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Another Fed "Insider" Quits, Tells The Truth

Tyler Durden's picture




 

Once more, an "insider" from The Fed exposes the reality of an academic ivory tower clueless of the real financial markets. Former adviser to Dallas Fed's Dick Fisher, Danielle DiMartino Booth speaking in a CNBC interview slams The Fed for "allowing the [market] tail to wag the [monetary policy] dog," warning that "The Fed's credibility itself is at stake... they have backed themselves into a very tight corner... the tightest ever." As she writes in her first Op-Ed, "The hope today is that the current era of easy monetary policy will have no deep economic ramifications. Such thinking, though, may prove to be naive... All retirees’ security is thus at risk when the massive overvaluation in fixed income and equity markets eventually rights itself."

 

Via The Liscio Report,

The Great Abdication

The business cycle is dead! Long live the business cycle!

Not too long ago, in a land not so far away, the business cycle was declared to be defeated. Policymakers at the Federal Reserve were credited with slaying the pesky beast that featured recessions as part of its nature. Such was the faith in the permanence of business cycle’s demise that the era was given its own label, The Great Moderation, a perfect world in which inflation ran not too hot or too cold and profit growth was accepted as the steady state.

As is so often the case, reality rudely disturbed nirvana’s prospects. The Great Moderation devolved into the Great Recession precipitated by one of the most devastating financial crises in U.S. history. The veneer of calm advertised over the prior years was stripped away. In its stead, economists had to concede that an era of benign monetary policy had encouraged malinvestment, the scourge that Austrian Ludwig von Mises warned of in the early 20th century. An overabundance of debt, if left unchecked, inevitably leads to the misallocation of resources. In the case of the first years of the 2000s, the target was, of course, the housing market.

The hope today is that the current era of easy monetary policy will have no deep economic ramifications. Such thinking, though, may prove to be naive. It goes without saying that the heat of the financial crisis merited a monumental response on policymakers’ part. That said, the most glaring outgrowth has been politicians’ exploiting low interest rates to their benefit. While it’s conceivable that well-intentioned central bankers want no part in encouraging Congressional malfeasance, the fact remains that the lack of action on politicians’ part would not have been possible absent the Fed’s allowing Congress to abdicate its responsibilities to the manna of easy money.

Of course, we all appear to have been spoiled over the last 25 years. A funny thing happened when the Fed placed a floor under stock prices with assurances that investors’ pain and suffering would be mitigated – recessions faded from the norm. Over the past 25 years, the economy has contracted one-fourth as often as it did in the 25 years that preceded this benign era. Hence the illusion of prosperity, one that has rendered investors complacent to the point of being comatose. That’s what happens when entire industries are able to run with more capacity than demand validates simply because the credit to remain in operation is there for the taking. To take but one example, capacity utilization is at 78.1 percent, shy of the 30-year average of 79.6 percent some six years into the current recovery. The downside is that the cathartic cleansing that takes place when recession is allowed to play out all the way to the bitter end of a bankruptcy cycle never occurs – winners and losers alike stay in business.

The savvy fellows in the C-suites are not blind to reduced competitiveness. As such they are remiss to expand their core businesses too much, that is, until the time they can truly assess the operating environment in a post-easy money world. The tricky part is that the credit is still there for the taking. What’s to be done? In the words of one of the wisest owls on Wall Street, UBS’s Art Cashin, such environments raise the not-so-fine art of financial engineering to a “botox state”. It’s no secret that companies have been gorging themselves on share buybacks and mergers and acquisitions, non-productive but highly lucrative endeavors. When combined the results are magnificent – costs are cut, profits juiced and bonus season becomes the most wonderful time of the year.

The insult added to the economic injury is the players who are compelled to underwrite the not-so-virtuous cycle. Broken pension accounting and incentives continue to force the hands of the individuals tasked with allocating the portfolios underlying the nation’s $18 trillion in public pension obligations. One of the least discussed consequences of easy monetary policy is the damage wrought on the nation’s pension system. Not only have low interest rates compounded underfunded statuses, they have driven pension assets into riskier and less liquid investments than anything prudence would dictate. The catalyst is the perverse rate of return assumptions that are wholly disconnected from reality. Averaging 7.75 percent, these bogeys have forced allocations into credit plays, many of which are caged in the least liquid corners of the debt markets. The irony is that many pensions have sought to diversify away from their bloated equity holdings by seeking out what they perceive to be the traditional safe harbor of fixed income investments, much of which flows straight back into the stock market via debt-financed share buybacks and M&A.

All retirees’ security is thus at risk when the massive overvaluation in fixed income and equity markets eventually rights itself. Pension math, however, will forestall the day of reckoning in the financial markets given the demographic surge in retiring beneficiaries that require states and municipalities to top off pensions’ coffers. Pensions will thus dig themselves into a deeper grave than they would otherwise by buying the credit craze more time.

Meanwhile, would-be retirees who don’t have the safety of promised pensions continue to be punished by low interest rates. The past seven years have criminalized conservative cash savings. The Swiss Re report quantified what U.S. savers have lost in interest income at $470 billion, while debtors had an easier time. It’s no coincidence that the average 401k balance for a household nearing retirement will only cover two years based on the nation’s median income. Nor is it any wonder that the labor force participation rate for those aged 55 and older has increased by three percentage points over the past decade. If only they were all earning what they did in their prime years.

And the lesson to be learned when making ends meet is simply not feasible? That would be the tried and true economic offset, the magic behind the miracle of our consuming nation, which for too long now has been debt that pulls forward the demand that should have to wait. Despite the collapse in mortgages, overall household debt remains elevated; it isn’t that far below its pre-recession level, and households are now splurging on cars as lending standards have caved. Even credit card borrowing is making a comeback – the average household’s credit card balance of $7,177 is the highest in six years. Meanwhile, student debt is scaling record heights as families struggle to keep pace with the most egregious inflation plaguing household budgets, that of higher education.

As for the gravest sin of the QE era, in the fiscal year 2015, the U.S. government paid 1.8 percent on public debt. One would be hard pressed to identify any other debtor whose borrowing costs decrease despite its trebling in debt outstanding. Actually, that’s a privilege we need to protect. As for indemnifying the nation’s balance sheet, that opportunity has been squandered by spineless politicians who would rather maintain the veneer of scant deficits rather than extend the maturity of the nation’s debts. Our wise neighbors to the south recently issued a 100-year bond. Where, one must ask, is our leaders’ wisdom when we need it most?

Could it be that hiding behind the Fed’s largesse is the path of least resistance? It would certainly appear to be the case. All the while, the excesses in the financial markets continue to build unchecked. The time has long come and gone to abandon the model-driven decision framework that pushes the Fed into an ever-shrinking corner. It is high time central bankers acknowledge their complicity in enabling Congress to fiddle while the country burns. As was the case with the revelation that the Great Moderation was but a myth, it is crucial that our leaders retake the country’s reins thus also bringing to an end the deeply damaging era of The Great Abdication.

*  *  *

Well now we know who will not be invited to Jackson Hole any time soon...

 

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Wed, 06/17/2015 - 13:12 | 6206124 q99x2
q99x2's picture

On Q99X2 the FED's credibility is not at stake. We have issued arrest warrants across the planet for all of them

Wed, 06/17/2015 - 13:14 | 6206130 dogismycopilot
dogismycopilot's picture

Fuck this bitch. She is just looking for a job.

For real info you guys have got to watch the well made Martin Armstrong movie. 2015.75 - Soverign Debt Crisis....BONDZILLA!

Wed, 06/17/2015 - 13:59 | 6206297 TeethVillage88s
TeethVillage88s's picture

Noticed it was a totally controlled narrative, nothing about the Americans getting screwed like in Her Editorial.

I read US Households lost $1 Trillion in Savings due to 8 Years of LIRP/ZIRP & QE Polities on ZH.

CNBC is All Propaganda, All the Time.

Looks like A counter-Intelligence Operation. They want everyone to watch this circus.

Wed, 06/17/2015 - 14:07 | 6206334 TeethVillage88s
TeethVillage88s's picture

I didn't know he was being prosecuted. I have to check him out some more.

Wed, 06/17/2015 - 13:22 | 6206177 TuPhat
TuPhat's picture

Just another psychopath advocating that big gov should do more.  We are totally screwed.

Wed, 06/17/2015 - 13:40 | 6206233 gwar5
gwar5's picture

She says what most have already understood.

Bankers are co-signers for the unfunded liabilities for all the unfunded entitlement promises that can never be kept. I previously never understood why capitalist bankers were such socialists. Since 2008 my eyes were opened to the massive control and Trillions of usury to be made in the Welfare-Industrial Complex. 

 

 

 

Wed, 06/17/2015 - 13:41 | 6206239 Comte d'herblay
Comte d'herblay's picture

err......uh....ma'am, U can't "coin a cliche".  It's already been coined by the first human bean to create it. That's an oxymoron, a contradiction in terms. To coin means to mint or make from other materials.  You can only repeat, state, speak, or aver a cliche.

Yer Welcome now show us your legs. Which look terrific in that tiny photo.

Wed, 06/17/2015 - 13:58 | 6206293 Wahooo
Wahooo's picture

Why can't they go straight to Penthouse and spate us their opinions?

Wed, 06/17/2015 - 14:54 | 6206515 DerdyBulls
DerdyBulls's picture

What economic growth justifies a rate increase? She's a fan of Mises?

Wed, 06/17/2015 - 15:16 | 6206543 BoPeople
BoPeople's picture

I watched the interview and did not just read the article. She is a fraud, plain and simple. Anyone watching her closely could tell the same. She seems to be still in the employ of the evil system and its master(s).

A. It was on CNBC, a known propaganda mouthpiece for the banking and elitist scum

B. If she finds a new "good" job then she is not a former insider, she is still an insider. Given the above, one must assume that this insider's information release is all part of the plan.

 

Lies and more psy-ops in a an attempt to prepare us for what they have already decided will happen. Can THEY really be that incompetent?

Wed, 06/17/2015 - 15:21 | 6206603 Last of the Mid...
Last of the Middle Class's picture

they're closer than the layers in a clad quarter.

Thu, 06/18/2015 - 02:53 | 6207530 honestann
honestann's picture

Someone from the fed calls Ludwig von Mises hero?

-----

Is this dogs sleeping with cats?

Rats jumping a sinking ship?

At very least, hilarious!

Thu, 06/18/2015 - 01:20 | 6208188 polo007
polo007's picture

http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=14001

JESSICA DESVARIEUX, PRODUCER, TRNN: Welcome to The Real News Network. I'm Jessica Desvarieux in Baltimore.

So the big question in the world of economics is whether or not the Federal Reserve will raise interest rates and end their bond buying program known as quantitative easing. Chair Janet Yellen will give a quarterly economic and interest rate forecast at a meeting between June 16th and the 17th. But what would her announcement mean for everyday people? Joining us to discuss all this and the man behind the Hudson Report is Michael Hudson. Michael is a distinguished research professor of economics at the University of Missouri, Kansas City. His latest book is Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy.

Thank you, Michael, for joining us.

JESSICA DESVARIEUX: So Michael, just briefly can you start by explaining how quantitative easing works, for our viewers?

MICHAEL HUDSON, PROF. OF ECONOMICS, UMKC: The Federal Reserve created $4 trillion worth of credit electronically on its computers when the economy was in trouble in 2008. It could have used this $4 trillion to write down the debts. It could have used it to spend into the economy and create sort of a recovery. But instead it gave all the money to the banks, and its claim was that if you give $4 trillion to the bank reserves this is going to help the economy, because the bank is going to lend more money to the economy and drive it in, $4 trillion deeper into debt.

This was a crazy idea. Here we were in a debt crisis, and the Fed said what the economy needs to cure the crisis and get employment moving again, is more debt. So the banks got the $4 trillion. And of this was so much money that interest rates were driven down to 1/10th of 1 percent on government bonds. And the Fed was lending money to the banks at 1/10th of 1 percent. So the idea was, the pretense was that now the Feds can lend mortgage money at hardly anything at all, and people can [bid] prices, house prices even higher. And that will save the banks from losing all the money on their liars' loans--the liars were the banks--on their junk mortgage loans. Or the Fed will lend the money to industry, and corporations will now say gee, we can borrow so cheaply that all we need to do is make maybe a three or a four percent profit, and we can hire enough labor to make people all fully employed again.

DESVARIEUX: All right, Michael. Hold on, hold on, one second. Now that the federal government though is talking about ending quantitative easing, also known as QE, who would be the winners and losers of this policy ending?

HUDSON: Well, in order to say who would be the winners and losers I have to say what happened when they did the easing. When they did it it drove interest rates down to, as I said, to a fraction of a percent, what did the banks do with the money? They didn't lend to industry to hire, they lent to industry to essentially arbitrage. They lent to corporate raiders to buy out industrial corporations, and they, most of all, they lent to companies to buy back their own stock.

So in the last, for this year alone, Standard & Poor's and other agencies guess that the winners are going to be the corporations that are going to spend over a trillion dollars in buying back their own stock. Because they can borrow so cheaply, why not buy back their own stock with interest rates so low.

So this trillion dollars is not going to be invested in new goods and services and production. It's not going to be invested in hiring labor. So who will be the winners? Well first of all, the pension funds have been complaining that interest rates are so low that they haven't been able to make enough money in their funds to be assured to pay the pensions that are falling due. The cities and states, California, New Jersey now, Illinois, are all saying wait a minute, we're so far behind in our pensions because we haven't been able to make the money, that we need higher interest rates in order to make enough money to pay the pensions. And the insurance companies have said, well, look, we need higher interest rates to solve the problem that we're making so little money securely that we promised to pay all these annuities, and we may go broke.

So in principle the whole idea is to help the pension funds, insurance companies and retirees make enough money to live on. That's the promise. But it's a false promise. It's just really the cover story. Because what's going to happen, as is so often the case, solving one problem creates yet new problems.

So look at who the losers will be if the Federal Reserve stops quantitative easing. Well for one thing, if they raise interest rates here--and when they say stopping quantitative easing, Janet Yellen really means let's raise interest rates and get them high again, as if that's going to help the economy. Well the first thing is if the United States raises interest rates that's going to push the dollar way up against the Euro, and most of all against third world and Asian countries. This means that countries that owe foreign debt, that's almost all denominated in dollars, especially to the International Monetary Fund or the World Bank, they're going to have to pay much more money in higher-priced dollars for their own currency. So this is going to aggravate debt deflation and defaults in third world countries.

Secondly, all of a sudden when they raise the interest rates, all this arbitrage that's been occurring to bid up the stock market, to bid up the bond market and to bid up real estate markets is going to be reversed. Because if interest rates rise, banks are not going to lend as much money to buy stocks and they're not going to make as much money to lend real estate.

So the economy's really painted itself into a corner. Nobody's able to win at this point, that's the problem with the economy. And in that sense you can say it's not that we really have a problem. We have a quandary. And a quandary is something where there isn't a solution. Mathematicians call this the optimum solution, or the optimum position. The optimum position is one where you can't make any move without making things worse. And that's the position the United States is in right now. This is as good as it gets, which is another way of saying it's all downhill from here.

DESVARIEUX: Michael, you don't see any way of us being able to get out of this sort of, debt deflation, this worst case scenario options here? Do we have any sort of options that allow us to kind of get out of this?

HUDSON: There is one way to get out of it, but it's, they're not willing to do it. The way to get out of debt deflation is you write down the bad debts. And this is what should have been done in 2008. As a matter of fact, when President Obama was running for election he promised to write down the bad mortgage debts to bring the mortgages in line with what people could pay. Well, right now you have a lot of interest on mortgages. You have a lot of principal coming through. You have a rise in defaults on mortgages because the debts are not written down.

And as soon as Obama was elected, Barney Frank went to him and said look, I've got the Republicans to agree and Paulson at Treasury's agreed we can write down the debts. And Obama said, I changed my mind, I'm not going to do what I promised. I'm appointing Tim Geithner as the bank lobbyist in charge of the Treasury Department, and he said we have to help the banks and forget the voters. And so the debts are not written down. If you don't write down the debts, the economy is going to have to use its money to pay down the mortgage debts, to pay all the corporate debts.

Let's look at these corporations that are buying their own stock, for instance. They say, well, look. If our stock is paying, maybe, 6 percent dividend, or 5 percent, or even 4 percent, let's borrow money from the bank and buy the stock. But now if the interest rate goes up, the stock market may fall easily by 20 percent. That's what people are so worried about. Whenever Janet Yellen talked about ending quantitative easing, the stock market takes a couple of hundred points' plunge.

So if the stock price goes down, say, 20 percent, then here are these companies that have borrowed to buy their own stock. And instead of making a two or three percent gain, the difference between the 1 percent they borrow at and the 4 percent, say, that the dividend rate is, all of a sudden they lose 20 percent and they're in trouble. They've taken a huge loss.

So all of this seeming gain, this sort of fictitious capital that's been created is going to be wiped out if you don't simply write down the debts. And because you, the government and the politicians, Congress, have all said we're assigning economic policy outside of the government, we're letting the Federal Reserve be the central planner, well, the Federal Reserve is loyal to its customers and its owners, the commercial banks. So basically Congress and the executive branch has said we're going to save the banks, not the economy. And saving the banks means you impose debt deflation on the economy, you shrink the economy. There's not going to be a revival in employment under these conditions. There's not going to be rising wages. And the capital gains that have been spurring the stock and bond markets, and the real estate recovery, are going to be reversed.

Thu, 06/18/2015 - 02:39 | 6208301 scatha
scatha's picture

I found much better and shorted explanation what QE was and still is. There is Global QE going on as we speak and even increasing. One can understand this only if realizes that there is only one single bank called global banking system. 

https://contrarianopinion.wordpress.com/2015/01/28/liquidity-of-blood-sw...

For all those what are wondering how it came to be that bankers in US and all over the world ended up with power and influence surpassing those of governments over almost entire world population and metaphorically and actually tell people (even with no bank account) what to do in their intimate private lives every day, should definitely read unique and telling story about money, it’s origin and its true role and purpose in society.   

https://contrarianopinion.wordpress.com/2015/04/14/plutus-and-the-myth-o...

 

Thu, 06/18/2015 - 03:19 | 6208347 hedgiex
hedgiex's picture

What are you waiting for ? Rats are deserting the granaries.

Enjoy the new spins from texts manufactured in the Econ Temples of Chicago School, Austrian School, etc. spin by whores/pimps of media brothels. These are new coats of paints for the same traps.

Yawn ! They win because so many preys need the fixes

 

 

Thu, 06/18/2015 - 04:15 | 6208391 JailBanksters
JailBanksters's picture

Well I hope she has more integrity than that nut job from the World Bank. She lost me when she started banging on about reptillians in the basement of the vatican and there's a 100,000 tons of gold  in Hawaii

 

Thu, 06/18/2015 - 07:58 | 6208678 sTls7
sTls7's picture

Wisdom...  Out the window.  Feds = Idiots out of control.

Thu, 06/18/2015 - 23:04 | 6212572 PrettySkulls
PrettySkulls's picture

That woman is a lying statist.

"Ludwig von Mises is my hero" my ass.

She then goes on to blythly show her statist mindset by bangin on about the fed setting interest rates.

I recall von Mises saying that interest rates should be set by the market.

She is part of the problem, and can be safely trotted out as an "insider telling the truth" because she wont say anything that actually damages them.

Sickeneing rubbish not worthy of ZH.

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