Ask a D.C. insider what’s the best way to solve the debt crisis. Nine times out of ten, they’ll recommend taking on more debt. That’s how things operate in the Potomac swamp. Up is down, right is left, digging yourself into more debt is the best way to get out of it. But it wasn’t always like this. In fact, there used to be common sense when it came to the economy. So where did it all go wrong?
Politicians talk about the uninsured. Special interests argue on behalf of those with pre-existing conditions. But why is no one wondering how doctors are affected by the new law? They’re the ones on the frontlines dealing directly with new patients, as well as the red tape that makes bureaucracies go round.
Politicians proclaim the benefits of small business while on the campaign trail. But when they meet in the seedy halls of Congress, they have no problem doing whatever they can to stifle, regulate, and subdue their progress. Instead of siding with entrepreneurs, these politicians often side with political allies and cronies that helped put them into office.
Just because you’re retired doesn’t mean you have to stop working. Especially now that you have all the time in the world to do what you really want. Entrepreneurs don’t only come out of Silicon Valley. They come from all walks of life, from all different ages. If you’re retired and want to stay active while you relax, then find out the steps you need to take in order to start, manage, and grow your next small business.
Austrian economics does more than tell you what happens when the government disturbs market forces. In the hands of knowledgeable investors and entrepreneurs, it can tell you exactly what to expect from the market. Market behavior depends on how people behave. And how people behave is central to the Austrian perspective.
The U.S. dollar has been the world's reserve currency for almost a century, and already there are signs it may be in decline. But that doesn't mean it's not still valuable. On the contrary... As Chris Mayer explains, there are many reasons the U.S. dollar will remain relevant on the world stage for years to come. Read on...
World War II might have dragged the country out of the Great Depression, but it did so at a great price. Central planning took center stage, and politicans and bureaucrats suddenly knew what was best for America, the economy, and your life. On top of that, they replaced the free market with a new economic system… Creditism.
If you’re good at something should you be penalized so others have a chance at success? Should award winning actors and actresses be barred from future Oscar ceremonies to give other men and women the chance to succeed? Success should always be rewarded and encouraged. But what happens when you have a government that wants to even the playing field and take away the spoils of success. Gregory Bresiger finds out...
Practical people often pooh-pooh fiction reading as a time wasting dalliance, dominated by a Marxist coloring of the world. However, fiction readers were given a scientific reason recently for spending hours absorbing fanciful figments of someone’s imagination.
Argentina is suffering the ravages of government debasement of the currency -- i.e., inflation, the process by which government pays for its ever-increasing debts and bills by simply printing more paper currency. The expanded money supply results in a lower value of everyone’s money, which is reflected in the rising prices of the things that money buys.
When government expansion is allowed to continue unabated or when it casts a heavy regulatory shadow on America’s entrepreneurial spirit, the freedoms that we’ve come to know, and perhaps take for granted, slowly begin to slip away.
Its acceptance is as widespread as its justification is important, for it provides the rationale for the Federal Reserve’s unprecedented monetary expansion since 2008. While critics may dispute the wealth effect’s magnitude, few have challenged its conceptual soundness. Such is the purpose of this article. The wealth effect is but a mantra without merit.
Baron Rothschild, the famous French financier, was once heard to say that he knew of only two men who really understood money -- an obscure clerk in the Bank of France and one of the directors of the Bank of England. “Unfortunately,” he added, “they disagree.”
The new reality of Obamacare’s tax credits has left finance reporters to pen articles warning readers to “take care” when considering a tax credit and providing strategies for how best to “protect yourself.” So what do finance reporters know that the White House doesn’t?
Nihilo ex nihilo fit. Out of nothing, nothing comes. First put forward by ancient Greek philosopher Parmenides in the fifth century B.C., Thomas Aquinas and St. Augustine later used this axiom to prove that the universe needed a “first mover” to get things going. Even if the whole thing began with some kind of “Big Bang” moment, it still needed a banger to bang it. Who? God, of course.
Economic theories don’t lend themselves to laboratory testing, so the work of a national appraisal firm is especially enlightening. A new study lends support to the Austrian business cycle theory, which says that the less government is involved, the faster a market will recover.
What positive steps can we take? The energy that is now expended by well intentioned, freedom-seeking individuals on the destructive course of politics can be turned into powerful steps that will have a positive effect on the future. All are moral, right and just. None require aggressing. Consider the following...
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 […]
Why a third round of quantitative easing? Sure, Ben Bernanke says that it is all about jobs and growth, as shown by various 60-year theories pushed by Lord Keynes.
Really? Let’s get serious. This approach has done nothing over five years. It has prolonged the suffering. Another round virtually guarantees continued economic stagnation. QE is poison for the future of American prosperity.
Is Bernanke just ignorant of the economics of adjustment? Or is there more going on? Very few commentators have considered this possibility. They mostly take Bernanke at face value. It’s time that we look a bit deeper, remembering that the big banks are the Fed’s main clients.
Let’s first consider one of the great mysteries of current Fed policy. Why is the Federal Reserve paying banks 25 basis points on their excess reserves parked at the Fed? This policy guarantees that banks have greater incentive to do nothing, rather than lend to you and me. In this way, the Fed’s policy seems to be at war with Bernanke’s stated objectives.
Of course, a quarter point doesn’t sound like much. But it has made a world of difference. Since the Fed put the policy in place during the dark days of October 2008, there is now over $1.4 trillion sloshing around the central bank. Before 2008, there were exactly zero excess reserves held by the Fed.
This is something of a puzzle. People have been puzzling about it for years. Even the grand old man of tight money, ex-Fed chair Paul Volker, doesn’t understand why the Fed is writing checks totaling $3.75 billion a year to the nation’s banks. “I don’t quite understand,” he said, “why they’re putting all this money into the economy and then paying interest on excess reserves of the banks, which is where the banks are parking some of the money.”
And remember, the Federal Reserve sends most of its income to the U.S. Treasury. The Fed transferred $76.9 billion in earnings to the U.S. Treasury during 2011, but it could have transferred nearly $4 billion more. That won’t balance the budget, but that’s another few billion dollars that taxpayers are ultimately on the hook for.
It’s suspicious if nothing else. Consider that the same month that the Fed started paying for excess reserves, Congress and the FDIC approved the Transaction Account Guarantee (TAG). For those that missed this space last week (archived here), TAG provides unlimited FDIC insurance for noninterest-bearing accounts on deposit at the nation’s banks. Unlimited.
So if you are willing to forgo a (very) few basis points of interest, the FDIC will cover your deposits even above the $250,000 limit. TAG deposits total about $1.3 trillion. And remember, banks aren’t paying anything for TAG deposits, so banks enjoy a nice, easy stream of revenue from government policy arbitrage.
Back in 2008, the New York Fed was a bit more overt about its plans:
“Paying interest on excess balances will permit the Federal Reserve to provide sufficient liquidity to support financial stability while implementing the monetary policy that is appropriate in light of the System’s macroeconomic objectives of maximum employment and price stability.”
“Financial stability” means that profitable banks and the Fed always covers the backs of the big banks. No need for the shocked face: After all, the banks own the Federal Reserve system. Since three-quarters of TAG deposits are at the top five banks, a back-of-the-envelope calculation means $2.81 billion is being funneled to the too-big-to-fail banks courtesy of the TAG/pay for reserves program.
That’s pretty good work when you can find it.
Of course, this whole gambit wouldn’t make any sense if the banks wanted to lend the money out. You and the small business down the street would certainly be paying far north of 25 basis for a loan from your friendly local banker, or even from the unfriendly zombie variety.
A quick perusal of any bank’s CD rates will tell you they are saying no to loan applicants much more than yes. Banks have every reason to take the 25 basis points when loan-to-deposit ratios are at a multidecade low of 71%.
According to the FDIC’s “Quarterly Banking Profile,” deposits grew in the second quarter by $88.1 billion. The report stated, “Much of the growth in domestic deposits ($71.7 billion) consisted of noninterest-bearing transaction deposits with balances greater than $250,000 that are temporarily fully covered by the FDIC.”
Banks made $34.5 billion in the second quarter, the 12th-straight year-over-year increase in quarterly income. That all sounds peachy, except banks are juicing their earnings by taking money out of their loan-loss provisions to make their numbers.
Banks set aside $14.2 billion for bad loans in the second quarter of this year, a $5 billion decline from the same time last year. That is the smallest quarterly total in five years. Banks have reduced their reserves for nine straight quarters.
Many small banks are adding to loan loss reserves, but the FDIC profile points out that reserve reductions are centered in the larger banks. In total, loan loss reserves are $86.7 billion below the peak level reached at the end of the first quarter of 2010. That’s $86.7 billion toward the bottom line. That can’t last forever.
Also, noninterest income rose, spurred by the gain on loan sales and on fair values of financial instruments. Both are direct beneficiaries of Bernanke’s zero interest rate policy.
In other words, when it comes to the core business of banking, the numbers don’t look so hot. Net interest income actually declined $287 million in the second quarter and the average net interest margin was 3.46%, down from 3.61% a year previous.
Loan charge-offs were down $8.4 billion from a year ago, another driver of earnings improvement. However, while the industry’s “coverage ratio” of loan loss reserves to noncurrent loans inched up from 60% to 60.4% between March 31 and June 30, this continues to be far below a healthy coverage ratio of more than 100%.
Reuters reports that some people at the Fed have suggested that cutting the interest on excess reserves is a policy option. Why doesn’t the Fed do this? Fed officials say the central bank is concerned that such a move would hurt returns on money market funds that could destabilize financial markets.
Here is proof from the minutes of the Fed’s July 31-Aug. 1: “While a couple of participants favored such a reduction, several others raised concerns about possible adverse effects on money markets.”
It hardly seems possible that this 25 basis point subsidy is required to keep money market funds from breaking the buck.
If this is true, these are indeed dangerous times, more dangerous than most people imagine. It means that the only way banks can really make money is through the “return-free risk” that Jim Grant often writes about. The Fed, therefore, has concocted this entire policy (TAG, ZIRP, and QE3) for one reason only. It‘s not about jobs and growth. The goal is to keep the banking system afloat.
FDIC board member Thomas Hoenig made the point clearly in a speech to the Exchequer Club: “In television commercials, one large bank [Citibank] is advertising its celebration of 200 years in business. I congratulate them. It is well documented that this bank has received U.S. government support four times in the last 100 years.”
“We have slowly, perhaps unintentionally, expanded the safety net and its subsidy beyond what is justified to serve the long-run interests of the economy. What started as a means to providing stability to the payments system and intermediation process — both vital to our economy — has become a tool for leverage and a subsidized expansion into activities that has led to greater instability.”
The banks have become like the post office, Fannie Mae, Freddie Mac, and the car companies — public utilities that survive and thrive through the force of government power and privilege. The tiny tweaks that keep us baffled are simply the required scaffolding that government must erect to keep its friends and supporters in business.
Inevitably, these temporary crutches always become permanent, only to be supplemented with more of the same during the next crisis. And everyone, including Bernanke, knows that there will be a next crisis.