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 […]
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 […]
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.