Posts Tagged ‘central bank’

Waste and Corruption Out of Thin Air

Friday, August 7th, 2009

If government proposed a “stimulus” program to give each American 50 million dollars, we’d immediately think of inflation.  At that scale, the proposal would meet its deserved ridicule.

However, I’d like to look at how it would work ex-inflation, so let’s pretend there is no inflation problem.  The Federal Reserve’s magic omnipotence determines that there’s “slack” in the economy so that government can create and give everyone 50 million dollars (and Goldman Sachs its commission), with no significant inflation.  We’ll make no assumption about ever repaying the 50 million per capita, which is a realistic expectation in the current real world of money and credit expansion anyway.

So with no inflation, should The Fed get really excited (they must have been at least starting to doubt the magic) and do it again?

No.  Even without inflation, the artificial abundance of credit money will cause plenty of other distortions to economic behavior.

For starters, some people will simply retire to become consumers only.  With their production removed earlier than it otherwise would have been while their consumption is still there (and may increase in early stage “stimulus” euphoria), over all wealth measured in production (rather than money out of thin air) has gone down.

In our decades long credit roller coaster this retirement miscalculation has certainly occurred, with credit expansion giving people false signals that they can retire or semi-retire when actually they still needed the economy and the economy still needed them (provided they could somehow have been directed to real production and not to bubbleland).

The scope of this gift from The Fed and the banking system to our seniors and near seniors is still unknown.  Some people soon to be forced into unretirement now that the credit veil has slipped will have skills they can market at the level they’re used to in the face of impaired economy headwinds, and some won’t.  Since that’s about all we can know for now, we’ll have to leave these folks high and dry where the helpful stewards of the economy have put them, and move on to other expansionary credit “life blood” effects.

With my 50 million, I’ll probably stop everything else to pursue a writing career.  Any other productive possibilities from me will be permanently (or at least until everything blows up even more) lost to society.

In the 50 million for everybody story, plenty of other part-time writers will join me in pursuit of the full-time dream.  Also, actors, film makers, dancers, models, painters, sculptors, chefs, fashion designers, musicians, and of course, singers.  American Idol will need at least a few extra rotations– maybe even its own network.

Something like this happens in real life credit expansion.  It’s not just directly bohemian pursuits, but other apparently more practical endeavors that become over indulged because of false expansionary signals: we get more retailers, restaurateurs, boutiquerateurs, financial and real estate tycoons in training, “internet marketing gurus”, advertisers, public speakers, and miscellaneous experts– every type and stripe of consultant who once did something successfully for a decade (or at least didn’t fail too publicly), and have now risen above doing the expert activity to advise others.

Pursuing the dream, or advising others on dream pursuit, isn’t bad as such (too late, I’ve insulted everyone– no one is reading anymore).  And it’s certainly not that many people in professions this piece may appear to denigrate aren’t exactly in their productive niche and awesome there.  However, regardless of whether we make those judgements that money and credit creation make the economy too fluffy, it clearly does make it too frothy– entrepreneurs get hasty in pulling the trigger, and then hang on waiting for the next boom that credit expansion signals have promised them.  This paper promise must eventually be broken since no amount of paper, nor any book keeping entry of whatever size, is ever going to eat a single restaurant meal, or otherwise consume anything except for a dwindling supply of economic clarity and perspective.

(It isn’t entirely a vacuumful of wishful thinking on the production side of course.  The psychological extremes of overreaching are naturally late stage, while consumers will all along have been helpfully translating their expansionary false signal receptions into “real” but ultimately regretted demand for dreamy non-essentials– the new era feedback loop that the Fed thinks it wants, and doesn’t really even seem to much doubt after it collapses.)

In the 50 million dollar story, Fed magic is still on the job, and there’s no collapse yet.  There are no laborers– everyone is retired, an artist, or an entrepreneur– but we still haven’t got to the true elephant in the central bank.

The “slack” has come out of the economy– at 50 mil per head, probably with a pop.  The artificial boom has ratcheted up the optimism of the players.  Those entrepreneurs with apparently successful businesses will be getting signals to expand them.  The Fed, not wanting to “choke off” the apparently vibrant economy, and getting plenty of cheerful feedback from the banking system that new credit can be “absorbed”, will feed the frenzy, as they were born and structured to do.

Now the future looks so huge that the entrepreneurs believe they can take on bigger and more distant expansionary projects.  Indeed, the situation seems to demand it.  The closer borrowed money gets to being free– a favorite central bank ploy– the more dangerous it seems to decline expansion.  Your competitor may be using the free money to grow to infinity and then smother you.

Because the credit is artificially created, it can signal temporary enthusiasm, but it can’t signal an actual match up to future available resources.  The flashing, screaming pedal to the metal promise of future resources to complete every entrepreneur’s project is a screaming pedal to the metal lie that no actual arriving future can possibly fulfill.  (For one thing there aren’t any laborers, somebody’s bound to notice that eventually.)

This is where the true “confidence” issue shows up.  It doesn’t matter if players are confident that government “will provide liquidity”.  Speeches, guarantees, backstops and loans of last resort don’t help– in fact make it worse, because these are rational doubts about what is and is not being produced from finite resources, how much of the future is being crammed into the present, and when exactly this denuded future will make it’s appearance (or from where we are at the moment, its curtain call).

No Bernanke or Geithner speech can address this, because all they can produce is debt and more speeches, and all that brings is economic and political miscalculation, waste, instability, and possibly on top of that, inflation.

By Les Lafave
Monetary and Banking Reform –
Originally Published at Strike The Root

Bear Stearns Should Have Guessed Better

Tuesday, April 8th, 2008

There’s been a lot of commentary that the recently exploded Bear Stearns “should have known better.  “Really?  How can anyone be sure that they know better about how much leverage to use in a financial system that’s based on deliberately mysterious fluctuations in leverage?  One can certainly argue in retrospect that Bear Stearns made plenty of mistakes, but the “should have known better” comments have a strong element of whistling in the dark.  (Silly Bear, they used leverage.  Can you imagine?  Oh well, just one (cross your fingers) of those things.)

We have immense leverage in our system starting right down in our central bank bones.  We eat, drink and breathe leverage.  (And if it seems like we’re not getting enough, we cry to the market nannies in the Federal Reserve System for more.)

It’s never a steady predictable stream of leverage– that would be too easy (no pun intended).  Instead, the Fed tries to “stay ahead of the curve” and make “surprise moves” to manipulate “market expectations”.  With these Fed moves as a perpetually shifting funhouse floor on which to build our economic judgments, how confident can we be that we know better?  We’re getting an answer to that question, courtesy of the Federal Reserve (even as we’re shifting the blame to a supposed market failure.)

In our financial system, we all have to make decisions about how much leverage to take on.  Take no leverage, and you’ll fall behind and die as your money is debased right out of your hands.  It’s particularly tough on business.  You can do everything right about your core business, but misjudge your use of debt– too much or too little– and you’re toast.  If you’re in demand as a wage slave instead, then you can relax– but that’s only as long as you never retire.

I feel pretty sorry for the people at Bear Stearns.  They’ve been sacrificed twice on the Federal Reserve’s now thoroughly blood-soaked alter.  Once during the monetary policy whip-sawing (still ongoing), about which Bear supposedly should have known better, and again during the company’s forced liquidation, when to all appearances any choice to shop for a better offer were squelched by the Fed.  (Maybe that’s another area where a “knowing better” mythology helps us out– it deleverages our empathy, giving us a short-cut away from imagining the next shoe dropping smack on top of us.)

The Bear Stearns story, all whistling aside, is not very extraordinary.  Somebody has to explode in every cycle, or why would the expansionary credit good times ever end?

What is extraordinary is that even now we’re not questioning our occult, erratic (and highly leveraged) monetary system. Instead, we point to a few companies, industries, or government officials scattered here and there, who “should have known better”, or “made a mistake”, or “got behind the curve”.

There was an item on MarketWatch giving comments from Lehman Brothers’ CFO about the Fed’s new broader access policy for the Discount Window.  “I think as shareholders our ability to access that form of financing (and) to do more business for clients is incredibly interesting.  It presents a very good opportunity.”

That probably isn’t (or shouldn’t) be what the Fed had in mind, although the idea that the Federal Reserve can finely control where the credit it creates goes is a silly (if nevertheless commonly held) conceit.

The Bear Stearns folks who read those Lehman Brothers’ comments while preparing to pack up their stuff must be thinking, “It sure would have been nice to have that ‘good opportunity’ a couple of weeks ago.  Maybe we could have been offered for sale at $50 a share instead of $2, and been saved some pain”.

It just goes to show, you never know (better).

By Les Lafave

Banking Reform –