Do Our Monetary Authorities Know What They Are Doing?

I’m looking for some kind of indication that our economic and monetary officials know what they are doing.  I’m not finding anything.  All indications are that they don’t have a clue.

Let’s look at this from the lead article on the front page of Friday’s Wall Street Journal.

The Fed said Wednesday, at the conclusion of its last policy meeting of the year, that it would enter 2013 with a plan to purchase $85 billion a month of mortgage-backed securities, part of a continuing attempt to drive down long-term interest rates to encourage borrowing, spending and investing.  The Fed said it didn’t expect to touch short-term rates until it saw the unemployment rate fall to 6.5% or lower, as long as inflation forecasts remain near its 2% target.

So they now have the idea that they can just multiply the monetary base by a factor of five or so and there will be no inflationary effect?  I like that phrase “as long as inflation forecasts remain near its 2% target.”  Who is making these so-called forecasts, and where did they buy their crystal ball?  Did it occur to them to take into account that the monetary base is in the process of  multiplying by 5 without the economy growing much at all?  Exactly how do you even make a forecast of inflation without the monetary base/GDP ratio as your primary input?

According to data from the St. Louis Fed  here, the entire monetary base of the United States as of November 2008 was around $800 billion.  Then we had QE1, and suddenly it was about $1.7 trillion.  Then QE2 and suddenly around $2.7 trillion.  And now we’re going to be buying $85 billion more of assets per month, effectively monetizing all or nearly all of trillion-dollar-plus annual deficits.  Should be approaching $4 trillion by the end of 2013.  But don’t worry, our “forecast” is for inflation not to exceed 2%!

Here is the statement of the Fed's mission from Section 2A the Federal Reserve Act:

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

That's rather an explicit statement of what they're supposed to do:  maintain monetary aggregates in a stable relationship with the economy, which in turn will lead to maximum employment, price stability, and "moderate" interest rates.   Now they've just turned everything around 180 degrees.  Our new number one goal is to drive unemployment down to 6.5%.  We'll do that by having a blow-out expansion of the monetary base.  Where do they possibly get the idea that they have control over the rate of unemployment, other than very indirectly influencing it through the blessing of stable money?  Can anyone give one example from history where a five-fold expansion of the money supply without substantial economic growth moved unemployment down a few points and did not ignite inflation?  Well, this is what is called hubris.  Unfortunately, we know what follows hubris.

Here's a little news for them.  No one knows when the inflation will come, but when it does come the value of the currency (against other currencies, or against gold or a basket of commodities) could drop to half (or maybe to a fifth) in the blink of an eye.  And they will have no ability to stop it, because they have already done the damage.  When you run your monetary policy like an Argentina or a Brazil or a Venezuela at the heights of their folly, sooner or later your currency will behave like the currencies of those countries.  

On The Irrational Attachment To Ponzi Schemes

Every day as I read about Social Security and Medicare and the fiscal debates in Washington, I am reminded of an event that happened about 44 years ago when I was a freshman in college.  Today, my older daughter sent me a link to a Washington Post editorial that makes clear the relevance.

In 1968 when I was a freshman at Yale my three new friends in the room next door came over one day in a state of excitement.  They had received a chain letter.  Just send $20 to a name two levels up the chain, it said, and then send out 10 copies of the letter to people you know.  Wait for the letter to progress to a second level beyond you, and you will receive $2000, as if by magic.  At the time, $2000 was almost equal to the year’s tuition at Yale.  The sender of the letter assured that this had worked perfectly for everyone in the scheme to date.

Somehow at that early date I had already become aware that monetary chain letters were treated as criminal frauds by Federal prosecutors, and I believed I understood why.  Hey, I was a future math major, and my friends had to be rather bright to have been admitted to Yale.  So I set out to explain to them why this was really a fraud and why it couldn’t possibly work.  To me it was just some simple math.  Did they realize that to progress to a tenth level this scheme would have to enlist more people than existed on the earth?

To my complete surprise, they would have none of my arguments.  In the short time between when they got the chain letter and when they first talked to me about it, they had become excited about and emotionally invested in the project.  Not only were they going to do it, but they kept trying to get me to do it too.  I didn’t.  They did.  I think one of them got his $20 back.  The others did not.

Skip forward to yesterday’s editorial in the Washington Post.   Compared to other voices of the left, this one takes a relatively sane approach, conceding the essential fact that the main entitlements are on an unsustainable growth path:

But the underlying fiscal problem is that federal expenditures are slated to rise faster than economic growth because of rising health-care costs and an aging population. The long-term drivers are Medicare, Medicaid, Social Security and subsidies for the health-care exchanges established by the Affordable Care Act.

That’s not a partisan statement. It is reality.

I’ll let the commenters take it from there:

The editorial board of this once decent rag has been bought and paid for by the sadistic, genocidal monsters at the Fix the Debt commission. The few remaining reasonable writers on this rag have admitted that SS does NOT drive the deficit, and that seniors PAID FOR their benefits, but the editorial board will not be happy until millions of seniors are dying of starvation on the streets. And that is not hyperbole. For shame, you sadistic lying pieces of excrement.

Social Security Insurance is paid for and is not an entitlement. Medicare is paid for and not an entitlement.
Medicaid is necessary and not an entitlement. The word entitlement is used rather loosely in the beltway.

Think – Exercise your brain. What system do real 21st century countries use to address universal medical care? Can you think about that and get back to me?

Well, is this just a matter of emotion or can we please address the math and whether it can possibly work as currently constructed?  You can call people evil when they point out the impossibility of the existing structure, but that will not keep the whole thing from crashing down like Madoff when there aren’t enough new entrants to keep it going. There are just two ways of looking at the world.  I'm looking at it the other way.  I guess that’s why I’m the Manhattan Contrarian.

The Senate's 60 Vote Requirement Shows That It is Still Useful

In a development of a type that I had begun to think was no longer possible, the Senate earlier today appears actually to have accomplished a modest reduction in the Federal government's provision of infinite insurance for everything.  The fight is not necessarily over, but there is real reason to hope that this has worked.

The program in question is called TAG -- the "Transaction Account Guarantee" Program.  You haven't heard of it?  This is the program by which the Federal government, through the FDIC, lifted all limits and agreed to go to infinity on guarantees of  bank deposits.  Up until the financial crisis in 2008, the FDIC only insured bank accounts up to $250,000, itself a way excessive amount.  During the panic in 2008 the government got buffaloed into thinking that infinite bank account guarantees would calm everything down and make the world perfect again.  So TAG was enacted, supposedly as a two year program.  In 2010, in the way of all Federal programs, it then got extended, for a second two years.  That extension runs out at the end of 2012, and hence we have the Senate taking up the question of extension. 

This is Federal insurance that by definition backs up people (and companies and governmental entities) with over $250,000 in the bank -- they're all rich!  It covers some $1.5 trillion of deposits.  Is there any hope that this wouldn't be continued like all other Federal handouts?

Turns out there is hope.  Senator Pat Toomey (R, PA) raised a "point of order," arguing that the extension had budget impact and should only be heard as part of budget-related matters.  Senator Johnson (D, SD) moved to waive the point of order.  That motion required 60 votes to pass.  The vote was 50 - 42 in favor, not enough to pass.  Note that if majority vote would do it, this would have passed.  By the way, if that motion had passed, the next motion would have been "cloture," otherwise known as a motion to cut off a filibuster.  That also requires 60 votes under current rules, and presumably the result would have been the same 50 - 42.  So at least for the moment this Federal giveaway to the rich appears to be dead.

The big backers of this were the American Bankers Association, and needless to say their head, Frank Keating, immediately came out with a statement seeking to keep the thing alive:

“We’re disappointed that the Senate failed to vote on a temporary extension,” American Bankers Association President and Chief Executive Officer Frank Keating said in a statement. “The TAG program has been fully funded by the banking industry at no taxpayer expense and millions of small businesses and municipal depositors would have valued its continuation during this period of economic recovery.”

(Keating was a conservative Republican governor of Oklahoma from 1994 - 2003, but unfortunately has now gone over to the dark side as a lobbyist.)  Keating's argument is eerily similar to the arguments made for years by the proponents of Federal flood insurance -- Hey, the premiums fully fund this program!  That is, until they don't.  In the case of flood insurance, the premiums covered it until Hurricane Katrina in 2005, when suddenly the program needed a $20 billion bailout; and now, how about another $20 billion after Sandy for the flood insurance program alone, and by the way another $60 billion of "supplemental" appropriations on top of that.  Same for deposit insurance.  So far the premiums have covered it.  Oh, except for the S&Ls, whose Federal insurer (FSLIC) got a bailout of around $160 billion to cover losses from the 80s through 2004.   Just wait until a systemic crisis of the same sort hits the banks insured by the FDIC.  Current insured amounts exceed $10 trillion, with TAG representing an additional $1.5 trillion.  Believe me, when the real crisis hits, the premiums will look like a drop in the bucket.  And, the crisis will hit.  It's just a question of when.

To be fair to those pushing for extension of TAG, there is another argument put forward, namely that without TAG the big banks have a huge advantage over small banks in attracting big deposits, since the big banks will be deemed "too big to fail" under the Dodd-Frank law.  It's not a ridiculous argument by the little banks, but there are many better solutions, including, in my order of preference, (1) remove "too big to fail," (2) make Federal deposit insurance applicable only to bank funds invested in designated non-risky instruments, and (3) break up the big banks.

The Union Movement In Its Death Throes

The big news in labor relations this week is the passage in Michigan of so-called right-to-work legislation, and its signing by Governor Rick Snyder.  Experience in the 23 states that previously had right-to-work laws indicates that this legislation, if it sticks, will have a very negative influence on union membership, revenues, and ultimately, influence.

But the dramatic decline of private sector unionism long pre-dated this latest legislation, and is highly likely to continue, even if the Michigan unions can succeed in somehow rolling back the legislation.  While right-to-work legislation is a serious negative for private sector unions, their much bigger problem is that companies, once unionized, fail to grow, then decline, and ultimately die.  Unions are not shrinking because they get voted out, or even because of inability to organize new workplaces.  Unions are shrinking because their conduct drives their employers out of business.

First, some broad numbers.  According to widely reported Labor Department statistics available for example here from the New York Times, the rate of union membership in the United States declined from 35% in the mid-1950s, to 20.1 % by 1983, to just 12.3% by 2009.  And that massive decline masks even more dramatic figures for the private sector, since during this period the rate of unionization in the public sector was increasing, reaching 36.2% in 2009, and leaving just 6.9% of private sector workers in unions.

Can anyone actually name an example of a union getting voted out of any workplace with a significant number of employees?  It does occur, but that is by no means the main source of the union decline.

Consider the auto industry.  According to data here, membership in the UAW has plummeted from over 1.5 million in the 1970s to around 300,000 today.  Has the union been voted out of GM, Ford or Chrysler?  Of course not.  What has occurred is that the combination of high wages, expensive health and pension benefits, and restrictive work rules made GM, Ford, Chrysler and many of their suppliers, uncompetitive in the marketplace.  They have closed plant after plant and their unionized workforces are a fraction of what they were at the peak.  That created openings for the likes of Toyota, Honda, Nissan, BMW, Mercedes and Hyundai. all of which greatly expanded manufacturing in the United States, and all or nearly all in the right-to-work states.  None of them would go anywhere near Michigan.  Back in Michigan, GM and Chrysler exist on government life support, the City of Detroit has lost well over half its population since the 1950s, and even the State of Michigan as a whole lost population between the 2000 and 2010 censuses, the only state to do so.  Not having a right-to-work law has preserved existing privileges of Michigan's union members and leaders, but has not prevented rapid decline of the union movement in the state.

Very similar stories exist in other formerly heavily-unionized industries, such as steel and tires -- huge declines in the unionized companies, accompanied by the rise of non-union competitors, often in right-to-work states.  New York is the state with the highest remaining rate of private-sector unionization, at over 20%.  But here is a report from the New York Times on September 3, 2012 on ongoing dramatic declines in private sector union jobs in New York City. 

The number of city residents with union jobs in the private sector has dropped by nearly 20 percent since the recession started in 2008, the report by scholars at the City University of New York shows. That amounts to a loss of about 95,000 union jobs, and a decline twice as steep as that for the rest of the nation, said Ruth Milkman, a sociology professor who wrote the report with Laura Braslow. . . . 

“I saw this happen in California in the 1990s,” Professor Milkman said. Such a sharp decline is difficult to turn around because the businesses created after a recession are less likely to be unionized than the older ones that failed in the downturn, she said.

And it only takes a little looking around to see where some of the next declines in unionization are going to occur.  How about the U. S. Postal Service?  They have gone from mostly-unionized 909,000 employees in 1999 to just 617,200 in early 2012, and they are hemorrhaging employment at the rate of 30,000 - 50,000 per year.  Will they even still be in existence in 2020?  Hostess just closed with a loss of over 18,000 mostly-unionized jobs.  If anything the trend is accelerating toward the end.

Already The Government Has Found Its Next Big Shakedown

Just a short week ago, the Second Circuit finally clamped down on the government's biggest ongoing shakedown of industry, the so-called "off label marketing" restrictions of the FDA.  That one had netted them well over $10 billion in fines over the last decade for conduct that now appears to have been completely legal all along, indeed protected by the Constitution.  Well, now that that one is gone, what is going to replace it?

Already we know!  This morning virtually every news source had the story:  British banking giant HSBC settled with Federal authorities after an investigation of so-called "money laundering."  According to Reuters:

HSBC Holdings Plc agreed to pay a record $1.92 billion in fines to U.S. authorities for allowing itself to be used to launder a river of drug money flowing out of Mexico and other banking lapses.

Mexico's Sinaloa cartel and Colombia's Norte del Valle cartel between them laundered $881 million through HSBC and a Mexican unit, the U.S. Justice Department said on Tuesday.

$1.92 billion -- that's real dough!  Only a couple of the off-label drug prosecutions reached that level.  So what is this thing about "money laundering" enforcement?

Those at all familiar with the area will already know that the term "money laundering" is the government's catch phrase employed to give an air of sleaziness to the perpetrators and legitimacy to itself; but "money laundering" enforcement has little to do with the "laundering" of money, whatever that is, and everything to do with the government's forced enlistment of the banks into spying on the citizenry in all financial transactions.  The field was created by the so-called Bank Secrecy Act of 1970 (which should more appropriately have been called the Bank Non-Secrecy Act, since it requires reporting to the government on private financial transactions).  As amended through today, the Bank Secrecy Act requires banks to collect identification information on each client and to report to the government on any transactions deemed "suspicious," whatever that means.  If the government so asks, the bank is not allowed to tell the customer that he is being spied on, and indeed, it is a crime to tell the customer.

Sometimes this is sold to the public as part of the war on terror.  That is nonsense, since acts of terrorism do not require large amounts of money (see, e.g., 9/11).  Almost all "money laundering" enforcement is really about the Drug War, and as you can see from the above quote, that's what this one against HSBC is about.

So how is money laundering enforcement doing at winning the war on drugs?  Well, according to this article from Marijuana Business News, the U.S. marijuana market is estimated to be approximately $100 billion annually -- approximately the same size as the market for "brewed beverages," i.e., beer and ale.  OK, maybe that's an exaggeration and it's only $50 billion.  How much of that money finds its way into the U.S. banking system?  I have my answer:  ALL OF IT!

The fact is that money laundering enforcement doesn't put the slightest dent in the drug business.   We have allowed the government to deputize the banks to spy on us all 24/7 behind our backs to enable an exercise in total futility.  How do those devious drug dealers manage to evade all the spying?  Well, here is a great article from the Wall Street Journal in 2007, reporting on the activities of two functionaries of a Colombian drug kingpin.

At 8:50 a.m.  on March 15, 2006, Luis Saavedra and Carlos Roca began going from bank to bank in Queens, New York, depositing cash into accounts held by a network of other people, according to law-enforcement officials.  Their deposits never exceeded $2,000.  Most ranged from $500 to $1,500.  Around lunchtime, they crossed into Manhattan and worked their way up Third Avenue, then visited two banks on Madison Avenue.  By 2:52 p.m., they had placed more than $111,000 into 112 accounts, say the officials, who reconstructed their movements from seized deposit slips.  Confederates in Colombia used ATM cards to withdraw the money in pesos, moving quickly from machine to machine in a withdrawal whirlwind, the officials say.  "The organization at its height was moving about $2 million a month," estimates Bridget Brennan, Special Narcotics Prosecutor for New York City.

These two guys were caught by the luck of a tip by an informant.  Meanwhile, if you think the banks can do anything effective to stop this, you are just kidding yourself.  Despite endless costly efforts at "money laundering" compliance, any given bank takes in anywhere from tens of millions to billions of dollars annually in "drug money," otherwise known as small amounts of cash.  So every few years the Feds will come around and shake down each bank for a some millions or billions of dollars.  Dare anyone tell them that the Drug War is effectively over?

The Worst United States Senator

OK, there are a lot of candidates for that title.  But can anyone beat the appalling senior Senator from New York, Charles "Chuck" Schumer?

With its large financial and business community, New York still ranks among the wealthiest states, even after decades of decline relative to the other states caused by uncompetitive state and local taxes.   New York is home to large numbers of high income earners, given the numbers of professionals in fields like banking, law, accounting, entertainment, and so forth.  According to data from the Tax Foundation, over 3.6% of New York tax filers reported AGI above $200,000 in 2009, compared to an average of around 2.5% for the other states; and the disparity is undoubtedly greater at the highest incomes.

Because our Federal income tax structure is progressive, it is inevitable that New York (and the other high income states, like California, New Jersey and Connecticut) will pay disproportionately more Federal income tax than lower-income states.  Our former senior Senator, Moynihan, published regular reports demonstrating that New York sent far more money to Washington than it got back. 

Our current senior Senator, Schumer, needless to say, has discontinued these reports.  They would reflect badly on you-know-who.  Where does he stand on increasing income taxes?  Why, of course, he is leading the charge.  From the New York Times of October 9, 2012:  "Schumer Shakes Up Deficit Talks With Call to Raise Taxes on the Rich."

Why would the senior Senator from one of the wealthiest states lead the campaign for disproportionately higher taxes on his own constituents?  Not because it is the interest of his constituents or of New York State as a whole. The opposite -- because it is the personal interest of Schumer to centralize as much money as possible in Washington and then make himself into a godfather passing out the goodies to grateful special interests in return for campaign contributions, fealty and votes.

And he makes no secret that this is what he is doing.  Go to his web site and go through the endless lists of minor handouts that he has passed out to one special pleader after another.  The latest include handouts for historic buildings in Schenectady and Rochester, a few hundred thousand dollars for something called a "job engine" at a college in Poughkeepsie, and on and on.  Nobody could possibly figure out how much all these are worth, but without a doubt we are paying double to triple for what we get back.  How can that be a good thing?  It's all about campaign contributions and getting Chuck Schumer's name in the headlines as often as possible.

There's no level of economic destructiveness to which he will not lower himself.  At the "New York" section of his web site we have one after another protectionist measure to hobble foreign competition for the benefit of some particular New York industry: a "silicon metal" producer in Niagara Falls, two furniture makers, a candle maker in Syracuse, apparel makers in New York City, and on and on.  Does he not know that the internationalization of world commerce is what drives New York's main economic engine?  It doesn't matter -- no campaign contributions, no headlines in that.

And how about agricultural subsidies?  Surely, Schumer must realize that New York is among the most highly urbanized states, and expenditures of taxpayer moneys on agricultural subsidies are a big net loss for his constituents.  Well, no. Here is the Agriculture section of his website, bragging about obtaining one minor benefit after another on behalf of the small number of New York farmers.  He even brags about helping the dairy industry by keeping dairy prices up!  Does he realize that that represents a major burden on poor mothers trying to buy milk for their children?  Doesn't matter; their votes are already securely bought.

Charles Schumer is the purest symbol of what is wrong with the United States Congress.  The entire New York press eats out of his hand, parroting his brain-dead press releases and never doing the math to conclude that this is all a huge net loss to us.  Will anything change next time he is up for election?