Big Banks Profit While Main Street Suffers

If anyone doubts that the Western world’s monetary order is rigged to enrich the banking system, the first quarter financial reports of America’s top banks should disabuse any unbelievers.

The Financial Times reported that four of the five big U.S. trading banks had a combined revenue of $19.4 billion in the first quarter of 2015. Goldman Sachs had a 14.7 percent* return on its equity in the first quarter, while J.P. Morgan, the nation’s largest bank, earned $5.91 billion (or $1.45 a share), up 3.6% from a year earlier.** Revenues for J.P. Morgan grew 4% to $24.8 billion.

The enthusiastic coverage of the big banks’ healthy first quarter proceeds and the chest-thumping of its bank executives left out, not surprisingly, the real reason for their windfall gains – the Federal Reserve. The big banks have been the chief beneficiaries of the Fed’s easy monetary policy since the start of the financial crisis.

The Fed’s “zero interest rate policy” (ZIRP) and its “quantitative easing” (QE) program have been the catalyst for the large banks’ recent record performance. Ostensibly, these policies were instituted to assist the economy in its recovery from the Great Recession; however, in actuality they have been done to save the big banks from collapse while the economy has been flooded with billions of increasingly worthless dollars causing significant price inflation.

Low interest rates have enabled the banksters and financial houses to borrow at next to nothing and invest in all sorts of ventures, many of which are highly risky. Easy money is also the cause for the huge run up in assets prices and the highs in nominal stock prices.

Worse, ZIRP has allowed the federal government to sustain its ridiculous level of spending, borrowing what it cannot raise in taxes at a near zero rate of interest. When interest rates do rise, the federal government will most likely default, bringing the banks down with them.

While the big banks and Wall Street have done quite well from the Fed’s massive money printing, everyone else has suffered and has seen their standard of living plummet even from official estimates.

The Federal Reserve reported a slowdown in hiring in March, a big drop off in industrial production, and lower housing starts in the first quarter–to mention just a few troubling statistics. Things are getting to the point that the Fed is reconsidering whether it should raise interest rates in the second half of the year as it had hoped to do. Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, admitted that “Data available for the first quarter of this year have been notably weak.”***

The first quarter sizable earnings of the big banks are an example of what a number of commentators have termed “crony capitalism.” Through government assistance, businesses earn wealth not by pleasing customers and satisfying their needs, but by currying favors from the state. In the banksters’ case, instead of making wise and prudent loans, they receive largesse in the form of billions of Federal Reserve notes.

Not only is such a system immoral, but it gives legitimate market activity – those firms that do not receive state assistance – a bad rap as profitable enterprises are lumped in with state favorites. This ultimately leads to greater regulation as calls for the government to tax “windfall profits” would affect all firms–even those who earned rightful profits.

The solution to crony capitalism and the ill-gotten gains of the banking system is not greater oversight, but instead the abolition of the Federal Reserve and a return to sound money based on gold or silver. Under such a system, banks and financial houses would profit only if they satisfied consumers’ wants.

In the banks’ case, this would mean safeguarding depositors’ money and making prudent loans with the funds they were entrusted with to lend. For those financial institutions that succeed at such tasks, profits would be their reward; those who do not and mismanage investment funds would be out of business and allowed to fail. Banks would operate under the same economic laws as any other enterprise.

The prevailing system of crony capitalism which benefits the 1% must be exposed for the grand redistribution scheme that it has long been. Only when bankers earn their wealth as Main Street does will America return to a just and sound monetary order.

*Tom Braithwaite & Ben McLannahan, “Goldman in Robust Return on Equity Showing,” Financial Times, 17 April 2015, 14

**Ciaran MCEvoy, “JPMorgan Profit Beats Wall St. Views, As Does Wells Fargo by Shrinking Less,” Investor’s Business Daily, 15 April 2015, A1.

***Jon Hilsenrath, “Fed Shies Away from June Rate Hike,”  The Wall Street Journal,  17 April 2015.

The views expressed in this opinion article are solely those of their author and are not necessarily either shared or endorsed by WesternJournalism.com.

This post originally appeared on Western Journalism – Equipping You With The Truth

Negative Interest Rates: A Brilliant Concept!

Editor’s note: This article first appeared at Forbes.com.

I have to admit that initially I was uninterested, even close-minded, about the negative yield being offered on a growing share of European sovereign debt. “It must be a short-term aberration,” I thought at first. “Completely nutso,” I sniffed dismissively as the phenomenon spread. “Who in their right mind would invest in a financial instrument that would guarantee a loss of principal?” Upon calmer reflection, I would shrug and think, “Well, to each his own, but none of those topsy-turvy debt instruments for me.”

More recently, I have taken a more tolerant attitude toward negative-yield debt. As I teach my Econ 101 students, the key to success in the economic marketplace is to set aside your own preconceptions and preferences and to acknowledge that the consumer is always right. If some of my fellow human beings want investment products that repay them less than their principal, who am I to find fault?

In fact, the more I think about it, I find myself attracted to the idea of offering such a service to satisfy this unfathomable consumer appetite for negative yields. Maybe I should announce that anybody out there who would like to send me money on the condition that I return less than all of it to them in the future is free to do so (as long as they include payment for any incidental transaction costs). From that perspective, negative interest rates are quite ingenious.

Actually, (I’m going to attempt to be serious now) what really got me thinking about the growing phenomenon of negative-yield debt was how to explain the concept to my 101 students. The traditional introduction to interest rates involves three basic components. The first is the “originary” rate of interest—the time preference between the present and the future. In years of teaching economics, I’ve never yet had a student express a preference for a hundred dollars next year over the same amount today; and I doubt I would get a different response if I lowered the payoff in the future to $99.90. Conclusion: The time preference of humans doesn’t account for the increasingly common negative-yield phenomenon.

Perhaps, then, we can solve the mystery by examining the second component of interest rates—the risk factor. Students readily grasp the rationality of lenders adding a risk premium to interest rates to compensate for lending to higher-risk borrowers. Traditionally, the primary function of financial intermediation has been to assess the creditworthiness of borrowers. That isn’t always the case at present, with government citing “disparate impact” and penalizing lenders who dare to consider risk before issuing loans. I can get my head around a risk premium of zero for government debt, since central banks can use QE and other techniques to ensure that governments have unlimited ability to return to its creditors however many monetary units it has borrowed. But a negative yield? One could certainly argue that nongovernmental borrowers, not having their own central banks, can’t give 100 percent guarantees that they’ll be able to repay what they borrow, while governments do; therefore, some creditors feel safer contracting for a negative yield from a government than a positive yield from a private entity. The problem with this line of thinking, though, is that creditors could lock cash in secure storage and know that they would get all of it back, rather than paying government to borrow their money.

The third component of interest rates is the inflation premium, which creditors sometimes demand to protect against currency depreciation. The late Franz Pick used to call bonds “guaranteed certificates of confiscation” because, between depreciation of the monetary unit and government taxation of interest income, bondholders’ purchasing power was systematically and ruthlessly transferred to government. Even today, in the bizarro world of central banks trying to “achieve” positive inflation (i.e., currency depreciation), one would think that creditors would insist on an inflation premium to offset the targeted depreciation. Instead, we have the spectacle of widespread acceptance of a nominally negative return on paper denominated in a currency that the relevant central bank is actively trying to depreciate.

In sum, elementary interest rate theory doesn’t solve the puzzle of why there are negative-yield instruments, so we need to look elsewhere. Perhaps the holders of negative-yield sovereign debt instruments anticipate earning capital gains due to increased demand for negative-yield securities in the future. This seems like a bet on the “greater fool theory” with central banks playing the part of the “fool.” I suppose it’s possible that in our strange new world of unlimited QE, chronic ZIRP, negative interest rates, etc., yields may become even more negative in the future, thereby rewarding those who solved earliest this counterintuitive riddle. Such a race deeper into the rabbit hole of negative yields may happen, but timid (blind?) little me won’t be on the buy side of those deals.

One other possible explanation for the phenomenon of negative interest rates is that central banks are trying to make their currency less attractive in currency exchanges. This is what makes the most sense to me—central bankers hope that negative interest rates will be an effective tool of currency manipulation in a world of competitive devaluations.

Negative interest rates are a weird and alarming symptom of profound economic dysfunction. In a healthy economy, interest rates coordinate production between the present and the future according to people’s composite time preferences. Today, those vitally important market signals are mangled, broken, shattered. Maybe negative-yield instruments will pay off in ways I don’t yet perceive, but I’m content to keep my distance from them and let others play that bizarre game. I’d rather preserve my sanity.

This post originally appeared on Western Journalism – Equipping You With The Truth

What Will You Do If Your Dollars Stop Being Accepted In America?

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What will you do when the dollar no longer spends? With Obama letting in the floodgates of new immigrants from our Southern border, expect welfare rolls to explode, with trillions more in taxpayer funding triggering possible runaway inflation.

And if that happens, do you know how much a cup of coffee might be? About $500 trillion dollars per cup–and that is for old, cold bitter Java. If you want Starbucks lattes, expect to pay 2 quadrillion dollars.

Don’t laugh and don’t say it’s impossible. Rhodesia used to be the Garden of Eden of Africa. Shortly after adopting socialist money schemes, and sporting the new name of Zimbabwe, their coffee cost more than that. So did their gasoline and milk and eggs. After a while, the money stopped spending altogether.

But the United States is actually deeper in debt than Zimbabwe was before their collapse. The United States of America used to be richest nation in modern history.

So I ask you again: what will you do if your paper dollars become worthless?

Here’s one solution: Buy a few thousand dollars in gold coins as a possible hedge against runaway inflation; and if the day comes that coffee costs a trillion dollars, never fear. For your gold would likely be worth well north of several quadrillion dollars. And no matter how much higher the dollar inflates, your gold, if it follows traditional patterns, would keep ahead of the curve into quintillions of dollars and so forth.

But without gold, your entire net worth, even if you are Bill Gates, could be worthless. Totally worthless.

To learn more about investing in gold coins, you may visit the web pages of any reputable gold coin dealers. One we like is: www.SwissAmerica.com.

The views expressed in this opinion article are solely those of their author and are not necessarily either shared or endorsed by WesternJournalism.com.

This post originally appeared on Western Journalism – Informing And Equipping Americans Who Love Freedom

What Did My Parents Ever Do To The Federal Reserve?

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In September 1993, President Bill Clinton reassured his radio audience that “if you work hard and play by the rules, you’ll be rewarded with a good life for yourself and a better chance for your children.” Picking up that theme over 18 years later, President Barack Obama affirmed that “Americans who work hard and play by the rules every day deserve a government and a financial system that does the same.” The trouble is neither the government nor the financial system backed by the Federal Reserve rewards people like my parents, who have worked hard and played by the rules their entire lives–only to have their savings wither away.

Instead, Federal Reserve officials and the intelligentsia who support them are continuously working to make their lives more difficult, frightening the masses of what shoppers look for every day—lower prices. Price deflation, the cry, is disastrous for the economy. They worry that lower prices will reduce profits, leading to shutdowns and lay-offs, and that lower prices make it harder for people to pay their debts. Sound economic theory and history, however, both indicate that price deflation is nothing the social economy needs to fear. If prices fall because the economy is more productive, this is unambiguously positive. However, if prices fall because people spend less, their desire is for larger real cash balances. Falling prices help them achieve their goal, which precisely is the purpose of economic activity.

Lower prices and wages can make it harder to pay fixed debt. This, however, serves as an excellent incentive to stay out of debt in the first place, as my parents have done as a result of significant sacrifice. Before creating even more money out of thin air to ward off lower overall prices, we should at least consider some of the ethical issues involved.

Many men from my father’s generation are not unlike John Adams, who wrote to his wife that he “must study politics and war, that our sons may have liberty to study mathematics and philosophy.” My father embarked on 20 years of hard labor in a meat packing plant providing for his family until he lost his job due to his union pricing him and his fellow workers out of a job. When his plant closed in the mid-1980s, he embarked on a second successful career with my mother, operating their own barbecue business for another 20-plus years. I saw firsthand the challenges they faced trying to keep quality up and costs down, while producing top-drawer barbecue meat and sandwiches for a demand that was always uncertain. I saw the stress on my mother’s face one week in the early days when they netted a mere $15 before taxes. My father indeed “studied” meat packing and barbecue, in part, so I could go to college and become an economist and college professor.

Additionally, mom and dad had the foresight and character to make the sacrifices necessary to stay out of debt. Indeed, they are Paul Krugman’s worst nightmare—a family determined not to live beyond their means. Now retired, like many in their generation, they are enjoying life the best they can on an almost fixed income. Because they have no debt, they have been able to live without tremendous economic hardship thus far. The Federal Reserve’s inflationism, however, increasingly makes life for them more difficult as steady price inflation daily chips away at their livelihood. Since 2009, for example, the Consumer Price Index has increased over nine percent. This masks, however, significantly larger price increases for important necessities. Prices of dairy products are up almost 17 percent since 2009. Gasoline prices are up almost 11 percent despite the recent decline. Prices for meat, poultry, fish, and eggs have increased a whopping 26 percent since 2009. Higher overall prices do not help people like my parents at all. They instead act as a thief, snatching wealth away from them in the form of diminished purchasing power. What they long for is to see the value of their savings increase. Far from creating economic hardship for them, lower overall prices would be a boon.

Both sound economics and ethics, therefore, demand that we give up the anti-deflation rhetoric and the inflation it fuels. Charity demands that we cease striking fear into the hearts of the masses, softening them up for ever higher prices. The Federal Reserve should stop punishing people like my parents who have worked hard and played by the rules their whole lives. After all, what did they ever do to Greenspan, Bernanke, and Yellen?

Dr. Shawn Ritenour is a professor of economics at Grove City College, contributor to The Center for Vision & Values, and author of “Foundations of Economics: A Christian View.”

The views expressed in this opinion article are solely those of their author and are not necessarily either shared or endorsed by WesternJournalism.com.

This post originally appeared on Western Journalism – Informing And Equipping Americans Who Love Freedom

Don’t ‘Audit The Fed’ – Abolish It

Photo credit: International Monetary Fund (Flickr)

In recent remarks to the Senate Banking Committee, Federal Reserve Chairwoman Janet Yellen (pictured above) was her typical evasive and non-committal self when the topic of interest rate hikes were broached. When the subject of potential oversight of the Fed came up, however, Ms. Yellen became quite forthright in her response.

When asked about a bill introduced by Kentucky Senator Rand Paul to “Audit the Fed,” Ms. Yellen declared: “I want to be completely clear: I strongly oppose ‘Audit the Fed.’”  Ms. Yellen defended her position on the grounds (which have been given by every previous Fed Chairman) that oversight would lead to politicized monetary decision making, thus compromising the central bank’s “independence.”

Senate Banking Chairman, Richard Shelby, R-Ala., countered the Chairwoman, saying “there is an even greater need for additional oversight” of the Fed since the onset of the financial crisis in 2007.

Ms. Yellen, her predecessors, and every other Fed apologist are simply wrong when they assert that the central bank is an independent agency that is free of political influence. The Federal Reserve System was created by an act of Congress (1913) and can ultimately be “reformed,” altered, and/or abolished by Congressional fiat if so desired.

That Congress does not oversee Fed policy is a result of its charter, which was originally crafted by the Big Banksters of the time (mostly the Rockefellers and Morgans) in concert with their bought-and-paid-for politicians. The lack of oversight was a deliberate part of their plan to give bankers and financers free reign to conduct monetary policy for their own benefit.

The Federal Reserve is and has always been a political creature designed for the benefit of financial elites. It is a highly privileged cartel with monopoly control of the nation’s money supply. Unlike the propaganda that emits from Fed officials, the central bank was instituted to protect banksters from financial collapse and bank runs. Fine-tuning the economy, reducing unemployment, or fighting inflation are all ancillary concerns for the Fed.

These are the simple facts that are deliberately kept from the public at large by the political establishment, academia, and the media.

The Audit the Fed movement, which began in earnest with Ron Paul’s first presidential run, is a wrongheaded approach to solve the nation’s ongoing financial crisis. Senator Rand Paul’s bill is mostly grandstanding to bolster his status among the Republican Party’s populist contingent in his anticipated race for the nomination.

In fact, instead of meaningful reform, greater public oversight of the Fed would most likely lead to worse results. Every Congressman and Senator would be pressuring the central bank to fund their pet projects. Can one imagine what the growth rate of the money supply would be if 535 ravenous politicians had a say in the conduct of monetary policy?!

Those who want to reverse the nation’s economic malaise should seek the Federal Reserve’s abolition and advocate its replacement with a de-politicized monetary order free of central banking. Such a system would most likely be based on a commodity (gold and/or silver) where “money producers” are free to engage in the creation of the “best money” and banking services to satisfy customers’ needs.

In such an order, banks would function as any other enterprise by profit and loss. If banks loan funds wisely, they will succeed; if not, they will fail and go out of business, replaced in the marketplace by more savvy entrepreneurs. There will be no bailouts at taxpayers’ expense for reckless financial speculation. Money and banking would become a sound and honest undertaking.

To actually believe that an Audit the Fed initiative would become law is beyond naïve. The political establishment will never voluntarily relinquish or allow any legitimate oversight of one of its chief pillars of power.

Instead of seeking change via politics, reformers must first change the climate of public opinion–which can only be accomplished when the prevailing ideology is debunked. Until the Federal Reserve is seen as an engine of inflation and the creator of economic disorder that needs to be eradicated, America’s financial woes will, unfortunately, continue.

Antonius Aquinas@AntoniusAquinas

The views expressed in this opinion article are solely those of their author and are not necessarily either shared or endorsed by WesternJournalism.com.

This post originally appeared on Western Journalism – Informing And Equipping Americans Who Love Freedom