Episode 27 September 12, 2019
CLP Topic: Economic Growth
Title: Does the Fed’s Job Performance Justify Its Independence?
Our podcast today examines the Fed’s argument that its independence from political influence is justified because their decisions are “based on the best interests of the nation, not the interests of a small group of politicians.”
The issue raised by the podcast is not the Fed’s decisions, it is the Fed’s performance and results of those decisions.
Our podcast argues that the Fed shifted its mission, in 1998, to stabilizing global financial conditions.
Their dismal economic performance must be viewed within the context of their effort to promote globalism, not create economic prosperity for common American citizens.
Prior to 1998, the national welfare function that the Fed aimed at improving was the national economic welfare, albeit, heavily skewed to the welfare of bankers and the wealthy social classes.
After 1998, when the Fed bailed out the Russian oligarchs, with $4 billion of U. S. tax revenues, the Fed viewed itself as “Banker-for-the World.”
There is nothing in Madison’s framework of checks and balances that authorizes citizens to restore the Fed’s mission back to the original goal of improving sovereign national prosperity and consistent economic growth.
The podcast evaluates the Fed’s job performance on 4 major criteria:
- Promotion of stable economic growth in the domestic U. S. economy.
- Promotion of a competitive U. S. banking industry.
- Promotion of a sovereign U. S. domestic economy.
- Promotion of high rates of domestic technological innovation.
Our podcast concludes that the Fed’s economic performance has resulted in a systematic series of boom-bust cycles, where the financial welfare of common citizens are devastated, while the privileged wealthy elite bankers escape unharmed.
We conclude that the Fed’s arbitrary discretion to manipulate the economy by setting interest rates must be taken away from them.
A better goal for national economic policy is to target gross domestic private business investment, which leads to high rates of technological innovation, which create new future markets, which reduce wealth and income inequality.
In addition to removing the Fed’s discretion on setting short-term interest rates, the U. S. Congress should authorize the SEC to create a GDP futures currency market that would help bankers find the natural real rate of interest to charge each other in overnight bank loans.
I am Laurie Thomas Vass, and this is the copyrighted Citizen Liberty Party News Network podcast for September 12, 2019.
Our podcast today is under the CLP topic category Economic Growth, and is titled, Does the Fed’s Economic Performance Justify Its Independence?
The most recent podcast of the CLP News Network is available for free. The entire text and audio archive of our podcasts are available for subscription of $30 per year, at the CLP News Network.com.
Stable Economic Growth
Since 1947, the Fed has manufactured a series of asset bubbles, caused by a sequence of easy money, followed by a policy of tight money, primarily by raising the rate of interest on overnight bank deposits, that are held at the 12 regional Fed banks.
The sequence of events is initiated by a Fed announcement that it is considering lowering interest rates to promote aggregate economic demand.
The announcement, itself, not the Fed’s actual interest rate adjustment, causes increased speculation among bankers and investors, who bid up the price on fixed assets, primarily bonds, held in the accounts of the most wealthy citizens and banks.
In other words, by announcing its intentions, the Fed initially acts to benefit the financial interests of the wealthy class, because the market price of bond assets goes up when interest rates decline.
The Fed repeatedly overshoots the interest rate target, resulting in rampant inflation, which the Fed is required by law, to control. As a result, the Fed tightens money supply, the economy contracts, and inflation is brought under control.
The Fed repeatedly overshoots the money supply target, leading to prolonged, avoidable, recessions.
Before 1998, the economic conditions in the U. S. were the primary variables that influenced the Fed’s performance.
After 1998, when the Fed became Banker-for-the World, the variables that the Fed considered were global economic growth rates, not domestic U. S. economic conditions.
Jeffrey Hummel’s table below describes the economic instability of the Fed’s job performance, from 1947 to 2007, by breaking the economic downturns into 3 different outcomes: economic recessions, bank panics, and bank failures.
The Fed’s job performance on interest and money supply results in economic chaos about every 5 years.
Table 1. Jeffrey Hummel’s Analysis of U. S. Economic Recessions.
Recession Bank Panic Bank Failure
Another way to view the Fed’s performance is with the benefit of statistical hindsight.
The Federal Reserve Bank of St. Louis publishes the GDP-Based Recession Indicator Index, which looks at past data and measures the probability that the U.S. economy was in a recession during the indicated quarter.
The hindsight is better than the real-time NBER estimate of the beginning of a recession which is based upon contemporaneous subjective data, which are usually not released to the public for several years.
The Index describes a perfectly symmetrical, recurring five year cycle of Fed induced economic chaos. The great benefit of this index is that its construction is entirely mechanical, and is based solely on real, not subjective, GDP data.
The economic performance of the Fed, described in the index, is not “based on the best interests of the nation,” as the Fed chairmen wrote in their WSJ op-ed, their performance is based upon stabilizing the global economy, and rewarding wealthy global banks, through a policy of asset-based speculation.
Graph 2. St. Louis Federal Reserve Bank Statistical Hindsight of Recession.
Promotion of a Competitive Domestic Banking Industry.
Prior to 1998, the focus of the Federal Reserve generally followed the platitude expressed in their WSJ editorial that the mission of the Fed was to pursue “the best interests of the nation, not the interests of a small group of politicians.”
After 1998, the mission of the Fed changed, not to the interests of a small group of politicians, but to promoting the financial welfare of a small group of New York banks.
The welfare function being maximized by the Fed is not a Bergsonian national social welfare function, it is, instead, a James Buchanan selfish private welfare function of 5 private banks, who became co-equal partners with the Fed, after the 2008 Fed-induced chaos.
As a result of the Fed’s deliberate effort to consolidate banks, after the 2008 crisis, five New York banks emerged as “too big to fail.”
The financial focus of the 5 banks is global in operation, not the sovereign domestic financial interests of American citizens.
In his interview with Russ Roberts, in 2013, former Dallas Fed Governor Richard Fisher explained that the shift in focus, after 2008, was due to the “Very NY Concentric,” view of the world of the Fed’s policies to stop the economic crisis.
Graph 3 below captures the time horizon of the banking consolidation of banks assets after 2008.
Prior to 2008, the 5 banks owned about 41% of all domestic financial assets.
As the graph shows, after 2008, the 5 banks owned 49% of all U. S. domestic assets. The increase in assets of the 5 banks is entirely due to the Fed’s policy decisions to eliminate small banks, in order to consolidate power in the 5 big banks.
The chairmen of the Fed, and the Secretary of the Treausry, during the time of the 2008 crisis were former employees of the 5 banks.
To rephrase James Buchanan, the welfare function that they were maximizing was their own.
There is no political mechanism in Madison’s system of checks and balances that empowers citizens to shift the focus of the Fed away from global economic stabilization, back to the promotion of national welfare.
Graph 3. Growth of assets of the Five “too big to fail” New York banks.
This conflict over whose financial interests count the most in the Fed’s decisions is the crux of the issue between President Trump, who wants to Make America Great Again, and Chairman Powell, an investment banker and former lobbyist for the banks, who aims at improving the financial welfare of the big banks.
In his 2013 comments about too big to fail, Richard Fisher stated,
“I will argue that the big banks represent not only a threat to financial stability (of the U. S. economy), but to fair and open competition, that they are the practitioners of crony capitalism and not the agents of democratic capitalism that makes our country great.”
He noted that there are about 6000 smaller, regional banks, and 10 big banks, primarily located in New York, who obtain special banking privileges at the Fed.
Table 4. below lists the top 10 banks, along with their assets.
As a result of their privileged status at the Fed, the big banks obtain an insurance policy from the Fed that insulates them from the economic chaos inflicted on ordinary American citizens, with the Fed’s boom-bust policies.
“A dozen megabanks today control almost 70 percent of the assets in the U.S. banking industry. The concentration of assets has been ongoing, but it intensified during the 2008–09 financial crisis, when several failing giants were absorbed by larger, presumably healthier ones. Today, these megabanks—a mere 0.2 percent of banks, deemed candidates to be considered “too big to fail”—are treated differently from the other 99.8 percent and differently from other businesses… Without fear of failure, these banks and their counterparties can take excessive risks.”
“I will argue that these institutions operate under a privileged status that exacts an unfair tax upon the American people.”
The unfair tax on citizens is two-fold. First, in 2008, under Bernake, the citizens bailed out global banks and corporations with $1.7 trillion, with no strings attached, and no consent of the governed.
In other words, tax dollars were used to reward private global banks for taking on more risk than they would have, without the Fed insurance policy.
The second part of the unfair tax on U. S. taxpayers is the opportunity cost foregone in terms of domestic U. S. economic growth and technology innovation.
This opportunity cost is another component of the political conflict between President Trump and Powell.
When Trump states that the American economy lost about 1% in growth because of Powell’s tight money policy, he is referring to the economic opportunity cost of the Fed’s tax on citizens.
By coordinating U. S. banking policy with European banking policies, the Fed’s performance mimics the rate of economic growth in Europe.
In contrast to the Fed’s statement about the national interest, the EU “slow-growth” policies that are good for large banks are not good for the nation.
The Fed’s policies create unearned, rent-seeking, financial benefits from the Fed’s policies that give the big banks a competitive advantage in the cost of obtaining loanable funds over the 6000 smaller banks.
The Fed induced competitive advantage for large banks provides political power for the big banks to set national economic policy that are aimed at global financial conditions, not national domestic financial interests.
Promotion of U. S. Domestic Investment.
In his analysis of U. S. economic growth rates, after 2008, David Beckworth asks:
“Why aren’t banks lending?”
Beckworth notes that the 6000 U. S. banks are sitting on excess reserves that are earning 0.25%, at the 12 regional Fed banks,
Beckworth explains that part of the issue of banks sitting on excess reserves is due to the way that Bernake “sterilized” his policies of being both a lender to banks, and then, subsequently, buying the same value of U. S. Treasury bonds.
After buying the bonds for its own investment account, the Fed, itself, is sitting on huge, excess reserves, that are locked up on the Fed’s balance sheet, and unavailable for investment in the private economy.
The Fed’s excess reserves, called Quantitative Easing, is another prime conflict between President Trump and Powell.
Trump wants the excess reserves freed up to promote domestic economic growth.
Powell is not willing to free the QE funds up because he wants to coordinate his policies with the European “go-slow” economy, which stabilizes global financial conditions for the big banks.
As a result of the Fed’s go-slow economy, private banks are also compelled to sit on huge excess reserves that could create economic growth, if those funds were invested.
To answer Beckwith on why banks are not lending, the banks cannot find investment opportunities in the go-slow private economy that provide better results than the Fed’s 0.25% interest on excess reserves.
The main reason that banks cannot find investment opportunities better than 0.25%, is that the best lending and investment opportunities were formerly in American manufacturing, which was destroyed by the global trade policies that Trump is trying to fix.
Prior to 1992, manufacturing played a dual economic role, by providing the best investment opportunities for both bank loans and capital investments.
Second, manufacturing created inter-industry supply chains that increase the rate of technological innovation and provided investment opportunities in the domestic supply chains that fed manufacturing production.
The economic damage to manufacturing accelerated after 2001, when China joined the World Trade Organization. Most of the manufacturing plants were shipped to China, along with the supply chains.
Capital investment in the U. S. domestic economy collapsed after 2002, and has never recovered.
The graph below describes the China WTO economic effect on investment after 2002.
Graph 5. Relationship of Private Domestic Investment on Domestic Economic Growth.
In the absence of a high rate of private capital investment, after 2002, the rate of GDP growth declined. The graph below is perfectly symmetrical, and can be interpreted as describing how investment leads to economic growth, or, in the absence of investment, leads to economic decline.
Graph 6. Historical Relationship Between Private Domestic Investment and U. S. GDP Growth, 1947 – 2014.
It is not the lack of corporate profits that is causing the banks to sit on their excess reserves. The rate of corporate profits, after 2002, have been going up dramatically.
In the absence of the economic go-slow global stabilization by the Fed, this rate of corporate profits would have been expected to lead the banks to make investments in domestic manufacturing companies, because increased profits act as a beacon for bankers on where to invest.
The large corporations and big banks benefitted the most from the Fed’s global policies, but the average American citizen did not benefit, because the profits made overseas were not re-invested in the American domestic economy
Graph 7. Increased Corporate Profits After 2002.
In other words, the Fed’s globalization policies did not float all the boats. It only floated the boats of 10 big banks and the most wealthy, large corporations.
The Fed’s policy of sitting on excess reserves, and the effect the Fed’s policies on the 6000 smaller banks excess reserves, means that the rate of capital investment is way too low to maintain Trump’s economic recovery.
The rate of private domestic investing started to decline, after 2002. It has never recovered, and is currently at the same level it was in 2002.
Graph 8. Domestic Private Business Investment.
When the jobs were shipped overseas, the rate of domestic technological innovation collapsed because the manufacturing supply chains that diffuse knowledge were destroyed.
Global coordination of financial policies does not promote the national sovereign interest because it does not promote high rates of domestic economic growth.
The Fed’s job performance on promoting U. S. prosperity does not justify its continued existence, much less its continued independence.
Domestic Technological Innovation
After China joined the WTO, in 2001, the communist government began a systematic theft of U. S. technology and intellectual property of the U. S. corporations that began trading with China.
The reason that the communists are compelled to steal U. S. technology is because their social-cultural rules prohibit self-generated technological innovation.
Technology innovation requires open flows of knowledge, and individual initiative to commercialize new technology products, that create new future markets.
The logical lynchpin that connects entrepreneurial insights to innovate with future new markets is the ability of the individual to appropriate future profits.
Since the communists do not allow entrepreneurs to appropriate their profits, the communist society cannot generate their own technological innovation, and consequently, they must steal technological knowledge from the U. S. corporations.
To some extent, this same set of cultural-social values afflicts all social class collectivist societies, like the EU.
In Europe, the rates of economic growth are low because the EU is socialist, not individualist, culture.
The EU economy cannot generate its own required rates of technology innovation to promote high economic growth because all of the private sector innovation is concentrated in the small set of large EU corporations.
When President Trump admonishes the EU to be more like the U. S., he is talking about emulating the U. S. individualistic entrepreneurial culture.
The initial factor endowment that made America great, and economically different, was the individualistic, unique “Yankee” can-do cultural value.
The cultural-social values, before 1998, constituted America’s great comparative, competitive advantage over all other nations.
After 1998, the Fed’s globalist policies diminished America’s comparative advantage in favor of making the U. S. economy emulate the EU slow growth policies that promote stability for bankers and big corporations.
Graph 9 describes data generated from the San Francisco Fed bank that purports to show the “tech pulse” of private investment in domestic American technology companies.
Graph 9. San Francisco Fed Tech Pulse.
The tech pulse declined dramatically, after 2002, and never recovered. The performance of the Fed in coordinating American bank policy with global financial banks is the reason the tech pulse never recovered.
Graph 10 describes the contribution to GDP growth that private business capital investment in technology innovation makes.
The graph shows that, after 2002, capital investment in U. S. manufacturing technology innovation declined because those former investments in the domestic economy were being made in foreign nations, primarily China.
The contribution to GDP from technology innovation in manufacturing has never recovered because the Fed’s global focus on stable financial conditions causes slow economic GDP growth in America.
Graph 10. St Louis Federal Reserve Bank Technology Innovation.
Another indicator of the Fed’s performance that belies their platitude about making investment decisions in the best interest of the nation concerns the rate of domestic new venture creation.
The rate of new venture creation is critical to the rate of technological innovation because it is new technology ventures that introduce new products into the market.
It takes a very high rate of new venture creation to contribute to future economic growth because about 70% of all new technology ventures die within the first 3 years.
The 30% of the new ventures that survive after 3 years are the seed corn of future American prosperity because new technology products create new future streams of income.
The Fed’s job performance must be judged on how its policy decisions affect new venture creation in technology commercialization manufacturing firms.
Graph 11 describes both new venture creation and new venture deaths, from 1995 to 2017. The graph shows that new venture creation and new venture deaths were status quo, indicating very little net new venture creation.
Graph 11. New Venture Creation Vs. Venture Deaths.
Another way of looking at the rate of new venture creation, after 2002, is to compare the rate of new venture creation from 2004 to 2014.
In 2004, the rate of new venture creation was 3.2%. By 2014, the rate had dropped to 2.9%.
A rate of 2.9% of new venture creation is too low to sustain American domestic economic growth. The Fed’s job performance is the cause of the decline because their focus is stable global economic conditions, not high rates of domestic economic growth.
Graph 12. New Venture Creation Rate in Domestic Private Businesses.
The Fed’s interest rate policies are based upon short term price-based decisions which depend on temporary, fleeting, overnight relationships between bankers.
Longer-term technology innovation strategies are investment-based, not price-based, and depend on obtaining financial rewards in a future market.
Most of the future market relationships in the American economy require the anticipation of who to trust in future exchanges based upon the cultural values of reciprocity and mutuality.
Trust is a moral and cultural value that is inherited when the social and legal structure is characterized by a certain configuration of civil rules of exchange and laws regarding property and appropriation of profit.
The Fed’s job performance is based upon promoting globalism, and the financial welfare of five big New York banks, not the sovereign domestic economic welfare of citizens.
There is no reason for citizens to trust the Fed’s platitudes, and no logical, constitutional justification for the continued independent existence of the Fed.
This is my Conclusion.
Bernake’s policy of creating 5 banks that are “too big to fail” means the
- S. taxpayers will be forced to bail out the banks when the financial conditions collapse.
Under Bernake’s global focus, the Fed has become a gigantic, financial central planner, just like the global socialist bankers in Europe, and very close to the role of the central bankers in China.
Bernanke’s monetary policy of “sterilizing” monetary policy, in the 5 years after 2008, created the tightest money supply, since Herbert Hoover.
Bernake’s monetary policies were highly contractionary, and Powell continues to embrace Bernake’s tight money policies because Powell is a globalist.
The Fed’s current independent political institutional power should be replaced with a constitutional mandate to focus solely on commercial bank oversight and providing money of stable value.
The Fed’s short-term interest rate discretion should be replaced with a market-based currency futures market on future GDP, that allows the banks to determine the natural rate of interest to charge each other on overnight loans.
If the GDP currency futures market creates actual interest rates that are above the natural interest rate, then less money will be lent by banks.
Conversely, if the currency future market creates actual interest rates that are below this natural rate, then lending should increase, and economic expansion should result.
The economic performance of a market-based interest rate would be vastly superior to the Fed’s erratic job performance of creating the five year boom-bust economy, that devastates common American citizens, and is the political result of an unelected financial elite that has more authority over the future of America than the President.
I am Laurie Thomas Vass, and this podcast is a copyrighted production of the CLP News Network
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