The Mendacity of the Fed and the Ruination of Capitalism

David Stockman tells it like it is.  In his interview and from his articles posted on his website, “Contra Corner”, Mr. Stockman gives the cold hard and politically incorrect version of what the Federal Reserve is up to in all its misdirected glory and auto-assumed powers.

“The Fed runs everything; it has pegged, manipulated, medicated and manhandled the entire financial system. There is not an honest interest rate left…..A Regime of crony capitalism, for both sides… using the tools of the State the budget and the central bank…to accomplish ends that would not be remotely feasible, reasonable or likely in a free market.”  So says Mr. Stockman. “The Federal Reserve has taken over and runs the GDP.”

Mr. Stockman opines:

“Even in those halcyon days of Keynesianism, few in Congress believed that they had mandated the Fed to pursue rigid quantitative targets for inflation and unemployment—let alone precisely a 2% annual gain in the PCE less food and energy or 6.5% on the U-3 measure of unemployment, which didn’t even exist then…And most certainly, the Congressional majority that passed the act (Humphrey Hawkins) did not in its wildest imagination foresee that the route to the quantitative inflation and unemployment targets it didn’t mandate would be through the canyons of Wall Street and the made-up monetary doctrine of “wealth effects” as the surest route to their achievement.”

Describing the ill effects of this Federal Reserve overreach:

“The business sector debt stood at about $11 trillion on the eve of the 2008 crisis, and has now vaulted upward to $13.5 trillion. Yet nearly the entire gain has gone into the preferred financial engineering games of bubble finance -- namely, LBOs, (leveraged buyouts)  cash M&A (mergers and acquisitions) deals and stock buybacks. Indeed, in the latter case the big corporates are now borrowing hand-over-fist to fund buybacks at nearly a $1 trillion annual rate. Compare that to investment in productive plant and equipment where real outlays are still running $100 billion or 8% below its late 2007 level.”

Day to day, hour to hour, the market participants are concerned with essentially one thing. “What is the Fed up to today?”  Case in point: on the final day of the first quarter of this year, Janet Yellen decided to break a record.  The Federal Reserve conducted the largest POMO (permanent open market operation) in history to goose the markets. It was decided it would happen. It worked.  Banks applauded.  Fund manager quarterly performances were maximized. 

In free markets, as Hayek described, multitudes and myriads of independent consumers, producers and planners act using their own thoughts and motivations directed by their own cogitations and information.  The aggregate of all this knowledge goes beyond the ability of any central planner to “know.”  Central Planers do not, cannot know what the multitude, the myriad of independent spenders, consumers and creators know.

When Central Planners “decide,” they consequently and deliberately assist some and hurt others.  No era has proven this more clearly that the past 5 years of Federal Reserve “planning.”  Retirees, savers and holders of dollars have been hurt.  Speculators, stock investors, CEOs with stock options, and borrowers have been helped.  It was decided that that should occur.  It did. Some hurt, others helped.

Stockman describes the current condition.  There is “…no intellectual integrity left …understanding of sound money and fiscal rectitude and free markets is lost.  (It’s) All is about what it takes, by the day, by week and quarter to keep the bubble going….”

Yet economic planning by the Federal Reserve only begins with a macroeconomic impact on the individual.  The effects then dove tail off into not so easily detected ramifications on daily life and life’s course itself. As Hayek notes, “Economic control is not merely control of a sector of human life which can be separated from the rest; it is the control of the means for all our ends. And whoever has sole control of the means must also determine which ends are to be served, which values are to be rated higher and which lower, in short, what men should believe and strive for.” (Hayek "Road to Serfdom" p 68 69)  In other words, Janet Yellen is running your life.  How did we get in that position?

Mr. Stockman offers this: “To pretend, as does Yellen and most of the monetary politburo, that they must plow ahead printing money at lunatic rates because Congress so mandated it, is the height of mendacity.”  It was not the intent of the original Federal Reserve mandate, nor the intent of the so often quoted current mission statement crafted from the Humphrey Hawkins Act (HHA), that in any way sponsors such powers and goals as assumed by today’s Federal Reserve.  Additionally, and seemingly unnoticed, is that the world has changed since the mid 1970’s.  The international economic linkages, the emergence of China and the Pacific Rim as economic powers, the over leveraging, et al that caused the systemic threat in 2007 and 2008 all are new considerations.  The guidances from the HHA are dated and flawed.

Hayek pondered and then answered, “…what is the best way of utilizing knowledge initially dispersed among all the people is at least one of the main problems of economic policy -- or of designing an efficient economic system.”

“The answer to this question is closely connected with that other question which arises here, that of who is to do the planning. It is about this question that all the dispute about ‘economic planning’ centers. This is not a dispute about whether planning is to be done or not. It is a dispute as to whether planning is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals. Planning in the specific sense in which the term is used in contemporary controversy necessarily means central planning—direction of the whole economic system according to one unified plan. Competition, on the other hand, means decentralized planning by many separate persons. The halfway house between the two, about which many people talk but which few like when they see it, is the delegation of planning to organized industries, or, in other words, monopoly.” (“The Use of Knowledge in Society”, Hayek)

But we have it different today.  Mr. Stockman explains:

“In short, the Fed has interposed itself throughout the very warp and woof of the nation’s business economy. It does this in a manner that makes a mockery of our purported mechanism of economic governance -- that is to say, the spontaneous actions and decisions by millions of producers, consumers, investors and savers on the free market in response to honest price signals arising from the vineyards of commerce and industry. Instead, in a manner like the ‘caribou’ soccer of 6-years olds, today’s economic actors have no choice except to ceaselessly chase the Fed around the economic fields.”

Janet Yellen, and Ben Bernanke before her, are nothing more than lemming herders looking for a cliff.  They have promoted debt creation which is tantamount to future consumption denied.  We borrow from the future to pay for today’s “punch bowl.”

Conclusion: The Federal Reserve has monopolized economic planning and in so doing, controls not just interest rates and other macro economic levers, but its influence spreads to and culminates within the individual’s life decision making process. In short, Janet Yellen and the misdirected unauthorized whims of the Federal Reserve are running your life. Are you in the group they decided to help or hurt?

David Stockman tells it like it is.  In his interview and from his articles posted on his website, “Contra Corner”, Mr. Stockman gives the cold hard and politically incorrect version of what the Federal Reserve is up to in all its misdirected glory and auto-assumed powers.

“The Fed runs everything; it has pegged, manipulated, medicated and manhandled the entire financial system. There is not an honest interest rate left…..A Regime of crony capitalism, for both sides… using the tools of the State the budget and the central bank…to accomplish ends that would not be remotely feasible, reasonable or likely in a free market.”  So says Mr. Stockman. “The Federal Reserve has taken over and runs the GDP.”

Mr. Stockman opines:

“Even in those halcyon days of Keynesianism, few in Congress believed that they had mandated the Fed to pursue rigid quantitative targets for inflation and unemployment—let alone precisely a 2% annual gain in the PCE less food and energy or 6.5% on the U-3 measure of unemployment, which didn’t even exist then…And most certainly, the Congressional majority that passed the act (Humphrey Hawkins) did not in its wildest imagination foresee that the route to the quantitative inflation and unemployment targets it didn’t mandate would be through the canyons of Wall Street and the made-up monetary doctrine of “wealth effects” as the surest route to their achievement.”

Describing the ill effects of this Federal Reserve overreach:

“The business sector debt stood at about $11 trillion on the eve of the 2008 crisis, and has now vaulted upward to $13.5 trillion. Yet nearly the entire gain has gone into the preferred financial engineering games of bubble finance -- namely, LBOs, (leveraged buyouts)  cash M&A (mergers and acquisitions) deals and stock buybacks. Indeed, in the latter case the big corporates are now borrowing hand-over-fist to fund buybacks at nearly a $1 trillion annual rate. Compare that to investment in productive plant and equipment where real outlays are still running $100 billion or 8% below its late 2007 level.”

Day to day, hour to hour, the market participants are concerned with essentially one thing. “What is the Fed up to today?”  Case in point: on the final day of the first quarter of this year, Janet Yellen decided to break a record.  The Federal Reserve conducted the largest POMO (permanent open market operation) in history to goose the markets. It was decided it would happen. It worked.  Banks applauded.  Fund manager quarterly performances were maximized. 

In free markets, as Hayek described, multitudes and myriads of independent consumers, producers and planners act using their own thoughts and motivations directed by their own cogitations and information.  The aggregate of all this knowledge goes beyond the ability of any central planner to “know.”  Central Planers do not, cannot know what the multitude, the myriad of independent spenders, consumers and creators know.

When Central Planners “decide,” they consequently and deliberately assist some and hurt others.  No era has proven this more clearly that the past 5 years of Federal Reserve “planning.”  Retirees, savers and holders of dollars have been hurt.  Speculators, stock investors, CEOs with stock options, and borrowers have been helped.  It was decided that that should occur.  It did. Some hurt, others helped.

Stockman describes the current condition.  There is “…no intellectual integrity left …understanding of sound money and fiscal rectitude and free markets is lost.  (It’s) All is about what it takes, by the day, by week and quarter to keep the bubble going….”

Yet economic planning by the Federal Reserve only begins with a macroeconomic impact on the individual.  The effects then dove tail off into not so easily detected ramifications on daily life and life’s course itself. As Hayek notes, “Economic control is not merely control of a sector of human life which can be separated from the rest; it is the control of the means for all our ends. And whoever has sole control of the means must also determine which ends are to be served, which values are to be rated higher and which lower, in short, what men should believe and strive for.” (Hayek "Road to Serfdom" p 68 69)  In other words, Janet Yellen is running your life.  How did we get in that position?

Mr. Stockman offers this: “To pretend, as does Yellen and most of the monetary politburo, that they must plow ahead printing money at lunatic rates because Congress so mandated it, is the height of mendacity.”  It was not the intent of the original Federal Reserve mandate, nor the intent of the so often quoted current mission statement crafted from the Humphrey Hawkins Act (HHA), that in any way sponsors such powers and goals as assumed by today’s Federal Reserve.  Additionally, and seemingly unnoticed, is that the world has changed since the mid 1970’s.  The international economic linkages, the emergence of China and the Pacific Rim as economic powers, the over leveraging, et al that caused the systemic threat in 2007 and 2008 all are new considerations.  The guidances from the HHA are dated and flawed.

Hayek pondered and then answered, “…what is the best way of utilizing knowledge initially dispersed among all the people is at least one of the main problems of economic policy -- or of designing an efficient economic system.”

“The answer to this question is closely connected with that other question which arises here, that of who is to do the planning. It is about this question that all the dispute about ‘economic planning’ centers. This is not a dispute about whether planning is to be done or not. It is a dispute as to whether planning is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals. Planning in the specific sense in which the term is used in contemporary controversy necessarily means central planning—direction of the whole economic system according to one unified plan. Competition, on the other hand, means decentralized planning by many separate persons. The halfway house between the two, about which many people talk but which few like when they see it, is the delegation of planning to organized industries, or, in other words, monopoly.” (“The Use of Knowledge in Society”, Hayek)

But we have it different today.  Mr. Stockman explains:

“In short, the Fed has interposed itself throughout the very warp and woof of the nation’s business economy. It does this in a manner that makes a mockery of our purported mechanism of economic governance -- that is to say, the spontaneous actions and decisions by millions of producers, consumers, investors and savers on the free market in response to honest price signals arising from the vineyards of commerce and industry. Instead, in a manner like the ‘caribou’ soccer of 6-years olds, today’s economic actors have no choice except to ceaselessly chase the Fed around the economic fields.”

Janet Yellen, and Ben Bernanke before her, are nothing more than lemming herders looking for a cliff.  They have promoted debt creation which is tantamount to future consumption denied.  We borrow from the future to pay for today’s “punch bowl.”

Conclusion: The Federal Reserve has monopolized economic planning and in so doing, controls not just interest rates and other macro economic levers, but its influence spreads to and culminates within the individual’s life decision making process. In short, Janet Yellen and the misdirected unauthorized whims of the Federal Reserve are running your life. Are you in the group they decided to help or hurt?