of becoming a meaningless cliché, “Science Is Real.”  Our nation was midwifed by the enlightenment, a rejection of the medieval notion that scientific verities were determined by government or ecclesiastical agencies and votes of councils.  We are all indebted to courageous scientists who stood alone and refused to accept any scientific debate as “final,” who asked more questions that often led to better answers that have made mankind healthier, wealthier, and more flourishing.  May our nation of freedom encourage the continuation of that story.

The penultimate phrase on the signs is the prosaic declaration, “Water Is Life.”  I remember Barry Goldwater, Senator from Arizona, explaining to a skeptical Senate the importance of water rights.  There would appear to be a longtime tug of war in our government agencies about the importance of water management.  As with many important issues, relying upon our federal system of state and national interaction is most likely to give us the best management answers.  National mandates are likely to leave local communities dry.

The final phrase on the signs is the catchall, “Injustice Anywhere Is a Threat to Justice Everywhere.”  An unlimited aspiration, mankind has wrestled with it from the earliest times.  As this is to be an ongoing struggle of which we should not tire, the question is how best to proceed?  Our founders asked that question.  They recognized that arbitrary governments were the worst offenders.  The structure of liberty they established has fostered the multitudinous avenues for virtue that have not ceased to make progress in combating injustice.

I cheer such display of worthy attitudes of support for our nation’s growth in liberty.

By the way, there is a website where you may go to purchase these signs, $10 each.  Free enterprise is wonderful.

Filed under charity, Constitution, Declaration of Independence, freedom, individual worth, justice, markets, rights, rule of law, science, socialism Tagged with , , , , , , , , , ,

Of Social Disruption & the Great Cessation

March 25, 2020 Leave a comment

Photo by Tim Mossholder on Unsplash

This is not an alarmist post. It is anti-alarmist.  It is a request for a better way.

Last evening, at the quiet end to a quiet day, I ran the numbers. These are not my numbers, but numbers from oft-quoted sources:  The Johns Hopkins Center for Systems Science and Engineering, the U.S. Census Bureau, and The Wall Street Journal.

I live in a state with 8,500,000 people, not far from the average of 7,000,000 for all 50 states.  As of last night, in our state, just below 300 people were reported infected with the virus, and 9 had died from it.

I ran the numbers.  The percentage of people in my state currently hit by the virus is 0.003%, that is three one-thousandths of a percent.  Very large and very small numbers are hard to visualize.  In visual terms, if you had one hundred people to demonstrate the numbers, have one person step forward.  He would represent the 1%.  If that person weighed 100 pounds, 4.8 ounces of that person would represent the three one-thousandths of a percent.  That is my state, so far.  You can multiply that many times before you get to just 1 person out of the 100.

There is genuine hardship for people infected by disease, and as their neighbors we are concerned for them and wish to help.  Are social disruption—which social distancing has become—and the Great Cessation of business the best way to help?  That is a rational and reasonable question.

What about all the rest of the people in the state?  Unfortunately, our governor has chosen to be alarmist.  Invoking worries fed by extreme scenarios of how bad things could get in the future if this or that happens or does not happen, he has declared that all should be affected today, that 100% social disruption should be applied now.  When you run the numbers, that is truly an abundance of caution.

But it is not an abundance of life. You do not see an abundance in the grocery store, in the churches, in the places of work, on the streets.  You have seen the Great Cessation where you live.  You are recognizing the social consequences of cutting people off from one another, people who are by nature social animals and who need real, genuine social interaction.  You have also seen how our economy rests upon that social interaction, and you are seeing how the Great Cessation is affecting the people—you and me and the millions of people who are that economy.  Ask yourself if this is healthy, personally, and for your neighbors.  It does not feel right, it does not look right, it does not sound right.

We hear that essential businesses and jobs may continue.  Which businesses and jobs are to be labeled “essential” and who decides?  That is another reasonable, rational question.  The answers so far have not been reasonable or rational.  In practice an unflawed answer proves impossible, yet the force of law is being applied anyway.  You have to look away to argue that some jobs are essential and others are non-essential, ignoring the many job roots of each designated “essential” job.  It is a fool’s errand—no matter how well educated or official—to make up such a list.

Tell the man and woman put out of work that their jobs are “non-essential”, and include their children in the discussion.  Tell the small businessman who has been forced to close his doors and receive no revenues to pay his rent, keep his infrastructure, and meet his payroll, that his business is non-essential.  On Monday we went out to eat, the last day that the governor’s edict would allow in-restaurant dining.  I was troubled by the fear that I saw in the eyes of the employees, which their gratitude for our business could not hide.  That is the human perspective, which the officials show little signs of considering in their orders.

As President Trump said this week, in the midst of the national social disruption/Great Cessation experiment, the cure must not be made worse than the problem.  Let cool, rational, and reasonable consideration prevail.  I recommend a Wall Street Journal editorial, “From Shutdown to Coronavirus Phase Two.”  It is a rational and reasonable call for a better way forward.  What we have now is hurting everyone.  There must be a better way.

Filed under Great Cessation, jobs, markets, quarantine, statism Tagged with , , , , ,

Of Bears and Working

March 23, 2020 Leave a comment

Photo by Sandy Millar on Unsplash

I can support a cute idea like this.  One of our neighbor dads plans to take his children “on a bear hunt.”  Dad has planned ahead.  He asked neighbors who have them, to put a teddy bear in the window to be spotted by his children as they walk around the block.

Being empty nesters, our home is more often host to grandchildren; few of many bears remain in our house.  Once we had dozens—of teddy bears.  We now have more than a dozen grandchildren, and I am fine with the trade.

Speaking of trading, I suppose that we could put in the window a print out of today’s stock market, sliding deeper into bear market territory, responding to yet another attempt by the Federal Reserve to stimulate market confidence.  A more than casual observation might be that these government intervention moves can do more to spook investors than reassure them.  Usually declared while the markets are closed, the moves appear lately to be followed by a sharp market sell-off.  No criticism of their intentions, but when the 5 governors at the Federal Reserve (Fed for short) are pitted against the billions of people who make trillions of economic decisions each day, the Fed is frequently worsted.  No matter how good computers are, the economy is too complex for any of the models upon which any team of experts relies.

So, no picture of the bear market for the window.  We do not wish to scare the children or their dad.

Fortunately, we did find a teddy bear in the house, left by our youngest (who still has lots of his stuff here).  The bear now sits on our front porch, awaiting discovery.  On his lap he holds a sign, one that our daughter gave us some years ago to announce the pending arrival of her first child.  The sign reads, “Grandkids welcome.  Parents by appointment.”

No, the sign was not mandated by the CDC or the governor.  Humans need social interaction.  That fact is not apparent in the government orders to isolate people indefinitely.  Dad may not go to work, children may not go to school, so it is great to see fathers and sons and daughters taking pleasant walks.  At some point, someone is going to need to pay bills to buy things produced by somebody somewhere.  I wonder whether the complex models on which the governors rely are a match for the billions of human interactions in which their millions of citizens need to engage in order to live and be happy.

Filed under economic growth, family, Federal Reserve, jobs, markets, quarantine, statism Tagged with , , , , ,

Of the Federal Reserve and Taking from Savers

April 4, 2015 Leave a comment

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.

Filed under banking, economic growth, economics, Federal Reserve, government, interest rates, markets, personal finance, recession, socialism, statism, Treasury debt Tagged with , , , , , , , , , , ,

Of Banks and Over Taxed Regulators

September 27, 2014 1 Comment

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.

Filed under banking, BCFP, bubbles, Dodd-Frank Act, economic growth, government, interest rates, markets, prosperity, statism, wealth Tagged with , , , , , , , , , , ,