If there is anything Wall Street banks crave is relief. Primarily relief from the potential for failure and, next, relief from holding much, if any, equity capital. These banks like their capital tiny and their profits huge. Losses should be socialized. After all, we want the ATMs to keep spitting out cash.
The SLR will be allowed to expire at the end of this month before most of us knew what it was—”supplementary leverage ratio.” When covid hit the fan last March, as the WSJ explains, “The ratio measures capital—funds that banks raise from investors, earn through profits and use to absorb losses—as a percentage of loans and other assets. Without the exclusion, Treasurys and deposits count as assets [not equity].”
No SLR means less leverage and lower profits for the big banks. But, the Federal Reserve must be careful, the yield on the US ten-year note has exploded to 1.72 percent.
Not everyone would see it this way, however, Larry McDonald, who publishes the Bear Traps Report, told Ed Harrison on Real Vision, over the “last 10 years, just about everything they’ve [The Fed] done from a monetary point of view has been deflationary.”
He continued, “The problem is there’s 64 trillion of GDP outside the United States, 20 trillion in and the amount of global debt on the planet Earth is denominated in dollars, especially in EM [emerging markets] countries, it’s at least 13 trillion, 15 trillion bucks.”
Sixty percent of global trade is in dollars.
You may think, rates are still very low, however, McDonald explained, “a 50 basis point move today in yields relative to 10 years ago wipes out literally the entire budget of the marines, the navy and the army. In other words, because there’s so much debt today relative to 10, 15 years ago, a small debt, a small move in yields, 50 basis points in yields today is equivalent to 2% 15 years ago.”
Oh, that is a problem. Plus, the world is awash in dollar-denominated debt. McDonald continued, “[B]ecause of the amount of duration risk, so all these pensions, you’ve had literally close to 110 trillion, 120 trillion of bonds on the planet Earth is below, say, 1.75%. You just have a ton of pension bonds, a ton of wealth that a 50 basis points, 1% move up in yields, number one, it bankrupts the US in terms of your budget right now.”
Bankruptcy? “70% of the budget in the United States is entitlements and interest, so you just can’t afford a big move up in yields there,” McDonald said. “Then on the global side, you will blow up pensions around the world because so much wealth is in lower yielding bonds.”
So what’s a Fed to do? Christopher Whalen tweeted today, “Yikes … Tapering is next folks.” Or is it? McDonald makes the point that with the $1.9 trillion rescue bill starting to hit bank accounts and possibly more coming in the name of infrastructure, “[t]hat’s why the central bank gets asset purchases from the Fed, the certainty of that is so important, because you can’t taper into a $4 trillion bond sale problem. The Fed has to offer more certainty there.”
Fed chairman Powell did not play tough guy this week. He’ll keep his rate at zero until 2023 and no matter what will keep his foot on the monetary gas until employment rates improve. No mention of yield curve control, QE, or operation twist 2.0 was made.
“The serpent in the market, the beast in the market, will push him and push him until they break him again,” says McDonald. “They’ve broken the Fed four or five times since 2013. It’s going to happen again, but just think this time, the Fed is going to be more proactive. If the Fed doesn’t give the serpent enough, doesn’t give that piece in the market enough, they will push and then break the Fed in the next two meetings.”
Banks pressed for an extension of SLC, believing without it banks might buy fewer Treasuries, adding to the upward pressure on bond yields that has rattled markets in recent weeks.
“The banks are sitting on giant stockpiles of cash, U.S. government debt and other safe assets,” writes Andrew Ackerman. “By tweaking how the ratio is calculated last year, the Fed was effectively trying to engineer a swap” with banks lending to consumers and businesses instead of the government. But, bank loans increased only 3.5 percent, the slowest pace in seven years.
The Fed has always had the banks to keep afloat. Now, the solvency of the entire US government rests on Jerome Powell’s shoulders, with no margin for error.
Something good is coming out of the covid lockdowns. Economist David Rosenberg released a special report via the eponymous Rosenberg Research, concluding “the pre-COVID-19 ‘norm’ of a 7% personal savings rate will morph into a post-COVID-19 norm of 10%.”
Rosenberg makes frequent TV appearances after he was chief North American economist at Merrill Lynch in New York from 2002 to 2009, when he was consistently included in the Institutional Investor All-Star analyst rankings. From there he spent ten years as chief economist and strategist at Gluskin Sheff.
Rosenberg doesn’t portray his prediction of a savings rate increase necessarily as a positive, instead writing, “for the 70% of aggregate demand called ‘the consumer,’ this will exert an everlasting drag on the pace of economic activity.” But, he quickly follows with, “Then again, it will also mean a deeper pool of savings for productive investment.”
Rosenberg’s first line sounds like John Maynard Keynes’s “paradox of thrift” theory, which claims that personal savings are a net drag on the economy during a recession. The second line sounds more like Ludwig von Mises, who wrote, “Capital is not a free gift of God or of nature. It is the outcome of a provident restriction of consumption on the part of man. It is created and increased by saving and maintained by the abstention from dissaving.”
Rosenberg makes a point that has been lost during this whole pandemic-turned-recession episode,
I mean, seriously, over half of American households did not have enough cash on hand to even get through three months of a job loss—quite remarkable when you consider we went into this mess with a 50-year low unemployment rate of 3.5%. Not to mention the corporate sector where, for some reason, the word “liquidity” became a dirty nine-letter word this past cycle.
Once there was a time when personal finance experts would say a household should have at least six months’ worth of liquid assets on hand just in case. The same advice applied to those starting a business. But, everyone and every business has operated like the government does, borrowing not just for stuff, but for day-to-day expenses. Thus, due to covid, everyone from unemployed waitresses to United Airlines is rattling their tin cups for a handout. And Uncle Sam is, albeit slowly, responding. This papering over of the crisis may stymie Rosenberg’s prediction. Let’s hope not. As Murray Rothbard explained in Man, Economy, and State,
All saving is directed toward enjoying more consumption in the future; otherwise, there would be no point at all to saving. Saving is abstaining from possible present consumption in return for the expectation of increased consumption at some time in the future. No one wants capital goods for their own sake. They are only the embodiment of increased consumption in the future.
In closing, Rosenberg views the savings issue through Keynesian glasses, writing,
And this got me thinking about how the future will be one of treating “savings“ as sacrosanct. Beyond a quarter or two of pent-up demand released in 2021, frugality is going to emerge as the primary theme. It is not the end of the world, either, unless you’re an advocate for a sustainable and vigorous economic expansion.
Mises saw it differently, writing in Human Action,
At the outset of every step forward on the road to a more plentiful existence is saving—the provisionment of products that makes it possible to prolong the average period of time elapsing between the beginning of the production process and its turning out of a product ready for use and consumption….Without saving and capital accumulation there could not be any striving toward nonmaterial ends.
Although we’ve been given a brief respite from COVID-19 pandemic news, it’s likely that the killer of over one hundred thousand so far in America will leap back to the front page and that continuous calls to flatten the curve will return to top of the mind.
As a friend and fellow ex-University of Nevada Las Vegas (UNLV) Rothbard student reminded me, flattening the curve essentially means to socialize medicine: to ration healthcare, giving preference to COVID sufferers at the expense of non-COVID emergency medical care and elective procedures.
If the US healthcare system is the cowboy capitalism that many believe it is, why aren’t there doctors, nurses, and PPE (personal protective equipment) in abundance? Why the need to portion out medical care and talent?
The American Medical Association (AMA) was founded in 1847, incorporated in 1897, and as Paul Starr wrote in “The Social Transformation of American Healthcare: The Rise of a Sovereign Profession and the Making of a Vast Industry,” “The key source of physicians’ economic distress in 1900 remained the continuing oversupply of doctors, now made much worse by the increased productivity of physicians as a result…[of the] squeezing of lost time from the professional working day.”
Starr points out that the number of medical schools expanded at the end of the nineteenth century. From the founding of the AMA to 1900, the number of medical schools more than tripled from 52 to 160. The population expanded 138 percent between 1870 and 1910, while the number of physicians increased 153 percent.
“The weakness of the profession was feeding on itself; ultimately help had to come from outside,” Starr wrote. Help came in the form of the Flexner Report, penned by Abraham Flexner, whose claim to fame was being the brother of the powerful Dr. Simon Flexner, a key player in the chase for a vaccine to battle the 1918–19 Spanish flu,which killed 35 to 100 million people worldwide.
Brother Abraham was not a doctor himself. And while the report was commissioned by the Carnegie Foundation, “Flexner’s report was virtually written in advance by high officials of the American Medical Association, and its advice was quickly taken by every state in the Union,” Murray Rothbard explained in Making Economic Sense.
Using the Flexner Report as a guide, the AMA was able to use the state to cartelize the medical industry. Rothbard wrote,
The result: every medical school and hospital was subjected to licensing by the state, which would turn the power to appoint licensing boards over to the state AMA. The state was supposed to, and did, put out of business all medical schools that were proprietary and profit-making, that admitted blacks and women, and that did not specialize in orthodox, “allopathic” medicine: particularly homeopaths, who were then a substantial part of the medical profession, and a respectable alternative to orthodox allopathy. (Making Economic Sense, p. 76)
The report recommended closing schools, competing therapies, and minority doctors that were considered substandard. “Medicine would never be a respected profession…until it sloughed off its coarse and common elements,” wrote Starr. Medical schools had been closing before 1910, with 20 percent shuttered in the four years before the report was published. Capital requirements for moden laboratories, libraries, and clinical facilities “were what killed so many medical schools in the years after 1906,” Starr wrote.
Rothbard explained further,
In all cases of cartels, the producers are able to replace consumers in their seats of power, and accordingly the medical establishment was now able to put competing therapies (e.g., homeopathy) out of business; to remove disliked competing groups from the supply of physicians (blacks, women, Jews); and to replace proprietary medical schools financed by student fees with university-based schools run by the faculty, and subsidized by foundations and wealthy donors. (Making Economic Sense, p. 77)
A reader can pick up plenty of books on the Progressive Era and find barely a mention of the AMA, yet the medical mess we have today took root during that era. Some of us still remember house calls, five-dollar office visits, worn black medical bags toted by doctors with stethoscopes dangling from their necks. Before the Flexner Report, mechanics made more than doctors and the brightest students avoided the profession to enter the clergy.
The burgeoning cartel meant “a skewing of the entire medical profession away from patient care toward high-tech, high-capital investment in rare and glamorous diseases,” wrote Rothbard, “which rebound far more to the prestige of the hospital and its medical staff than is actually useful for the patient-consumers” (ibid., p. 77).
Abraham Flexner, according to Starr, “had an aristocratic disdain for things commercial.” The high-minded Flexner Report “more successfully legitimated the profession’s interest in limiting the number of medical schools and the supply of physicians than anything the AMA might have put out on its own.”
The result: after peaking at 162 medical schools in 1906, by 1922 the number had been cut in half. The Flexner Report (a.k.a. Bulletin Number Four) recommended that the number of schools be reduced to thirty-one. Fortunately, more than seventy survived. Left up to Flexner, twenty states would not have had a single medical school. Legislators intervened. The report “was the manifesto of a program that by 1936 guided $91 million from Rockefeller’s General Education Board (plus millions more from other foundations) to a select group of medical schools,” according to Starr. Two-thirds of these funds went to only seven schools.
Medicine made a great leap in the Progressive Era. “The transition from household to the market as the dominant institution in the care for the sick,” in addition to increased specialization of labor, “has created emotional distance between the sick and those responsible for their care,” Starr wrote, “and a shift from women to men as the dominant figures in the management of health and illness.”
The true sign of the elevation of doctors in society was evident in 1926, when H.L. Mencken snidely wrote, “Kiwanis, like golf, is a symbol of the business man’s natural desire to break the dreadful monotony of his days. And when I say businessman, I include also, of course, the doctor, the dentist, the lawyer, and all other bored and laborious walking gents of human comedy.”
Thanks to Flexner, the AMA, and state licensing, today’s healthcare cartel is no laughing matter, but deadly serious.
Shannon O’Toole, according to the author’s biography on Amazon, “worked extensively to identify fraud in multiple government programs. She received countless accolades and honors for her achievements and finally the prestigious HUD Secretary’s Award for her work.”
The talented Ms. O’Toole was a single mother needing a job when she showed up at the FDIC, which she describes as a “disorganized, flying-by-the-seat-of-your-pants atmosphere that seemed to permeate the place.” While she bore the brunt of untangling complicated real estate assets and readying them for sales, O’Toole was reminded again and again that government is not efficient or fair, as she was passed over for promotions by friends of one misogynist boss after another.
At publication date, 2017, her National Government Lien Recovery Program hadn’t gone anywhere despite having the potential to raise trillions of dollars for the US Treasury, if implemented.
However, as Ludwig von Mises explained in his 1944 book Bureaucracy,
The bureaucrat is not free to aim at improvement. He is bound to obey rules and regulations established by a superior body. He has no right to embark upon innovations if his superiors do not approve of them. His duty and his virtue is to be obedient.
As she works for the RTC (Resolution Trust Company) she comes face-to-face with competing government and private contractor factions fighting to sell the foreclosed properties from failed S & Ls. “There just seem to be layers and layers of oversight personnel, all watching but doing nothing.”
One of her co-workers explained that the RTC’s property management division was desperately keeping SAMDA contractors in place. “They’re trying to build an empire out of managing the assets and don’t want the sales department to dispose of anything. If Thomas can make a proposal to Washington DC for hiring more staff, his grade and pay go up because his empire increases.”
In the for-profit world this wouldn’t make sense, but, this is government. Mises wrote in Omnipotent Government,
Only to bureaucrats can the idea occur that establishing new offices, promulgating new decrees, and increasing the number of government employees alone can be described as positive and beneficial measures.
Because contractors were paid a fee based upon the value of the assets they managed, they wanted to hold them as long as they could. And, the contractors’ overseers at the RTC didn’t want the assets sold because that would put them out of their jobs.
Of course, the result was billions in government waste. “I’ve seen laziness at the FDIC and some waste but nothing like this,” O’Toole told a colleague. “This is beyond reason. It’s just plain crazy.”
His reply was one the author would hear often. “It’s just plain politics.”
“Bureaucratic management is management of affairs which cannot be checked by economic calculation,” wrote Mises.
If O’Toole pushed back, she was met with rules and regulations. “We must all accept that FIRREA is the founding legislation for the RTC, and that FIRREA instructs us to use outside fee contractors to manage all the properties from the failed savings and loans,” one of her superiors announced at a meeting.
Again, Mises from Bureaucracy,
They are no longer eager to deal with each case to the best of their abilities; they are no longer anxious to find the most appropriate solution for every problem. Their main concern is to comply with the rules and regulations, no matter whether they are reasonable or contrary to what was intended. The first virtue of an administrator is to abide by the codes and decrees.
O’Toole writes evocatively about union protected government employees disappearing from their jobs for weeks and sometimes years at a time. At one point, she was ready to retire, but the OPM (Office of Personnel Management) couldn’t tell her what her monthly check would be due to outdated computer systems.
Working for HUD and FHA during the Obama administration, the author couldn’t believe that the mandate to soften mortgage underwriting standards came down from DC, despite the nation still working through the rubble of the 2008 mortgage crisis.
She writes that government work is “a world of processes, not profits,” and that some of her friends call federal employment “White Collar Welfare.”
Through research, O’Toole determined the government places liens on properties for unpaid taxes. However, the government, she found, never followed up after being notified the properties in question were being transferred.
Thus, the liens fall by the wayside and the government is left to chase tax avoiders through garnishments and court actions. O’Toole tried desperately to obtain data on the number of, and total amount of liens placed by the IRS, on a state-by-state basis. The tax collector demurred, citing privacy concerns, despite O’Toole not asking for individual taxpayer information, just the aggregate numbers.
Libertarians might knowingly chuckle about all of this government nonsense, except, the Democratic presidential candidates are advocating that this same government completely take over the healthcare system.
A chilling thought after reading O’Toole’s memoir.
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