The Affordable Care Act creates a new health insurance marketplace (the exchange). But because of the great uncertainty about what buyers will enter the market and who will buy what product, the law creates three vehicles to reduce insurance company risk.
Politicians and bureaucrats are notorious for manufacturing euphemisms -- clever but deceptive substitutes for what they really mean but don’t want to admit. That’s how the phrase “revenue enhancement” entered the vocabulary. Some of our courageous friends in government couldn’t bring themselves to say “tax hike.”
It’s easy to be negative about the U.S. economy these days. Find a glint of silver, and folks come running to point out all of the dark clouds looming about. This, of course, is what we got last week when the monthly jobs report was released from the U.S. Department of Labor (DOL). Folks pooh-poohed the number of jobs and whining that they’re not enough or that it’s less than a bunch of economists thought that it might be. But you know what? Stuff ’em.
Facts are easy. You can check facts. What supporters of the Affordable Care Act are doing, on the other hand, transcends factual bungling. It’s far more advanced: a warping of reality so debauched it looks like something out of a tale by H.P. Lovecraft.
The east coast and parts of the southern U.S. were to varying degrees paralyzed by blizzards a few weeks ago. The snow as expected rendered the roads treacherous, and in anticipation of slick streets, shoppers flocked to the grocery stores in advance.The rush into grocery stores, and its aftermath, offers worthwhile lessons in economics.First up, […]
The highest form of charity, argued the 12th-century Jewish philosopher Maimonides, is when the help given enables the receiver to become self-sufficient.But our systems of state charity — aka welfare — have too frequently had the opposite effect: They have actually created dependency. It is time to rethink the way we help people.I’m going to […]
Last year was quite the year for Bitcoin. We’ve seen exponential growth in Bitcoin’s exchange rate and extensive coverage in the media. Another phenomenon we have witnessed is the proliferation of alternative cryptocurrencies, five of which we’ve provided below.What all of these cryptocurrencies have in common is that they rely on a decentralized network to […]
President Obama crowed in his State of the Union speech about the economy, even mentioning “a rebounding housing market.” Maybe he was referring to friends in high places, like the seller of Penthouse One in New York, which just closed for $50.9 million, all cash. Millions of mere-mortal homeowners likely wanted to throw something at […]
The nonpartisan Congressional Budget Office is acting in a bipartisan way to cover up the biggest single threat to the bipartisan political alliance that is stripping America of its wealth: the United States Congress.There is no question that the following policy is bipartisan. Democrats and Republicans in Congress are completely agreed that the following information […]
Recent difficulties with implementing the Affordable Care Act have increased opposition to the program. A majority of Americans now oppose it. Problems with the HealthCare.gov website are in all likelihood temporary. However, there are serious long-term problems, particularly considering long-term finance and labor supply issues. Given the mounting difficulties with and growing concerns about the […]
The faces of the Detroit bankruptcy are the thousands of pensioners whose promised benefits are suddenly part of the restructure negotiation. When Motown filed for Chapter 9 last July, the city had $11.5 billion in unsecured liabilities. The vast majority of this was pension and health care benefits owed to retired city employees.The images of […]
“Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime.”As the inequality gap grows, there is an ideological battle unfolding in the West.On the one hand, there are those who think government can fix things. It must do more, tax more, […]
On Feb. 7 the United States will once again reach its statutory debt limit, meaning it cannot legally borrow any more money. Since the obvious option of cutting spending to match the amount of revenue that the government collects is off the table for some inexplicable reason, Congress will have to pass a new, higher […]
The New York Times published an interminable article on health care recently. Plenty of facts — how scrupulous are these journalists! — but the article displayed absolutely no comprehension of the basics of cause and effect. I was left wondering about the whole point.The article details how the health care system rewards specialists to an […]
The Largest Company in History:“The United States Corporation of Government (USCOG)”I follow global social and commercial networks, looking for entrepreneurial opportunities.Innovation surges when industry and government models change. Buggy whips. Landline phones. Railroads. The Soviet Union. Apartheid South Africa. All marked social and commercial innovation, both bad and good.We are witnessing a new form of […]
We’d like to give the banks in Australia some credit. They’ve finally gone and done it. They have caught up with 1960s technology. They’ve figured out how to use PIN numbers.How to only use PIN numbers, that is. They’re considering scrapping signatures on credit cards to cut down on fraud. Apparently, having to verify your […]
We put in a good-citizen call to the SEC the other day.“There’s a massive scheme to manipulate stock prices,” we told the friendly agent.“I have to tell you that your call is being monitored so that we can better serve the public,” he replied.“Oh, don’t worry about that. The NSA is tapping our call anyway.”“Are […]
Dr. William C. Padgett is a retired optometrist who has been trying to bring an elderly care facility to Beaufort County, North Carolina, for over a decade.“Our senior citizens,” he laments, “are finding that it is difficult and in many cases impossible to find an appropriate long-term care facility locally.” Though he has received several […]
If you don’t have the angst out of your system concerning Wall Street banksters, Government Sachs, and the Affordable Care Act, settle in with Matt Taibbi’s Griftopia to make your blood boil one more time.Investors should be reminded of 2008 as they shrug their shoulders and put their money back in the stock market. The […]
What do 8 of the 10 wealthiest people in the U.S. have in common?Aside from being able to fly in private jets, the common thread is that each of them has made their fortune thanks to a start-up.Let me explain…From tech titans like Bill Gates and Larry Ellison (founders of Microsoft and Oracle, respectively), to […]
“Inequality is the defining challenge of our time,” according to President Obama. It’s certainly the topic of the day for Paul Krugman, Joe Stiglitz and a whole raft of liberal pundits.But have you noticed that hardly anyone else is talking about it? When is the last time you heard a shoeshine person or a taxi […]
In December of last year, I left my career to travel the world for one year.My plan was to visit as many countries as possible on my Star Alliance Around-the-World ticket in the first nine months, then, for the remaining three months, return back to the country that most caught my eye and my curiosity.Nine […]
Economic history is primed to repeat in the nastiest of ways unless the government stops distorting the price of something we use every day.Every product, good, or service has a price, which is essential to rational decision-making. We use prices every day as vital data that guide us. Without true prices, prices not distorted by […]
A new survey from Harvard University found a large majority of young Americans do not believe the law will save them money, do not believe it will improve their health, and do not intend to sign up for insurance through the new exchanges.
Uh-oh!The new pope, Francis from the Pampas, has just warned us to beware the “tyranny” of capitalism.Each man worships his own gods. Some worship at the altar of Jesus of Nazareth. Some at the altar of the Almighty Dollar. The capitalists don’t bad-mouth Francis’ god. You’d think he would cut them the same slack.Bad-mouthing Catholicism […]
The market has selected different things as money throughout history. Some of these items have served as money in isolated places for specific periods of time — for instance, cigarettes in prisoner-of-war camps. Cigarettes continue to be a currency in prisons if allowed, but if not, according to Wikipedia, “postage stamps have become a more […]
A president stands disgraced. Congress is scattering. Bureaucrats are baffled. Pundits are reaching. Industry is scared. Politicians are scrambling to do something, anything, to make it better. One political party is in meltdown and the other loving every minute of it, hoping to ride the calamity to electoral gains.The so-called Patient Protection and Affordable Care […]
Ben Bernanke began his press conference with a touching tribute to the unemployed. Oh, how he cares! And so deeply! His description of the problem was accurate enough. But then out came the smoke and mirrors.
Bernanke said that to remedy the unemployment problem, he will continue the Fed’s program of asset purchases. Specifically, the Fed will continue to buy and hold mortgage-backed securities (yes, they are still sloshing around the banking system) and Treasury securities — $40 billion-plus per month. Plus, he will keep the federal funds rates at near zero.
The great change, he said, is the intense focus on the policy objective of unemployment. The committee sees no inflation threat, so it might as well turn its attention to the labor markets. The Fed loves the unemployed, you see, and wants to help them.
But here’s the disconnect. What the devil does buying bad debt from zombie banks have to do with getting people jobs? The relationship between assets purchases and policy goals is murky at best.
“I need a job, so I hope the Fed buys more bad mortgage debt” — said no unemployed person ever.
Yes, I know about ancient Keynesian theories. There is tradeoff between unemployment and inflation. But those theories have not really explained much at all for the last 40 years. In fact, they blew up in the 1970s with the emergence of “stagflation.” An affliction where unemployment remains high even as inflation roars ahead.
You might be able to explain Bernanke’s outlook through the normal intuition. Low rates spur growth. Growth leads to new businesses. New businesses hire new people. Problem solved.
But the problem here is that the last five years have provided scant evidence that low and even zero interest rates have actually spurred economic growth. You can point to some measure of improvement in the data. But the cause-and-effect relationship between higher growth rates to zero interest rate policy is… less than persuasive.
And here is where we get to what has long bugged me and others about the Fed’s policies since 2008. These guys are not idiots. They read the same economic reports we do. The history is surely somewhat as plain to them as it is to us. The policy is not working as it should. Bernanke has conceded as much.
Why, then, does the Fed persist in this policy?
This is where you need to look beneath the surface to find the answer. What is the purpose of the central bank? Looking back historically, the central bank has served one primary purpose and one second purpose that is the source of its power. It is there to keep the banking industry solvent, providing liquidity when necessary and papering over the errors that are revealed in the course of economic crises. And secondarily, it is there to provide a market for government debt when governments get in trouble.
There is a quid pro quo here. Governments are willing to back the banking cartel with legal status provided the banking cartel serves government when it is needed. Government is more willing to enter into such a deal with banks, rather than the salt or shoe industry, because, well, banks are where the money is. Government needs that stuff because they typically want more money than taxpayers are willing to cough up.
That’s all you need to know to understand why the Fed is willing to create some $85 billion each month to buy more mortgage-backed securities and more Treasury debt.
The banking industry is still holding the stinking bag of you-know-what that was first exposed in 2007. The mess is still there. The banks are in continuing need of shoring up their balance sheets. Offloading bad assets on the Fed and writing them off the books is the best path from here to there. That the Fed is still doing this after all these years provides us an indication of just how bad the crisis really was and just how vulnerable the banking system was and is to finding itself completely insolvent.
As for the government’s needs right now, say no more. Our rulers have created a horrible mess of astronomical and unpayable debt, and even rating agencies are taking note. There is the fiscal cliff. There are the unfunded liabilities. There is the unsustainable empire. There is the utter impossibility of a rational political solution to this problem. Thus does the Fed come to the rescue, guaranteeing a market for government debt and helping its friends in the bond-selling business at the same time.
Now let’s consider the effects. Zero interest rates policies amount to a complete perversion of market signalling. The effect on savers like you and me has been disastrous. Average people in the past depended on the banking system to park their money for eons, but now only chumps do that.
But there is another angle here too. The banks can no longer rely on loan markets to be the main source of their profitability. Since 2008, the main activity of the industry has completely changed in response to zero interest rate policies. In what we might describe as a “lending cliff” the commercial banking sector has slowed lending, dramatically at first, and then crawling backing more recently and seeming to plateau at a much lower rate of expansion than the historical average.
This represents a change in the way banks work and the way money has traditionally been created in a fractional-reserve lending system. Picking up the slack have been nonbank lending institutions, which are in a boom stage of development right now. The lending standards in the nonbank sector, stung by 2008, are more strict than in traditional banking. They maintain a level of soundness that banks never have. And they sure as heck don’t go along with the zero interest policy, as you well know if you have taken out a loan from a nonbank source in recent years.
The banks themselves have always been the creative engine of new paper money to flood the system. If banks are creeping away from loans markets, effectively outsourcing them to the nonbank sector, this trigger mechanism is no longer in place. This is why there is a gigantic disconnect between Bernanke’s claim to have a “highly accommodative” policy stance and the monetary reality on the ground.
Close observers have noted this trend for many years. The Fed doesn’t seem to have the level of direct control over money creation that it once had. Here is a chart of “Money of Zero Maturity” that chronicles percentage change from a year ago.
Most notable is that you see a dramatic rise in the early part of the 2008 crisis and then a precipitous fall once the crisis was in full swing. Pumping efforts showed some promise in 2009 but faltered. The subsequent plunge continued through 2010, the very time frame in which the Fed claimed to be pulling out all the stops to flood the economy with money.
What’s up with this? If the Fed is creating massive amounts of money, why are we not seeing it appear very dramatically in money aggregates, and why isn’t this feeding the markets in the conventional way?
To ask the question a different way, even if price inflation is higher than the government admits, why have we not yet seen signs of Weimar Germany or Zimbabwe? The clue comes from looking at the reserve balances at Federal Reserve banks themselves, where the commercial banking sector is actually parking its new-found fake wealth.
They are doing this because the Fed has made it possible for the banks to earn interest from their deposits. Leaving money in the vaults make a lot more sense than trying to navigate Dodd-Frank regulations and risk violating Basel III capital requirements.
Putting all of this together, we can see that what Bernanke has done is fundamentally change the function of banks and the role of the Federal Reserve. In seeking to save the banks, he has essentially nationalized them, disabling their lending function relative to the past and turning the Fed from being a clearinghouse to being a gigantic holding tank for newly created money, the purpose of which is to pretty up the balance sheets and shore up confidence in a bankrupt system. This is why he can stand up there at press conferences and so confidently claim that inflation represents no great threat right now.
To be sure, Bernanke’s policies are not harmless. They represent a massive distribution of wealth from the productive sector to the banking system and the financial sector, solely for the purpose of keeping the Fed’s clients solvent.
Another danger comes from the many creative ways that banks have learned to make money in the age of Bernanke by playing recklessly in the derivatives market, holding on to infinitely guaranteed demand deposits, and manipulating every marginal opportunity for speculative trading that comes along.
This could be the banking bomb that will blow up in the years to come. But this explosion is going to take a new and unpredictable form from any that has come before. A bubble pops first at the weakest part of the balloon. Where that is precisely is known through experience.
The end of banking as we’ve known it is probably good news, and, in bringing this about, Bernanke has probably done the world a favor. Finding the right path forward is the great challenge that every holder of dollars will face in the years ahead.