Fed Policy Threatens Economy
Dissident Thomas Hoenig Warned Of Danger From 'Quantitative Easing'
Also on today’s menu:
Manchin’s Common-Sense Approach
Close Call Serves As Lesson About Ice Conditions
The more I’ve tried to understanding the banking system, the more I’ve come to see it as a giant Ponzi scheme. Ever since the monetary supply was unlinked to the gold standard, the real value of money has been elusive, and with cryptocurrency, which countries are now accepting as real money, it is even more of a chimera. Today’s article in Politico featuring the views of Thomas Hoenig makes it even clearer that money today is created out of thin air. I’ve always viewed the bank bailout of 2008 with suspicion, and “quantitative easing” made me even more suspicious. The article spells out what happens under that scheme:
The basic mechanics and goals of quantitative easing are pretty simple. The goal is to pump massive amounts of cash into the banking system at the very moment when there is almost no incentive for banks to save the money, because rates are so low. (When rates are low, banks don’t earn much from saving cash because the cash earns meager interest.) The Fed creates the money as it always has, by using its own team of financial traders who work at the Fed’s regional bank in New York.
These traders buy and sell assets from a select group of 24 financial firms called “primary dealers,” an ultra-exclusive club that includes the likes of JPMorgan Chase and Goldman Sachs. The primary dealers have special bank vaults at the Fed, called reserve accounts. To execute quantitative easing, a trader at the New York Fed would call up one of the primary dealers, like JPMorgan Chase, and offer to buy $8 billion worth of Treasury bonds from the bank. JPMorgan would sell the Treasury bonds to the Fed trader. Then the Fed trader would hit a few keys and tell the Morgan banker to look inside their reserve account. Voila. The Fed had instantly created $8 billion out of thin air, in the reserve account, to complete the purchase.
The article goes on to explain how that additional cash leads to inflation, while the purchase of government debt encourages further government spending.
The real insights, however, come from Hoenig, who provides an alternate vision of how the wealth disparity everyone is talking about came to be. The conventional view is that Reaganomics and the tax breaks it created led to wealth flowing upward and leaving poor and working-class Americans worse off. Hoenig, however, who lived through the inflationary 1970s, blames the policies of the Federal Reserve for making borrowing too easy then and now.
Hoenig orginally wasn’t alone in opposing Ben Bernanke’s solution to the economic problems of 2008. Regional bank presidents Charles Plosser, Richard Fisher, and Jeffrey Lacker also expressed concerns about quantitative easing, as did Fed Governor Kevin Warsh. Fisher said he was “deeply concerned” about the plan. “I see considerable risk in conducting policy with the consequence of transferring income from the poor, those most dependent on fixed income, and the saver, to the rich,” he said at the time. Ultimately, Hoenig was the only one to vote against Bernanke’s plan.
And now, for the first time since the Great Inflation of the 1970s, consumer prices are rising quickly along with asset prices. Strained supply chains are to blame for that, but so is the very strong demand created by central banks, Hoenig said. The Fed has been encouraging government spending by purchasing billions of Treasury bonds each month while pumping new money into the banks. Just like the 1970s, there are now a whole lot of dollars chasing a limited amount of goods. “That’s a big demand pull on the economy,” Hoenig said. “The Fed is facilitating that.”
Manchin’s Common-Sense Approach
Like Hoenig, West Virginia Senator Joe Manchin is being criticized for his opposition to aspects of the “Build Back Better” legislation being proposed by Democrats. By funding several of the programs for only a few years, with the expectation that future lawmakers will renew them, Manchin says, Democratic leaders have disguised the bill’s true cost, which he says is $3 trillion over 10 years, rather than the $1.85 trillion in the official Congressional Budget Office projection.
Jonathan Cohn in Huffpost writes, “Whatever Manchin’s motives, whatever the consistency or merits of his views, a bill that includes fewer initiatives but is funded permanently might actually be better as both politics and policy ― as a number of liberal writers and thinkers have been arguing for weeks.”
With their thin majority, the Democrats will not get all of what they want, but by being truthful about the costs and setting priorities, they can accomplish a lot if they come together and work out a reasonable compromise.
Close Call Serves As Lesson About Ice Conditions
The fact that three people and a dog escaped uninjured after falling through thin ice on Lake Winnipesaukee does not mean that they were wise. Moultonborough Fire Rescue said the incident should be taken as a warning that the ice is not safe, and that people should call 911 rather than attempting to make a water rescue on their own.
The department was dispatched at 10:12 p.m. on Sunday for an animal rescue off Long Island, but as units were on their way, they were alerted that three people also had gone through the ice while trying to rescue the dog. They were all able to make it out of the water before the crews arrived.
“If the ice wasn’t thick enough to support the animal's weight, it won’t support yours,” the department warned.
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