Federal Reserve Typifies What’s Wrong with Economy
Updated Feb. 1, 2012
There’s a troubling schism in U.S. politics, monetary policy and management of the economy.
Sure, at first blush, I agreed with a former GOP presidential candidate who raised eyebrows with his criticism of sacred cows. Rick Perry said Social Security is an “illegal Ponzi scheme” and he equates the Fed’s monetary policy with treason. He’s since self-destructed with his political approach.
He took a lot of heat for it before he dropped out of the race. Google his name and you’ll see 20,600 search results – mostly condemnation and sarcasm.
Cliff Schecter, an author and liberal PR activist, wrote a sarcastic blog for Al Jazeera, “Beware of Rick Perry, the French cuff cowboy.” Mr. Schecter advised Democrats to minimize Mr. Perry’s chances for the high office – to ridicule him: “That he’s as fake as a three-dollar bill, all hat and no cattle, or to put it in a language Perry can understand – he’s Blazing Saddles, not The Unforgiven.”
Aside from such silly rhetoric, what about the facts?
Granted, Social Security is indeed a lifeline for millions of Americans. But it’s been well-documented that Congress has played games with the payroll-tax fund, and diverted billions of dollars to underwrite other underfunded initiatives.
Consequently, there has been an upsurge in published reports about Social Security running out of money. Of near-term consequence, to conserve cash flow, Social Security has been late in mailing checks to retirees the past two months.
The shenanigans with Social Security do make it a Ponzi scheme.
Federal Reserve mismanagement
As for the Federal Reserve, it gets worse. Bloomberg published a shocking story: “Wall Street Aristocracy Got $1.2 Trillion in Loans from Fed.”
In a nice piece of forensic financial reporting – only made possible by a series of Freedom of Information appeals – Bloomberg reporters Bradley Keoun and Phil Kuntz revealed how the Fed secretly gave the financial institutions the outrageous loans totaling more than a trillion dollars in public funds. They examined nearly 30,000 pages of secret documents.
The reporters found the Fed furtively funneled $107.3 billion to Morgan Stanley, $99.5 million to Citigroup, and $91.4 billion to Bank of America. Nearly $300 billion – $298.2 billion in public funds were doled out from Aug. 2007 through Aug. 2010. Moreover, the secret bailouts were three times larger than what was publicly acknowledged by the other controversial bailout, the Troubled Assets Relief Program (TARP).
That’s right. The $1.2 trillion was in addition to the $160 billion in the TARP bailout funds.
Ironically, in 2006, and just before the secret loans, Bloomberg reported Citigroup and Bank of America garnered $104 billion in profits.
Fifteen of the borrowers were European banks.
These huge sums of money totaled 25 times more than the $46 billion loaned by the Fed just after the 9/11 crisis.
The Fed’s justification for the secret loans: To prevent a depression.
However, for a different perspective, consider:
“While the 18-month U.S. recession that ended in June 2009 after a 5.1 percent contraction in gross domestic product was nowhere near the four-year, 27 percent decline between August 1929 and March 1933, banks and the economy remain stressed,” wrote the reporters.
More Fed failures
Other indications of poor discernment at the Fed include:
Fed dissenter: Economy’s biggest problem is distrust of Washington …. In this piece written by Peter Schroeder on thehill.com, the headline appears to be accurate. He quoted Richard Fisher, the president of the Federal Reserve Bank of Dallas.
In a mind-boggling statement, Mr. Schroeder cited Mr. Fisher’s opinion: “…businesses have ample access to credit from banks, but that a growing distrust of the nation’s political institutions is keeping them on the sidelines.”
It’s true about the mistrust of Washington. But the rest is preposterous. The big banks’ chicanery during that period helped cause the problem and the financial downturn – for dubious reasons, 38 percent in credit-card interest rates charged to small businesses and individuals – plus, canceled credit lines and denials in loan applications.
As a result of the resulting poor credit, many businesspeople simple do not qualify for loans. That’s the reason for relatively little in loan demand. In a column, I posed this question: Does the Federal Reserve Understand Small Business? The answer is absolutely not.
My sense, for many months, has been: The Legal War on Wall Street Chicanery Isn’t Finished.
You might recall another Fed-bailout beneficiary was Goldman Sachs. Investors were shocked by a published report, Goldman Sachs CEO hires criminal defense lawyer.
Meantime, despite all this secretive wheeling and dealing, this business portal has repeatedly warned about the dangers from public policies and mismanagement as we head toward a double-dip recession.
While writing this piece, I received an email from a frequent reader who complains about the “ruling class” of public officials who continually tax and waste resources. He sent a link for an ABC News video that shows waste by the Fed. You won’t believe what you see.
So instead of sarcasm about presidential candidates who question the Fed and other sacred cows, let’s get pragmatic and take off the blindfolds. It’s time for sober discernment and productive action.
From the Coach’s Corner, here’s more about the poor stewardship of the economy:
Only Fiscal Sobriety Will Prevent Further Fiscal Chaos
Do We Really Honor the Declaration of Independence?
After Taking Us for a Ride, A Vacation Is Warranted for Obama
“It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
— Henry Ford
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Columnist Terry Corbell is also a business-performance consultant and profit professional. Click here to see his management services (many are available online). For a complimentary chat about your business situation or to schedule Terry Corbell as a speaker, why don’t you contact him today?
Does the Federal Reserve Understand Small Business?
To answer the question, I have a simple one-word answer: No. It appears at least one of the Federal Reserve’s 12 districts does not have a practitioner’s understanding of small business.
Small business is really the straw that stirs the drink in the nation’s ability to increase the number of jobs in this country.
According to Small Business Administration (SBA) figures, small businesses make up more than 99 percent of all employers and employ more than half of all workers. Another SBA stat stands out: Small businesses have created 64 percent of all jobs in the last 15 years.
But small businesses have really suffered during and after the Great Recession.
So why is it that a 2011 study by the Federal Reserve Bank of New York draws the wrong conclusions as to why small business employee rolls dropped a lot more than big-business employment in the recent recession?
The Fed’s study concludes that a drop in consumer demand triggered the cutbacks. Huh?
Fortunately, a blog by Dr. Scott Shane nailed the reason.
“I think two factors – reduced access to credit and the concentration of small businesses in the worst hit sectors of the economy – play a bigger role than the Fed researchers acknowledge,” he wrote.
I like his work, and have quoted him previously (Is the U.S. in Danger of Becoming Second-Rate in High Tech?). Dr. Shane is an entrepreneurial scholar – the A. Malachi Mixon III Professor of Entrepreneurial Studies at Case Western Reserve University.
The Fed was right about the loss of small-business employment rolls — 10.4 percent among companies with fewer than 50 employees. And Dr. Shane agreed. As Biz Coach, a business-performance consultant, I see it every day. Small businesses did lose more jobs than their bigger counterparts during the Great Recession. So, we’re in agreement on the job losses.
“Businesses with fewer than 50 employees accounted for 28 percent of the 121 million Americans employed in the private sector in 2008, the latest Small Business Administration figures show,” wrote Dr. Shane. “That’s too much employment in small businesses for policymakers to find a way to fix the job problem without getting the smallest companies to boost hiring.”
He’s right again.
“Small businesses are underrepresented in two sectors that have weathered the downturn relatively well: exporters and those in research-and-development-intensive industries,” he wrote. “And small businesses account for much more of the employment in the sectors hardest hit by the downturn.”
As an example, he cites construction.
“While total employment fell only 4.4 percent from 2007 to 2009, employment in construction dropped a 19.4 percent. With so many small businesses in construction, this has meant heavy job loss,” he explained.
“The Fed researchers also play down the importance of tightened credit markets in accounting for the losses, arguing that most of the decline in borrowing by small businesses during the recession came from a decrease in demand for loans – not a reduction in supply,” he asserted.
He cites figures from the National Federation of Independent Business: “In March 2009, at the depth of the recession, only 29 percent of small business owners reported that their borrowing needs were being met, down from 40 percent back in February 2007.”
Dr. Shane points out home-price declines adversely impacted small business credit.
“A 2007 survey by Barlow Research Associates shows that one-quarter of small business owners use the equity in their homes to fund their businesses,” he wrote. “And research by Kean University professor Samuel Bornstein shows that many of the loans used to tap that equity were the Alt-A, adjustable-rate and interest-only mortgages at the toxic heart of the crisis…”The decline in housing prices sucked a large amount of small business credit out of the system.”
Dr. Shane indicated home equity loans for small businesses decreased $25 billion.
“If policymakers want to counteract the job losses in small business, they need to do more than say that the cause is decreased demand,” he concluded. “Rather, they need to stimulate the small business heavy industries that were badly damaged by the recession and keep credit flowing.”
Amen. Naturally, it follows that new strategies for small business credit are needed. However, now there’s a bigger problem.
My sense is that the small business credit situation – in the aggregate – won’t qualify such firms for loans. The chicanery by big banks led to reduced credit limits and they got away with charging 38 percent interest on business credit cards for dubious reasons.
From the Coach’s Corner, here’s a resource link:
11 Strategies to Keep your Small Business Floating above Water
“Dreams come true if you survive the hard times!”
-George William Curtis
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Columnist Terry Corbell is also a business-performance consultant and profit professional. Click here to see his management services (many are available online). For a complimentary chat about your business situation or to schedule Terry Corbell as a speaker, why don’t you contact him today?
Legal War on Wall Street Chicanery Isn’t Finished
May 23, 2011
Three years after Congress promised answers in the big banks’ roles in the financial scandal, there are none – only questions.
However, New York Attorney General Eric Schneiderman is investigating Wall Street’s role in the mortgage quagmire and housing bubble, according to published reports. Mr. Schneiderman wants documents from Bank of America, Goldman Sachs and Morgan Stanley.
Even as a free-market advocate, I remain troubled by several unanswered questions:
- The banks’ roles in the role that led to the housing bubble?
- Regarding securitization details, the merging of countless bad home loans into securities, which were sold to investors – insurance companies, mutual funds and pension funds?
- Were the banks really that incompetent or was it a case of ethics?
- What will be done to prevent the future devastation of investors?
- What will be done to stop all the illegalities, including the robo-signing in the foreclosures of homeowners?
- What about a moral compass to halt the practice of giving multi-million dollars to employees at firms bailed out by taxpayers?
Ostensibly, Mr. Schneiderman is not alone.
“These days the Justice Dept. and the Securities and Exchange Commission are investigating Wall Street with tactics, such as wire taps, usually reserved for professional criminals and terrorists,” blogged Dr. Peter Morici, a business professor at the University of Maryland, and a former Chief Economist at the U.S. International Trade Commission.
“Apparently, those agencies recognize what Treasury and the Federal Reserve simply won’t admit – insider trading, robo foreclosures and peddling dodgy securities to unsuspecting investors are good old fashioned fraud,” he wrote. “Like the corruption tolerated by Third World autocrats, those practices handicap American capitalism in global competition and undermine prosperity.”
He cited the subpoenas for executives at Goldman Sachs and SAC Capital advisors.
“Punitive settlements and convictions-resulting from investigations into insider trading at Galleon and SAC, shoddy mortgage foreclosure practices at Bank of America, and shady marketing of mortgage backed securities at Goldman Sachs-ultimately, would curb cynical behavior and ever bigger paydays on Wall Street, and improve returns for stock investors,” he asserted. “As importantly, it would redirect American capital and talent toward more productive, jobs-creating purposes.”
Dr. Morici indicated stocks aren’t an optimized investment.
“In February 1998, the S&P 500 first closed above 1000-since corporate profits are up about 210 percent but equities less than 35 percent,” he recalled. “Corporate profits rose 6 percent annually but investing in stocks paid a disappointing 2.3 percent a year.”
Why else?
“Buying stocks doesn’t seem to pay, because too much of the profits created by innovators with ordinary investors capital is captured by hedge funds, Wall Street trading desks, private equity houses, aggressive M&A shops, and then paid to Wall Street executives and traders,” he wrote.
Dr. Morici suggested an eye-opening thesis.
“In the drive for ever bigger compensation packages, Wall Street’s best and brightest violate boundaries of ethical behavior and the law,” he explained. “Not all of our problems can be laid on Wall Street’s steps, but its culture of entitlement and sharp practices impose enormous burdens.
“The carnival culture on Wall Street is attracting too many young people to business schools to study economics and finance, instead of pursuing physics and engineering,” he added. “That’s why the best business schools are overwhelmed with applicants from Connecticut and California, while engineering colleges depend on students from China and Asia, who will then return home to compete with American businesses.
He believes that the obscene Wall Street paychecks hurt individual shareholders and pension funds, alike.
“The absence of significant appreciation in equities for more than a decade means that many retirees dependent on IRAs and other defined contributions vehicles can no longer live comfortably, and many baby boomers who have been pushed into such pension vehicles can’t retire,” he wrote. “Their money may be working hard, but only for Wall Street titans and not for them.”
He maintains the financial chicanery costs jobs.
“These days, too much money and talent are directed to financial engineering-efforts to design the next complex derivative-and not enough is going into physics and real engineering-designing electric cars, new materials, and products and services that will define U.S. global competitive success and prosperity for the next 25 years,” he maintained.
“Increasingly, venture capital and stock investors look abroad for the best returns, and this deprives small and moderate sized U.S. companies of capital needed to expand and invest in new ideas and create jobs,” he added.
So, what can Mr. Schneiderman, the Justice Department, and the Securities and Exchange Commission accomplish – while the Treasury Dept. and Federal Reserve appear incoherent?
“Prosecuting Wall Street will do a lot to curb abusive practices and excessive compensation, make stocks and IRAs sensible investments, redirect capital and talent into productive purposes, and get the American growth machine back on track for our children and grandchildren,” concluded Dr. Morici.
Agreed. At one time, my free-market philosophy would have differed on this scandal. But not now. The economic liberty of countless people is at stake.
From the Coach’s Corner, Dr. Morici’s analyses are regularly published in this portal’s Economic Analysis Op Ed section. His short-term forecasts for the U.S. economy are published here.
Here are links on the background of the financial scandal:
Will Goldman’s Scandal Prompt Cultural Changes on Wall Street?
Sen. Cantwell Is Right to Question Risky Derivative Dangers, Geithner
Is it Time to Police Pay at Wall Street Banks?
“There is two things that can disrupt business in this country. One is war and the other is a meeting of the Federal Reserve.”
-Will Rogers
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Terry Corbell is a business-performance consultant and profit professional. Click here to see his management services (many are available online). For a complementary chat about your business situation or to schedule Terry Corbell as a speaker, why don’t you contact him today?
Is Your Great Recession Over? The NBER Says It Is
Sept. 20, 2010
What a pleasant surprise to open my e-mail today. Among other sources of information, I subscribe to daily feeds of economic data from the National Bureau of Economic Research (NBER).
The Great Recession ended in June of 2009, according to the NBER’s eye-opening announcement:
NBER Business Cycle Dating Committee Announces Trough Date
The NBER’s Business Cycle Dating Committee announced on September 20 that the U.S. economy reached a trough in June 2009, making the 18-month recession that began in December 2007 the longest in the post-war period. Further details are provided in the committee’s announcement.
“Trough is right!” Not to criticize the NBER, but that was my reaction today. I had similar reactions and wrote similar comments in these columns a decade ago. Then, the NBER was slow to acknowledge the recession but too quick to call it over. But the NBER is comprised of bright academics who aren’t competing in the real business world.
Moreover, I complained then about the inability of Alan Greenspan and the Federal Reserve to see what was really going on at the Main Street level.
But this time, the economy feels worse – really worse. The U.S. is afflicted with a 9.6 percent unemployment – at least 15 million are jobless, wages are flat, home values are down while foreclosures and bankruptcies are still increasing.
How does the NBER evaluate the economy? It examines the levels of the gross domestic product of the value of goods and services, wages, employment rates, and manufacturing. The NBER is an organization of economic academics. It’s headquartered in Cambridge, Mass.
The NBER officially declared the recession started in Dec. 2007. Not to be a cynic, the effects of the downturn were being felt months before the NBER’s proclamation.
After the historically high four consecutive quarters of economic contraction, the nation’s economy ostensibly started a comeback from July to Sept. in 2009. That’s the reason for the NBER announcement today. That’s also why the NBER indicates any further declines would count as a new recession.
This recession is the worst in decades, and it feels it. I’ve worked through five downturns since the early 1970s. The nation endured the Great Depression for the longest period of time – starting in 1929 for 43 months. But a recession reared its ugly head again in late 1936.
And today, the bailouts, healthcare law, and financial regulatory reform have done little to solve the catalysts for the Great Recession:
- Predatory behavior by credit card companies
- Wall Street chicanery
- Mortgage morass
- Trade deficit
- Offshoring of jobs
- Poor public policy at every level
Our Great Recession might be history, but the negative effects linger. Hang in there, and keep on truckin’. I will. That includes reading the daily economic feeds from the NBER. But I’ll continue to closely monitor the trials, tribulations and successes of Main Street business to provide proven solutions for maximum profits. Hope to see you here often.
From the Coach’s Corner, In addition to the business-coaching columns ranging from marketing to finance, I invite you to visit these three sections:
Is it Time to Police Pay at Wall Street Banks?
Sept. 20, 2009
As a longtime free-market advocate, I never thought I would be writing this – but the time has come to regulate the Wall Street compensation of senior banking executives. So, I’m endorsing the proposal from the Federal Reserve – with two provisos.
The Fed ostensibly wants to discourage excessive risk-taking by many banks, including their permissive lending by regulating bank executives’ pay. Nearly 6,000 banks would be covered.
Such practices helped lead to the deepest financial crisis in decades. The behavior has been so bad, it also helped exacerbate problems with the agency that insures consumer accounts to $250,000. Federal Deposit Insurance Corp. may have to borrow money from the U.S. Treasury. FDIC’s bank insurance fund will be paying out $70 billion through 2013 after 123banks collapsed by Thanksgiving in 2009.
Businesses have suffered because their accounts are not insured.
“Wall Street greed and irresponsibility have nearly destroyed the U.S. economy,” said Dr. Peter Morici, a professor at the University of Maryland School of Business and former chief economist at the US International Trade Commission. “Big bonuses for bankers encourage reckless risk taking and were a principal cause of the credit crisis and Great Recession.”
Here are some examples:
“Banks wrote mortgages and sold those to Wall Street financial institutions, who bundled loans into bonds and sold those to investors, such as insurance companies and foreign governments,” said Dr. Morici. “From loan officers to the Wall Street bond salesmen, opportunities to exaggerate the quality of loans emerged. If local banks or Wall Street financial houses could pawn off high-risk, high-fee loans as reasonably safe, they enjoyed big paydays.”
He bluntly criticized the behavior on SWAPS, a financial instrument called a derivative. Simply put, it pays face value to the buyer if a company does not meet its debt obligations.
“Wall Street bankers wrote bogus insurance policies called SWAPS that were supposed to limit losses for investors when mortgages defaulted,” added Dr. Morici. “AIG wrote many SWAPS without capital to back them up, and banks even wrote SWAPS on each other’s mortgages – like two homeowners on a North Carolina beach promising to pay one another in the event of a hurricane.”
SWAPs and bad bonds victimized investors and the bankers garnered mega paychecks. But when the homeowners failed to pay mortgages, banks faltered and the huge losses rippled throughout the economy. But only the banks were bailed out by the government (taxpayers).
To add insult to injury, banks have been allowed to borrow at extremely low interest rates. But they failed to make funds available to consumers and business, and once again enjoy enormous profits. And they have been paying huge paychecks to management.
“Consequently, widows relying on Certificates of Deposit for income, now receive much reduced interest rates” said Dr. Morici. “That’s right – Ben Bernanke is taxing grandma to bail out Goldman Sachs.”
Receiving comparatively little attention has been the continuing predatory behavior on credit card customers – banks and credit card companies are still geting away with bogus reasons for jacking up credit card rates and fees.
But a year after the collapse of Lehman Brothers, another SWAPS practitioner, SWAPS have lost their stigma, according to published reports.
Dr. Morici agrees:
“Flush with profits, the banks are up to their old tricks – again creating highly engineered financial products, selling swaps, setting aside massive profits for bonuses, and manufacturing conditions for another crisis,” said the business professor. “If Wall Street banks are too big fail, then they are too big to let go on with this irresponsible behavior.”
But he points out the Fed would be over-matched in its proposal to regulate bankers’ pay.
“The latter is too complex to be realistic – the banks would run circles around such rules, much like lawyers creating tax shelters,” he said. “Better to limit bonuses and salaries of bankers to a fixed percentage of net income that aligns financial sector salaries with those of other industries.”
Agreed. In addition, I would add two caveats:
- Strictly reduce the amount of risk that banks undertake.
- Require high reserves – much higher.
And on a related topic while we are cleaning up Wall Street practices, let us correct the predatory behavior of banks and credit card companies that dramatically increase rates and fees for bogus reasons. The companies are domiciled in a handful of states that permit such behavior.
In other words, here is what is really needed: Police the behavior of these people.
But are the Obama Administration, Congress, certain state lawmakers, and regulators conscientious and determined enough to do the right thing and stop the madness?
