Why Federal Reserve’s QE3 Didn’t Help U.S. Economy



The Federal Reserve showed terrible judgment in printing billions of dollars for cheap money.
Among 314 million+ Americans, just a relatively chosen few — big investors — benefited from the Fed’s third edition in quantitative easing (QE).

The Fed has stopped its printing of money, but it’s too late.

There are many reasons why it’s been harmful — ranging from weak job growth to being a disincentive to save. It also hurt senior citizens badly because of the resulting negligible interest rates. Typically, a certificate of deposit interest rate has only been .05 percent on savings accounts of $50,000 or more.

Wise economists say the concept is deplorable. That includes Anthony Randazzo.

“…a fancy term for the Federal Reserve buying securities from predefined financial institutions, such as their investments in federal debt or mortgages – is fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy,” says Mr. Randazzo, chief economist at the Reason Foundation.

“It is a primary driver of income inequality formed by crony capitalism,” he astutely points out. “And it is hurting prospects for economic growth down the road by promoting malinvestments in the economy.”

Federal Reserve’s Districts

Indeed, investors have gone bananas over QE3, despite the nation’s formidable problems:

  • We’re in another year of a pathetic economy. Economic growth is a fantasy, a misnomer.
  • Noted economists like Peter Morici, Ph.D., have been warning the U.S. is headed for a double-dip recession unless President Obama fixes the nation’s economic infrastructure, stops spending, and works with Congress to end the fiscal-cliff threat. (See: Dr. Morici’s economic analyses here.)
  • Fewer Americans are working now than in 2000. Twenty-three million Americans are unemployed or under-employed, and if they get work, it’s part-time at smaller wages than they used to earn.
  • Thanks to the Obama Administration’s undesirable budget proposals that failed in the House of Representatives and the heavy-handedness of Majority Leader Harry Reid in the Senate, a federal budget wasn’t adopted for more than three years.
  • That’s not to absolve Republicans during the Bush Administration. They ran Congress and approved countless pork spending. Mr. Bush didn’t veto any pork until his sixth year as president.

No wonder the public debt keeps increasing. It’s about $19 trillion and counting.

The Fed’s support of banks prompts two questions: Where are the bank loans to business? Where are the bank jobs?

The Fed’s short-term rate – on loans between banks – has been near zero for many years. Bank profits have been huge – $34.5 billion in Q2 2012, according to the FDIC. Their balance sheets became much healthier.

The results: Many small businesses have long complained about the lack of bank loans and lines of credit. Before the Great Recession, banks had 2.2 million employees. But now there are thousands of fewer banking employees. No wonder most big banks are profitable.

Printing money hurts long term

Unfortunately, liberal Janet Yellen was appointed to replace Ben Bernanke as the chair of the Federal Reserve. She’s continued his absurd policies in unprecedented steps in a highly questionable attempt to boost the economy.

All of this means many Americans are mortgaged up to their eyeballs.

The Fed believes printing money out of thin air – issuing Federal Reserve Notes – is good for the nation. In recent years, his QEs have pumped up the stock market as he pushed interest rates lower to encourage spending.

Why Mr. Bernanke had critics

Republican presidential contender Mitt Romney — who has a track record in creating wealth and jobs – was opposed to such economic superficiality. Had he been elected, he said Mr. Bernanke didn’t have his support to be reappointed as Fed chair. (See why 5 Nobel Prize Winning Economists (Among Hundreds) Back Romney’s Economic and Jobs Plan.) 

Stock market recovery based on a band-aid approach hasn’t and won’t help the economy. Under-employment and unemployment will remain high and businesses won’t have customers for their products.

“This is a disastrous monetary policy; it’s kamikaze monetary policy”

-Peter Schiff

Ironically, investors are short-sighted in believing in the Fed’s bogus strategies. Creating superficial capital isn’t a solution. But instituting public policy for growth is.

Mr. Bernanke and Ms. Yellen aren’t the only Fed Chairs to come under fire for not understanding the economy or taking steps to help administrations stay in power.

Some examples:

  • More than four decades ago, money-creation policies exacerbated inflation. As a young father of two small children, I’ll never forget working at two jobs, in part, to pay for the high price of milk in 1971. That’s when President Nixon imposed wage and price controls. True, the price of milk was frozen, but so was my salary and everyone else’s.
  • In 1972, Fed Chair Arthur Burns over-stimulated the economy, which helped Mr. Nixon get re-elected despite the emerging Watergate scandal.
  • In the slow 1992 economy, Fed Chair Alan Greenspan’s tight policies helped Bill Clinton to defeat President George H. W. Bush.
  • Just four years later in 1996, Mr. Greenspan reversed course – he developed market-friendly policies that insured the re-election of Mr. Clinton.

That’s not to say the Fed has consistently performed poorly or disingenuously in recent decades. The nation had recessions in 1974 and 1975, which coincided with a terrible inflation rate. Remember President Ford’s WIN buttons, “whip inflation now?”

The tepid economy and President Ford’s pardon of Mr. Nixon from Watergate led to Mr. Ford’s 1976 defeat as Jimmy Carter was elected president.

It was President Carter’s foreign policy and economic failures – primarily, the Iran hostage crisis in which 52 Americans were held captive for 444 days and his inability to tame the 13 percent inflation rate – caused him to lose to Ronald Reagan in 1980. Mr. Reagan’s strong reputation, in intimidating Iran, was credited with the release of the hostages, who were finally freed literally just minutes before he moved into the White House.

Fed role model

Meanwhile, arguably in 1979, the new head of the Fed, chair Paul Volcker, had one of the most difficult economies with which to deal. A Democrat, Mr. Volcker, is recognized for solving the stagflation crisis. Stagflation meant the inflation rate was sky-high in double digits, economic growth was stagnant, and the unemployment rate was too high.

His measures – such as increasing the prime rate to 21.5 percent by 1981 – drew widespread anger. But he managed to tame inflation – from 13.5 percent to 3.2 percent. Combined with the economic approach of the Reagan Administration, America’s economic climate was a whole lot healthier.

In view of this history, one has to wonder about the answers to three questions:

  1. Just like the appearances of Messrs. Burns and Greenspan, why has the Fed taken steps at the expense of America?
  2. Or, why are the people at the Fed in over their heads?
  3. Do Americans want continued fiscal-policy and monetary-policy dysfunctions?

It’s too bad. With the right leadership for fiscal and monetary policies, we’d be on the road to robust economic recovery and jobs creation.

From the Coach’s Corner, here’s a related article: Federal Reserve Typifies What’s Wrong with Economy 

“This is a disastrous monetary policy; it’s kamikaze monetary policy”

-Peter Schiff

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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.

Why Is Transparency Crucial at the Federal Reserve?



Furtive actions by the Federal Reserve show the need for a change to transparency.

Then-Federal Reserve Chairman Ben Bernanke argued in 2012 that transparency would lead to a “nightmare scenario” in the Fed’s monetary policies.

But many others, including me, feel the Federal Reserve has overtly overstepped its monetary authority – by actually undermining the authority of Congress on fiscal policy issues. Not to mention the bogus printing of money that only benefits Wall Street insiders.

ID-100144214 Stuart MilesDespite opposition from the Federal Reserve, the U.S. House of Representatives is acting responsibly for the welfare of the nation.

By an overwhelming 327-98 margin, the House passed an audit bill, which sits in oblivion the U.S. Senate.

“I don’t know how anybody could be against transparency,” said bill sponsor Rep. Ron Paul (R-Texas).

He justifiably insisted American voters should be allowed to learn details about the Federal Reserve’s behavior – which includes massive bank-rescue deals and financial support of foreign central banks.

“They’re sick and tired of what happened in the bailout and where the wealthy got bailed out and the poor lost their jobs and they lost their homes,” said Rep. Paul.

You might recall the nonpartisan Government Accountability Office (GAO) audited the central bank in 2010 as required by an amendment introduced by Sen. Bernie Sanders (D-Vermont).

“As a result of this audit, we now know that the Federal Reserve provided more than $16 trillion in total financial assistance to some of the largest financial institutions and corporations in the United States and throughout the world,” said Sen. Sanders.

The bill directs the GAO to fully audit the Federal Reserve. It would also eliminate the transparency exemptions that protect the Federal Reserve and the Federal Open Market Committee.

However, published reports indicate Democrats in the U.S. Senate will ignore the need for transparency. That’s despite the wisdom of Sen. Sanders.

Several Democrats in the House and Senate echo the propaganda of Mr. Bernanke – they feebly argue transparency would emasculate the Federal Reserve and would damage the central’s bank’s image.

“That will politicize the making of such policy, and I think it’s a bad way to go,” said the House Minority Whip, Rep. Steny Hoyer (D-Maryland).

Really?

It’s past time that he and Democrats in the Senate and members of the Federal Reserve stop acting like a ruling class. This is a democracy. Transparency is crucial.

From the Coach’s Corner, related articles on the Federal Reserve:

Why Federal Reserve’s QE3 Didn’t Help U.S. Economy — The Federal Reserve showed terrible judgment in printing billions of dollars for cheap money. Among 314 million+ Americans, just a relatively chosen few — big investors — benefited from the Fed’s third edition in quantitative easing (QE). The Fed is slowing its printing of money, but it’s too late.

Federal Reserve Typifies What’s Wrong with Economy — There’s still a troubling schism in U.S. politics, monetary policy and management of the economy. The Federal Reserve keeps printing money, which risks inflation and only encourages more bad monetary policy. For another example, consider Bloomberg ‘s shocking expose: “Wall Street Aristocracy Got $1.2 Trillion in Loans from Fed.” Yes, $1.2 trillion in secrecy.

Does the Federal Reserve Understand 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 couple of decades. But small businesses have really suffered during and after the Great Recession.

“A politician is just like a pickpocket. It’s almost impossible to get one to reform.”

-Will Rogers

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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.

Photo courtesy of Stuart Miles at www.freedigitalphotos.net

Federal Reserve Typifies What’s Wrong with Economy



There’s still a troubling schism in U.S. politics, monetary policy and management of the economy. The Federal Reserve finally stopped printing money in 2014, which only encouraged more bad monetary policy.

For another example, consider Bloomberg ‘s shocking expose: “Wall Street Aristocracy Got $1.2 Trillion in Loans from Fed.” Yes, $1.2 trillion in secrecy.

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.

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 another article, I posed this question: Does the Federal Reserve Understand Small Business? The answer is absolutely not.

“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

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.

Mitt Romney had it right in the 2012 presidential campaign when he said he’d fire Ben Bernanke. Mr. Bernanke’s replacement isn’t any better. Common sense is lacking at the Fed.

From the Coach’s Corner, here’s more about the Fed’s poor stewardship:

Why Is Transparency Crucial at the Federal Reserve? — Furtive actions by the Federal Reserve show the need for a change to transparency. Federal Reserve Chairman Ben Bernanke argued in 2012 that transparency would lead to a “nightmare scenario” in the Fed’s monetary policies. But many others, including me, feel the Federal Reserve has overtly overstepped its monetary authority.

Why Federal Reserve’s QE3 Didn’t Help U.S. Economy — The Federal Reserve showed terrible judgment in printing billions of dollars for cheap money. Among 314 million+ Americans, just a relatively chosen few — big investors — benefited from the Fed’s third edition in quantitative easing (QE). The Fed stopped its printing of money, but it’s too late.

“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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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.

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 couple of decades. 

ID-100233085 patrisyuBut small businesses have really suffered during and after the Great Recession. 

The Federal Reserve simply doesn’t understand why its policies leaves small businesspeople feeling as though they’re restrained in chains.

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 Tips to Win Your Entrepreneurial (Marathon) Race — If you fear losing your entrepreneurial race, there are right steps to take and there are wrong. The good news is not all small businesspeople have cash flow issues. They’ve run the race and survived the marathon.

“Dreams come true if you survive the hard times!”
-George William Curtis

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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.

Photo courtesy of patrisyu at www.freedigitalphotos.net

Is Your Great Recession Over? The NBER Says It Ended in 2009

Updated March 7, 2015 –

In looking back, what a pleasant surprise it was to open my e-mail on Sept. 20, 2010. 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. I had similar thoughts and reactions, and wrote similar comments in news media articles years before. 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.

Years later, the majority of 1,300 global CEOs aren’t confident about economic conditions.

Dennis Nally, Chairman of PricewaterhouseCoopers International Ltd., reveals the results of PwC’s 18th Annual Global CEO Survey from the World Economic Forum annual meeting in Davos, Switerland in 2015.

See Mr. Nally’s presentation:

Getting back to the U.S. economy, the economy still feels worse – really worse. The unemployment rate is 5.5 percent — down from a 9.6 percent unemployment in 2010 – when 15 million were jobless.

But there are now 23 million unemployed or under-employed, wages are still flat, home values are down while foreclosures and bankruptcies are continuing. The continuing U.S economic forecasts aren’t great.

On March 3, 2015, Peter Morici, Ph.D. — an economist and business professor at the University of Maryland, national columnist and five-time winner of the MarketWatch best forecaster award — wrote:

Many of the health insurance plans Americans could afford through the federal exchange have deductibles and copays so high as to render them useless.

In the 28 states that have adopted ACA extensions of Medicaid, many able bodied men are jobless and not seeking employment in part because that program gives them free health insurance.

Millions of men between the ages of 25 and 65 are on the sidelines, collecting other government largess, not paying taxes and imposing enormous costs on the economy.

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. Again, 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. That’s also why the NBER indicates any further declines would count as a new recession.

This sour economy 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 sections:

“Good judgment comes from experience, and a lot of that comes from bad judgment.”
-Will Rogers

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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.

Is it Time to Police Pay at Wall Street Banks?



Updated March 4, 2015 –


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.

The Federal Reserve has been trying to discourage excessive risk-taking by many banks, including their permissive lending by regulating bank executives’ pay. More than 5,000 banks would be covered.

Such practices helped lead to the deepest financial crisis in decades. The behavior was so bad — in addition to the billions in Obama Administration bailouts — it also helped exacerbate problems with the agency that insures consumer accounts to $250,000.

ID-10076594 ZuzzuilloFederal Deposit Insurance Corp. was forced to consider borrowing money from the U.S. Treasury. FDIC’s bank insurance fund paid out $70 billion through 2013 after 123 banks collapsed by Thanksgiving in 2009.

Since then, big bank profits skyrocketed and bank employees are still getting massive pay and bonuses.

The 2013 profits were up an aggregate 21 percent — $74.1 billion for Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan Stanley and Wells Fargo.

Uninsured business accounts

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, Ph.D., a professor at the University of Maryland School of Business and former chief economist at the U.S. 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.”

SWAPS

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” wrote Dr. Morici. “That’s right – Ben Bernanke is taxing grandma to bail out Goldman Sachs.”

Five years later, grandma is still getting negligible interest on her CD.

Credit Cards

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 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:

  1. Strictly reduce the amount of risk that banks undertake.
  2. 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?

From the Coach’s Corner, here’s a related article:

Legal War on Wall Street Chicanery Isn’t Finished — Updated Sept. 9, 2014 Wall Street continues to prove again and again that it needs a moral compass. True, JP Morgan Chase was fined $20 billion in fines in 2013 and Bank of America was fined more than $16 billion for their companies’ behavior in Wall Street’s collapse in the Great Recession.

“The point is ladies and gentlemen that greed, for lack of a better word, is good.”

-Gordon Gekko, a character in the movie, “Wall Street”

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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.

Image courtesy of Zuzzuillo at www.freedigitalphotos.net


Seattle business consultant Terry Corbell provides high-performance management services and strategies.