The overwhelming source of what ails America economically is found in the Eccles Building. During the past three decades the Federal Reserve has fostered destructive financial mutations on Wall Street and Main Street.
Bubble Finance policies have fueled an egregious financial engineering by the C-suites of corporate America. This bubble has skyrocketed to the tune of $15 trillion of stock buybacks, debt-fueled mergers deals and buyouts of the last decade.
The Fed fostered a borrowing binge in the household sector after the 1980s. It eventually resulted in Peak Debt and $15 trillion in debilitating debts on the homes, cars, incomes and futures of what used to be middle class America.
It also led politicians down the path of free lunch fiscal policy. By monetizing $4.2 trillion of Treasury and GSE debt during the last three decades, the Fed numbed the US economy from effects of crowding out and rising interest rates that would have come from soaring government deficits. This left the public sector impaled on Peak Debt.
Ever since Alan Greenspan launched Bubble Finance in the fall of 1987, public debt outstanding has increased by nearly 9 times. Measured against national output, the Federal debt ratio has risen from 47% to 106% of GDP.
These actions have stripped-mined balance sheets and cash flow from main street businesses. The Fed has stifled economic growth while delivering multi-trillion windfalls into the hands of a few thousand speculators on Wall Street.
These rippling waves of financial mutation are why the US economy is visibly failing and why vast numbers of citizens in Flyover America voted for Donald Trump for president.
Ironically, even as he stumbled to his victory on November 8, Trump barely recognized that the force behind all the economic failure that he railed against was the nation’s rogue central bank.
Only when it occurred to him that Janet Yellen was doing everything possible to insure Clinton’s victory did he let loose an attack on the Fed. In his famous warning, he leveled that America was threatened by a big, fat, ugly bubble.
Unfortunately, there was never even a hint of policy content behind this campaign statement. It said nothing of a coherent plan to liberate the American economy from the nation’s central bank.
When Wall Street launched a phony Trump Reflation trade during the wee hours of election night, the Donald forgot all about the great bubble. In fact, he quickly embraced it as a sign that investors were enthusiastically embracing Trump-O-Nomics.
No new arrival in the Oval Office was ever more mistaken. The gambling halls of Wall Street were a clear and present danger to his presidency, but Trump had only a small window of time for a counter-strategy.
He needed to quickly puncture the bubble, not embrace it; and his first, second and third actions on the economic policy front should have been to clean house at the Fed. He should have named names and insured that the current Fed incumbents get the blame when the inflated stock and bond markets finally implode.
All the tools were there. The Fed had three vacancies out of seven seats on the Board, and he could have cleared more by demanding the resignation of Janet Yellen and Stanley Fischer from day one.
Instead, the Donald got off-track from the get-go with aiming his efforts against immigrants and refugees; nonsense about the Mexican border; and the hideously bloated Pentagon budget.
While all of that was bad, the Donald’s fatal error was delegating economic policy to Wall Street errand boys. Trump handed economic power to Steve Mnuchin, Wilbur Ross and Goldman Sachs’ next-in-line gatekeeper to Washington, Gary Cohn.
These characters are a slap-in-the-face to the populations in the rust belts which elected him.
At the end of the day, the lines of demarcation are crystal clear. The Fed is Wall Street’s angel and main street’s enemy.
The Donald has ended up handing the keys to economic policy to a cabal of Wall Street operators, who have wasted six months doing nothing on the central banking file.
Mnuchin has even toyed publicly with the idea that Yellen might be reappointed because she has done a “good job”.
You cannot talk about reappointing Janet Yellen and making the American economy great again in the same sentence.
To do so is to voluntarily take ownership of the very big, fat ugly bubble that has brought so much hardship to Flyover America.
Yesterday’s announcement of an appointment to one of the Fed vacancies leaves nothing to the imagination.
After finally announcing a candidate for a job which will determine whether American capitalism can even survive, the Trump White House picked the absolute worst candidate available. Trump named Randall Quarles, a veritable creature of the Wall Street/Washington establishment, as his nominee for vice chairman for supervision at the Federal Reserve.
Randy Quarles is the former Under Secretary of the Treasury in the George W. Bush Administration. Before founding Cynosure, Mr. Quarles was a longtime partner of The Carlyle Group, one of the world’s largest private equity firms.
In addition to his record as a successful investor, he has long experience at the highest levels of the international financial architecture, having represented the U.S. for many years in the G7, G20, and Financial Stability Forum, and having served the U.S. as Executive Director of the International Monetary Fund, Executive Director of the European Bank for Reconstruction and Development, and as a member of the Board of Directors of the Overseas Private Investment Corporation.
Earlier in his career, Mr. Quarles spent many years working as a partner at the Wall Street law firm of Davis Polk & Wardwell, where he was the co-head of the firm’s Financial Institutions Group and advised on transactions that included a number of the largest financial sector mergers ever completed.
Do not take comfort from the fact that Quarles mimics the Hoover Institution’s version of economics. The notion that it’s fine to intrude deeply into the mainspring of capitalism in the financial markets and distort all financial asset prices, but it should be done based on formulaic rules rather than “data-dependent” policy discretion.
Quarles has professed an affinity for the Taylor Rule, a Rube Goldberg policy contraption invented by one of Milton Friedman’s disciples, and named for himself.
It should be clear to anybody not drinking the Fed’s kool-aid, that it is impossible to accurately measure the Fed’s goals for unemployment and inflation on which the massive $4.4 trillion balance sheet is premised.
How else do you account for the rampant gains in the cost of living plaguing Flyover America that the BLS neglects to even measure? This measure has caused those members of the Fed working in the Eccles Building to pursue even higher levels of inflation.
During the first 14 years of this decade the Fed claimed price levels rose by only 31.7% when everything households in Flyover America were buying to survive had inflated by multiples – in some case 100-300%.
How can there be “full-employment” at 4.4% unemployment claimed by the BLS and the Fed’s monetary central planners, when there are 103 million adults without jobs?
What Randal Quarles brings to the table is a vision of anti-market monetary central planning that is far worse than what has already brought American capitalism to its knees.
The Donald now owns the Bubble and has left his Presidency and the American economy squarely in harms’ way.
There is no doubt that they bubble blind and have no understanding of the rampant speculation and driven risk-taking their policies have unleashed in the casino. Even Barron’s last cover story made it clear that robo-machines, ETF’s and other forms of passive “investing,” have set the markets up for a thundering crash.
Needless to say, the Fed is only now beginning to apprehend the train-wreck that lies dead ahead. Thus, the June FOMC minutes were grasping for something dimly worrisome:
According to the minutes, some FOMC members acknowledged that “equity prices were high when judged against standard valuation measures.” Some are even “concerned that subdued market volatility, coupled with a low equity premium, could lead to a buildup of risks to financial stability.”
Do ya think?
Does the Donald have a clue?
[Urgent Note: David Stockman warns that the nation’s future and a massive debt ceiling hangs in the balance as Wall Street’s peak bull stocks carry on. The economist is on a mission to send his new book TRUMPED! A Nation on the Brink of Ruin… and How to Bring It Back out to every American who responds, absolutely free. Click here for more details.]