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How The FOMC Became Institutionally Corrupt
Submitted by Eugen von Bohm-Bawerk via Bawerk.net,
The Humphrey-Hawkins Full Employment and Balanced Growth act signed into law by President Jimmy Carter on October 27, 1978, tried to translate into practical reality the right of all Americans to get useful paid employment at fair rates by embracing Keynesian economic theory. If someone magically has a right to work, someone must necessarily lose their right not to employ. And what is fair? Is the going market rate fair, or is that too low? Or even too high?
The act wants to achieve a rate of unemployment of no more than three per cent among individuals aged 20 or more and four per cent for people aged 16 or more. In addition the act (remember, this was enacted in the late 1970s) wants to reduce the consumer price inflation to no more than 3 per cent (Section 4).
Generally, Keynesians tries to fix both quantity and price, and as we all know, that is a logical impossibility. But hey, Keynesianism is not about logical consistency, it is about power.
Messrs Humphrey and Hawkins want to achieve all this primarily by relying on private sector expansion (Section 2), but where there are bottlenecks the President must step in to alleviate to not create inflation. Unless scarcity is abolished in a Garden of Eden state of affairs there will per definition always be bottlenecks in any society. Fittingly, nowhere is the expansion of money and credit mentioned as a tool to fight inflation.
In addition, to stabilise prices the act established stockpiles of various commodities which can be used to smooth out fluctuations in price signals given to the very same private sector the act pay lip service to (Section 8)
And for good order, since the free market society is deemed to push the proletariat down to subsistence level, if they can get work at all, the act requires the President to initiate public works projects and the development of “shovel ready” projects that can be started in short order to move the masses of the unemployed to productive work, such as digging holes and filling them back up.
The inconsistencies and wrongheaded policy recommendations that are baked into less than 30 pages are too much to address here, but we will look at one interesting outcome that has come from this. And no, we don’t mean Yellen’s recent blabber to congress. That is inconsequential and useless for all but highly leveraged “hedge” funds in need of knowing when they get another 25 basis points deducted from their profits.
We are talking about the institutional change at the Federal Reserve. Somehow these people believe that changing the rate of interest in the interbank market among Wall Street institutions is a good tool to secure the right Joe Sixpack in Stickney, SD has to a fairly paid job.
Couple Humphrey-Hawkins with a belief in the upper echelons of academia that has smitten every member of the political class, that as long as people feel rich they will spend more money and hence goose GDP numbers, and voila the whole thing become self-funding and self-perpetuating. We wrote more about this in our post titled Goebbelnomics.
If this is indeed the case we would expect a bias in favour of higher stock prices among members of the FOMC, because they could utilise this simple transmission mechanism to boost employment.
To test this hypothesis we made a simple adjustment to the S&P500 index. We assumed there were no change in the index on the days around the FOMC press release and then compared this to the original index value.
The result is striking as it goes to show how biased the FOMC has become. An unbiased FOMC would have no lasting impact on the stock market and the difference between the two series should be negligible. However, the unadjusted actual series is 37 per cent higher than the one which does not move on FOMC dates. The simple trend line on the adjusted series shows no notable leaning, while the original series clearly does.
Source: Federal Reserve of St. Louis, Federal Reserve, Bawerk.net
We can take this a step further and substitute the FOMC adjusted S&P 500 series for the original and calculate what the cyclical adjusted price earnings (CAPE) ratio would have been.
Again, it is striking to see 1) that the S&P 500 would have made a proper correction in 2008 / 2009 with a two standard deviation from the 1881 – 2015 mean, when it instead only made a correction to mean, and 2) the current valuation of the S&P 500 would be right smack dab on the long term mean; in other words, a fairly valued
Source: Robert Shiller – US Stock Markets 1871-Present and CAPE Ratio, Bawerk.net
So what does all this have to do with Humphrey-Hawkins? For the FOMC to reach its mandate of full employment they boost stock prices which then creates employment in bubble jobs. In The United States is not Greece… we outlined the idea of a job quality index which counts jobs based on their pay and hours; service based jobs typically score very low. For example one mining job counts for 1.35 jobs, while a job in leisure and hospitality only counts 0.38 with this methodology.
When people feel rich, they spend more money on the low quality bubble jobs, and hence employment reacts accordingly. This is obviously entirely unsustainable as spending paid for by feelings manipulated by the FOMC accounts to nothing more than pure capital consumption, and the money flow will disappear as soon as the FOMC tighten the screw and the good feeling disappears along with the stock market gains.
The third and last chart shows you exactly how corrupted the FOMC have become. By altering the stock market index they believe they can reach the Humphrey-Hawking requirement, all in the spirit of free market enterprise we are sure.
Source: Bureau of Labor Statistics (BLS), Federal Reserve of St. Louis, Bawerk.net
And that ladies and gentlemen is what a modern centrally planned society looks like!
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Doing Gods work...
"Institutionally Corrupt" is redundant, BTW.
WTF.. like this is news ????
If their paychecks were tied to the wages of workers they'd behave differently. As it is their incomes are dependent on making billionaires richer. It's all a matter of incentives.
That so-called "good feeling" left the building years ago.
Wasn't it Stalin's geneticist Lysenko .... who believed .... if you exposed wheat to harsh conditions .... the wheat would magically alter it's genes .... that's how socialists approach human nature .... to this day .... trial by ordeal .... let people live under the rigors of communist slavery .... and they will magically alter their genes .... to become good socialists !
Magic, indeed.
They've improved on that idiocy. Now, abortion gets rid of the productive class' kids while allowing the idiot freeloaders to multiply even faster by comparison. Greece dead ahead.
the money flow will disappear as soon as the FOMC tighten the screw...
tighten the screw? you're joking, right? the fed will own it all someday. all the stocks, all the bonds. everything else is just noise designed to increase trading volume.
And once the CBs do own it all, then everyone will get the opportunity to "go Greek." Just like the Greeks in their collectives have failed to swallow the bitter pill, so too will all others.
Because we all know that resistance will only increase their punitive retaliations.
I wonder just how many languages in which people will have to cry "Uncle!" before it all stops?
Pray tell, what are the bubble jobs?
Finance? No, that's still below 2008 levels.
Construction? No.
Government? Nope.
Energy? That just burst.
Maybe bartenders, but I await the explanation on how the FOMC inflated that one.
bubble jobs = only ones hiring. yes, waiters and bartender jobs have been very strong.
Service sector jobs aren't waiter jobs. They're waiter jobs and a whole lot more.
The thesis here is that a 1% jump in the S&P leads to such an increase in entertainment spending that is shows up in job numbers within months. This is stupid on it's face.
For one, the lag time should be much greater. For another, 1% increases don't make anyone feel richer. And another, 1/2 of the country has no significant money in the market. For another, most people that do don't check their portfolio on a monthly basis.
Fast food's a biggie. DC used Obama Care to tax anyone who worked over 30 hrs/week. Like FDR reducing the work week down to 40 hr/wk but, they did it w/O'Care to hide the fact.
94 million unemployed Merikuns sitting home watching NetFlix. They must be hiring.
And your point is, l have around $6 in real estate that's being marketed right now and I need this game of musical chairs to keep going for a few more months
The old "wealth effect", an illusion with a lot of delusion mixed in. If anyone really believes in it I have a perpetual motion air car for sale.
lots of analysis
When the central banks of the world stop buying AAPL and AMZN and the like to prop up stock indexes, the depression comes and SNAFU ends.
When barry leaves the white house, it is likely that this crap will taper/end. Barry wants his legacy as economic (ignore the debt or you will be audited and jailed) and he does this through extortion of gubbamint workers to produce fraudulent data - like the communists in china.
18 more months of ATHs and shit revenues and earnings based on joke / fraud accounting practices.
When you have a printing press and are unaudited you own the world.
"The inconsistencies and wrongheaded policy recommendations that are baked into less than 30 pages..."
Today, it would be over 3,000 pages, just to confuse everybody who reads it- after it is passed, to find out what is in it.
Yes, but feeling good and navel gazing is all the rage these days. That, and a forward-thinking of about 15 minutes until the next commercial break.
The FOMC should have only ONE mandate. That's it!! ONE mandate.
That is to safeguard the US Banking system. And this they can do by upholding the standards for good banking and adjusting interest rates (in small amounts) to keep the banks profitable.
The moment that the FOMC decided to act at the "beck and call" of the US Government, and the moment that they actually believed (delusionally) that they had any effect (or responsibility) for the US Economy and Unemployment .... they were SUNK. The Fed cannot possibly make the US Economy "competitive". It's completely impossible, and all of their computer models are irrelevant for that task. When the Fed started pursuing these "pipe dreams", they lost their ability to safeguard the banking system. A good organization can only do ONE GOAL well, not a hundred different goals. Hence we now find ourselves in a disastrous situation today, with US banks highly leveraged and real collateral at low levels.
WORSE still, was Alan Greenspan's secret endorsement of "derivatives" as a way to stabilize the markets when things were in "turmoil", or appeared to be "at risk. This gave way to one of the worst ideas that the US Government has ever endorsed - the so-called Plunge Protection Team. Since when does "TURMOIL" pose a real problem to the system??? It is simply a chaotic adjustment in values (usually downwards), but in the end ... an economic adjustment like everything else. There is no rule or law in economics or science that says that processes that appear to be "chaotic" are any less valid than any other type of process. It is the folly of Man (and most certainly Greenspan and Bernanke) to believe that he can "control" complex systems. The FOMC has proven its incompetence to understand that real processes in a complex economy, by aiding and abetting strategies that have NO PLACE in a Free Market System.
The FOMC never had a mandate to create jobs. The wording in their mandate about employment recognized that the banking system coud fucking destroy the economy for profit whenever it wanted. The employment wording was to restrict them from doing something stupid, like cutting off all credit just to make a profit shorting stocks or seizing collateral.
Audit the beneficial interest holders of the Fed.
zerohedge, you keep rolling articles one after another... any change in plan yet? or will you just keep rolling yet another article? at this rate you will not have anything else to write. the problem is what to do about it, and who will do it?