Jeff Cox, writing at CNBC is alarmed at the results of the Fed’s monetary policies:
The central bank printed $4.5 trillion and all we got was a lousy 0.2 percent wage increase.
While that sounds like a T-shirt for policy geeks that one might buy at the shore, it actually pretty accurately describes the plight of the average American worker. After years of easing never seen before in global central banking history, the Federal Reserve’s efforts have amounted to little when it comes to stimulating “good” inflation, particularly in terms of wage increases.
The employment cost index, an otherwise secondary data point that suddenly has taken on more importance, painted a bleak picture for workers in its latest update Friday.
On a quarterly basis, it showed wages and salaries increasing just 0.2 percent, believed to be the lowest three-month move ever for a data set that goes back to 1982. That translated to a 2 percent annualized gain in compensation costs, according to the Bureau of Labor Statistics.
What’s more, the scant growth went mostly to government workers, who saw a 0.6 percent increase, while the private sector was flat. On a 12-month basis, private worker compensation rose just 1.9 percent, which actually was a slight decrease from the 2.0 percent at the same time in 2014. Wages and salaries alone grew 2.1 percent, which actually was an increase from the 1.8 percent a year ago.
He shouldn’t be. As Barry Ritholz explains, the Fed’s policy is doing exactly what it was intended to do:
You probably learned the phrase “moral hazard” during the financial crisis. In short, what it means is that the bailouts rescued leveraged, reckless speculators from the results of their unwise professional folly and gave them an incentive to do it all over again. They were and the intended rescuees.
Do you think I am exaggerating? Consider the U.S. bailout in its manifold forms, from TARP to ZIRP to QE. How many bondholders suffered losses from their poor investment decisions? With the exception of holders of Lehman Brothers’ debt and a handful of banks that weren’t deemed too big to fail, just about every other bondholder was made whole, 100 cents on the dollar.
Thanks to rescue plans such as the Trouble Asset Relief Program, holders of bonds from a diverse assortment of failed and failing companies suffered literally no losses. American International Group? Zero losses. Government sponsored entities Fannie Mae and Freddie Mac? Zero losses. Banking giants Citigroup and Bank of America? Zero losses. Morgan Stanley, Merrill Lynch, Goldman Sachs, Bear Stearns? Zero losses.
The Federal Deposit Insurance Corp.’s actions were rare exceptions to this rule: Its bailouts actually benefitted consumers — savings and checking account holders. When banks such as Indy Mac, Wachovia, Washington Mutual went belly up, the FDIC arranged a shotgun marriages. WaMu went to JPMorgan Chase, Wachovia went to Wells Fargo, Indy Mac went to OneWest Bank.
Once it was certain the account holders were made whole, whatever assets were left went to the most senior creditors — typically bond holders. (Equity holders usually get wiped out). In Washington Mutual’s case, bond owners received between 20 and 28 cents on the dollar. Other FDIC resolutions yielded similar amounts.
Even the Federal Reserve’s zero interest rate policy (ZIRP), in place for so long that there hasn’t been a rate increase in more than nine years, is there to help rescued banks. For years after the financial crisis, their balance sheets remain festooned with so many bad mortgages and soured loans that an early increase in rates would have put those portfolios at huge risk. Now that prices have mostly returned to pre-crisis levels, it is considered safe to increase the fed funds rates, which we all know will have a significant impact on mortgage rates. With foreclosures down tremendously from their peak, the banks can tolerate interest increases. Despite plenty of evidence that the economy could have absorbed interest rates increases almost two year ago — the economy met the Fed’s own parameters at that time — bank mortgage portfolios were still shaky, and not in shape to deal with rate increases. More losses that could have compromised the banking industry’s health were likely.
As I always have, I think that way back in 2007, the U. S. should have done what Sweden did in its banking crisis: nationalized the banks. Liquidate them in an orderly fashion. Let the bankers of insolvent banks go broke or incarcerate them, as appropriate. I don’t doubt that there would have been a period of substantial disruption. It could have been managed as Bill Black has explained over and over again. We’re a big, rich, powerful country and we have lots of ingenuity. Our economy would have returned to something resembling normal much more quickly. The costs would have been borne by people whose profession it is to know better. Instead we’ve provided those same people with every incentive to do it all over again and they’re enormously richer now than they were then. It’s everybody else who’s bearing the costs.
I don’t honestly see how anyone can coherently think that income inequality is a problem and that we’ve done the right things with out banking system over the period of the last eight years.
All of this to me appears to be rooted in understandable self interest by persons in in banking, government, business and the enabling press appointed judges, ect. who benefit from their mutual incestual relationships. Job offers, conflict of interest, conflict of interest through marriage. Also understandable but dammit, who in our system polices this stuff? Goldman Sachs apparently is in fact the government here and elections are meaningless.
Anyone want to talk about Barney Frank? Probably not. Easier to give the devil to GWB.
I’d like to associate myself with every last word of Dave’s paragraph starting with “as I always have.” Perhaps with the caveat that they just were responding to policy signals received. This was by and of government policy. Period. Sorry, steve. These people are simply corporate animals responding to conditions. Get a clue, people. I wanted to invoke the “standard” workout model from day one. It’s in my blood. Fuck the equity holders and so forth. They knew better. They knew better all along. Fuck’m. We bailed their sorry asses out, because the average man on the street is more worried about Housewives of New Jersey. We did this to ourselves.
But here we are. Housing re inflated. Cars re inflated. Corporate Equity re inflated. All under the wonderous Obama. So it’s ok. One wonders what the pop will look like t his time
Endeth the rant.
Again, who in our system polices this stuff? Anybody know?
” This was by and of government policy. Period.”
Liars loans. They were responding to the same incentive people in the financial sector always respond to, money. Granted, the govt should have stopped them, and indeed at the state level some did try, but that was stopped at the Federal level. It could have been stopped by the ratings agencies, but they were making a lot of money declaring everything AAA.
Just to be clear, it is not that the government did nothing wrong, it is just that it did not play a major role. You cold have had the same crisis absent government involvement if you just let banks commit control fraud like they did. Seriously, we have hundreds of years of banks managing to crash economies with and without government help.
As the father of libertarian thought (or one of them) said……
“The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks.”
Lord Acton
Steve
Let’s go through this one more time.
President Bush had nothing to do with the housing crisis other than being another president encouraging people who should be renting to purchase homes. @Drew has pointed out that this has had a perverse negative effect on low income areas, and it is substantial.
The GSE’s were buying every MBS they could get their hands on.
The housing crisis started with the sub-prime ARM mortgages with teaser rates. These were mostly the 2005 & 2006 vintage, and the resets would be hitting in 2007 and 2008. The resets for the 2004 vintages were hitting in 2006, and they were having above average defaults.
The mortgages for 2005 & 2006 were to people who were in no better financial shape than the 2004 vintage. Therefore, it was predicted that the default rates would go up substantially, and as the rates went up, it would begin to affect the housing market. In early 2007, it became clear that a recession was on the horizon, and this was going to make everything worse.
Alt-A loans by themselves were not the problem. They got caught up in the housing bust caused by the sub-prime ARM teaser rate resets. It may look worse on paper to somebody who does not understand what was going on, but that should be a clue that your expert is an idiot.
The housing crisis could have been fixed with the $800 billion TARP funds. It would have been enough to pay off or restructure the troubled mortgages, but the usual suspects would have cried bloody murder. Instead, it was allowed to affect the financial sector. This is because Republicans, conservatives, and libertarians do not have a clue about how the modern financial system works.
When their experts assured them that Glass-Steagall was a relic of the past and that it was nothing more than another liberal plot to tie down the free-market, Republicans, conservatives, and libertarians could not fathom that they were being hustled by con artists who make Bernie Madoff look like a Girl Scout.
So, it turned out that the housing bubble was being leveraged into tens of trillions of dollars of all sorts of new and exotic financial instruments, and because G-S had been torn down, these wonders of the modern era had worked their way into the commercial banking sector.
Just to be clear, the CDS free-for-all was allowed because President Clinton’s administration refused to regulate them. This was the same Democrat president who signed the Republican & Democrat legislation to kill G-S.
All of this was a replay of the 1929 stock market crash and subsequent banking collapses, but instead of having stalwarts such as Sen. Glass and Rep. Steagall, we have weasels such as Sen. Dodd and Rep. Frank. Rather than take on the financial industry, they are the servants of their paymasters.
Iceland would have been the model to follow, but without sound money or any restraints on unsound, it is just a matter of time before it happens again. The problem is not the Fed printing money on behalf of the government. The problem is the banks printing money on behalf of the Fed.
Since the whole world is borrowing fiat money into existence as fast as they can, the US may wind up being the last country standing – so to speak. The crisis may turn out to be an exact rerun of the Great Depression, and then, the only question is who is going to get nuked this time.
Thank you.
What is going on in Europe with Greece is similar to the US housing bubble.
Greece was lent a lot of money it never should have been because “no country has ever defaulted before”. That debt was leveraged multiple times throughout Europe, and when Greek debt goes bad, it takes out tens of trillions of euros worth of credit instruments buried on balance sheets.
It would have been cheaper to pay off the Greek debt years ago, but the Germans, among others, would have screamed bloody murder.
French banks have dumped their Greek debt onto the EU public in one of the earlier rounds. I have not followed it well enough to know all the players off hand, but I have included a few links in some of my comments. Go to Zero Hedge and poke around.
The problem is unsound money – fiat money + fractional reserve lending + central bank + easy transfer of currency between commercial and investment banking + unenforced banking regulations. As much as people would like fiat money to go away, it ain’t gonna happen. The next best thing is to limit the damage unsound money can cause.
Siegfried and Roy learned the hard way that you cannot be a lion or tiger tamer, and wild animals are not your friends. They could have learned this from Sen, Glass and Rep. Steagall, but then again, Sen. Dodd and Rep. Frank could have learned the same lesson.
If your circus is dependent upon the tiger show draw crowds, it is going to collapse. Sen. Dodd and Rep. Frank decided to allow the tigers as pets, but they would create rules to make them behave. All you will get are schizophrenic tigers, and in the case of Dodd-Frank, the “evil” bankers have just shifted to other areas.
The financial system works like a multi-level marketing system (Amway), and any money created through lending gets kicked back up through the system. It is a “trickle-up” (upward flow) system. People at the top will always make more than “their fair share”. It is “baked into the cake”. There is no no scheme that can stop it. It is like a beast eating its tail to lose weight.
By credit instruments, I mean an asset that can be bought, sold, or used as collateral, and while it may be negative for the overall economy, it is positive for the individual holder. A credit instrument may have an income associated with it. Debt may have a collateral asset tied to it. Debt may have an ongoing payment schedule, and debt is negative.
Credit instruments as assets can be used to create more credit instruments, and much of this is done in the private (shadow) banking sector. (Without G-S, this bleeds over onto commercial banking balance sheets whether on the books (regulated) or off the books (unregulated).
Furthermore, the system has to expand to be able to service the debt that must increase to grow the system. You have the Red Queen come to life. The US must run as fast as it can just to stay in place, and it must run twice as fast to move forward. (All countries on fiat money have similar problems, and everybody is entangled.)