Vivek Kaul
Over the last few months, there has been talk about the Federal Reserve of United States, the American central bank, wanting to slowdown its money printing and gradually doing away with it altogether.
Every month the Federal Reserve prints $85 billion and puts that money into the American financial system, by buying bonds of different kinds. The idea is that with enough money floating around in the financial system, the interest rates will continue to remain low.
At lower interest rates people are more likely to borrow and spend more. And this in turn will help economic growth, which has been faltering, in the aftermath of the financial crisis, which started in late 2008.
Some economic growth has returned lately. Recently the GDP growth for the period of three months ending June 30, 2013, was revised to 2.5% from the earlier 1.7%. But even an economic growth of 2.5% is not enough, primarily because the country needs to make up for the slow economic growth that it has experienced over the past few years.
The fear is that with all the money floating around in the financial system, too much money will start chasing too few goods, and finally lead to high inflation. But that hasn’t happened primarily because even at low interest rates, borrowing has been slow. Hence, what economists call the velocity of money (or how fast money changes hands) has been low. Given this, inflation has been low. Consumer price inflation in the United States, for the period of twelve months ending June 2013, stood at 1.3%.
The rate of inflation is well below the inflation target of 2% that the Federal Reserve is comfortable with. So if inflation isn’t really a concern, and the economic growth is still not good enough, why is the Federal Reserve in a hurry to go slow on printing money?
As Gary Dorsch, the Editor – Global Money Trends newsletter, writes in his latest column “The fragile US-economy might find itself sinking into a full blown recession by the first quarter of 2014. However, the Fed’s determination to start scaling down QE-3 is essentially in reaction to the demands of the Bank of International Settlements (BIS), – the central bank of the world – which says it is time to rethink US-monetary policy. The BIS argues that blowing even bigger bubbles in the US-stock market can do more harm to the US-economy than the old enemy of high inflation. Thus, going forward, the costs of continuing with QE now exceed the benefits.”
Quantitative easing or QE is the technical term that economists have come up with for money printing that is happening across different parts of the western world.
What Dorsch has written needs some detailed examination. The argument for keeping the money printing going has been that it has not led to any serious inflation till now, so let us keep it going. While inflation may not have cropped up in everyday life, it has turned up somewhere else. A lot of the money printed by the Federal Reserve has found its way into financial markets around the world, including the American stock market. And this has led to investment bubbles where prices have gone up way over what the fundamentals justify.
The Federal Reserve, meanwhile, has continued with the money printing because it hasn’t shown up in inflation. Central banks work with a certain inflation target in mind. If the inflation is expected to cross that level, then they start taking steps to ensure that interest rates go up.
At 1.3%, inflation in the United States is well below the Federal Reserve’s target of 2%. Some recent analysis coming out suggests that inflation-targeting might be a risky strategy to pursue. Stephen D King, Group Chief Economist of HSBC makes this point in his new book When the Money Runs Out. As he writes “the pursuit of inflation-targetting…may have contributed to the West’s financial downfall.”
King gives the example of United Kingdom to elaborate on his point. As he writes “Take, for example, inflation targeting in the UK. In the early years of the new millennium, inflation had a tendency to drop too low, thanks to the deflationary effects on manufactured goods prices of low-cost producers in China and elsewhere in the emerging world. To keep inflation close to target, the Bank of England loosened monetary policy with the intention of delivering higher ‘domestically generated’ inflation. In other words, credit conditions domestically became excessive loose…The inflation target was hit only by allowing domestic imbalances to arise: too much consumption, too much consumer indebtedness, too much leverage within the financial system and too little policy-making wisdom.”
Hence, the Bank of England, kept interest rates too low for too long because the inflation was low. With interest rates being low banks were falling over one another to lend money to anyone who was willing to borrow. And this gradually led to a fall in lending standards. People who did not have the ability to repay were also being given loans. As King writes “With the UK financial system now awash with liquidity, lending increased rapidly both within the financial system and to other parts of the economy that, frankly, didn’t need any refreshing. In particular, the property sector boomed thanks to an abundance of credit and a gradual reduction in lending standards.”
So the British central bank managed to create a huge real estate bubble, which finally burst, and the after effects are still being felt. And all this happened while the inflation continued to be at a fairly low level.
But this focus on ‘low inflation’ or ‘monetary stability’ as economists like to call it, turned out to be a very narrow policy objective. As Felix Martin writes in his brilliant book Money- The Unauthorised Biography “The single minded pursuit of low and stable inflation not only drew attention away from the other monetary and financial factors that were to bring the global economy to its knees in 2008 – it exacerbated them…Disconcerting signs of impending disaster in the pre-crisis economy – booming housing prices, a drastic underpricing of liquidity in asset markets, the emergence of shadow banking system, the declines in lending standards, bank capital, and the liquidity ratios – were not given the priority they merited, because, unlike low and stable inflation, they were simply not identified as being relevant.”
The US Federal Reserve wants to avoid making the same mistake that led to the dotcom and the real estate bubble and finally a crash. As Dorsch writes “A BIS working paper that traces booming stock markets over the past 110-years, finds that they nearly always sink under their own weight, – and causing lasting damage to the local economy. Asset bubbles often arise when consumer prices are low, which is a problem for central banks who solely target inflation and thereby overlook the risks of bubbles, while appearing to be doing a good job.”
Over the last 25 years, the US Federal Reserve has been known to cut interest rates at the slightest sign of trouble. But only on rare occasions has it raised interest rates to puncture bubbles. Alan Greenspan let the dotcom bubble run full steam. Then he, along with Ben Bernanke, let the real estate bubble run. By the time the Federal Reserve started to raise interest rates it was a case of too little too late.
A similar thing seems to have happened with the current stock market bubble, where the Federal Reserve has printed and pumped money into the market, and managed to keep interest rates low. But this money instead of being borrowed by American consumers has been borrowed by investors and found its way into the stock market.
As Claudio Borio and Philip Lowe wrote in the BIS working paper titled Asset prices, financial and monetary stability: exploring the nexus (the same paper that Dorsch talks about) “lowering rates or providing ample liquidity when problems materialise but not raising rates as imbalances build up, can be rather insidious in the longer run. They promote a form of moral hazard that can sow the seeds of instability and of costly fluctuations in the real economy.”
Guess, the Federal Reserve is finally learning this obvious lesson.
The article originally appeared on www.firstpost.com on September 6, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
BIS
…And That's How Government Sachs Rules the World
Bruce Wiseman is a man who wears many hats. He writes detective fiction under the pseudonym of John Truman Wolfe (www.johntrumanwolfe.com). He runs a market research, survey and positioning company (www.ontargetresearch.com). He has managed money for many Hollywood stars through the investment firm Wiseman & Burke. And if all this wasn’t enough he has recently written a bestselling book on the financial crisis titled Crisis by Design, The Untold Story of the Global Financial Coup. In this interview he speaks to Vivek Kaul on how the investment Goldman Sachs rules the world.
You talk about an incestuous link between Goldman Sachs and the American government. Could you explain that to our readers?
The Rolling Stone magazine recently published an article called “The Great American Bubble Machine,” a masterful exposé by Matt Taibbi revealing Goldman’s greed and corruption in the creation of several investment “bubbles” that have made the firm and its partners—the term filthy rich comes to mind—but which have been devastating to Americans and to the U.S. economy. I have no problem with people making money—barrels of the stuff. Boatloads. But this needs to be done with some sense of ethics, some sense of morals, some sense of responsibility toward one’s fellow man.
Could you elaborate on that?
The all too coincidental participation of Goldman executives in the creation of the financial crisis is something that Machiavelli himself would be proud of. Taibbi laid bare the army of Goldman alumni that have turned up at critical decision points in the universe of credit, investment and finance. His orientation was such that he omitted a few that I will tell you about. My focus has been exposing the actual cause of the worldwide financial crisis. And our paths have crossed at a few key junctures. Junctures that bring to mind the great Gordon Gekko—Michael Douglas’s character in Oliver Stone’s Wall Street. Douglas shares the philosophy of the successful investment banker:“Greed is good. Greed is right. Greed works. Greed clarifies and cuts through and captures the essence of the evolutionary spirit.” Yeah, baby.
Could you give us an example?
I could start this part of the story with Henry Fowler, who, after serving as the 35thSecretary of the Treasury, in 1969 became a partner at Goldman after leaving office. But that’s not how things worked in the nineties and beyond. Oh no. The current sequence is very different. Pictures of Robert Rubin always remind me of the cartoon character Droopy. He seems to be in a perpetual state of sad worry. More to the point of our story, having served 26 years with Goldman Sachs, ascending to the position of co-chairman, Rubin came to Washington with the Clinton administration as the Assistant to the President for Economic Policy. Bill must have dug the Wall Street touch, because in January of 1995, he appointed Rubin the 70th United States Secretary of the Treasury. This could be called the start of what the New York Times has referred to as the modern era of “Government Sachs.”
Government Sachs?
Allow me to explain. The hallmark of Rubin’s years in Washington was deregulation—specifically, deregulation of the financial industry. Turn the financial industry loose. Let the big dogs eat. Let them earn. They have Porsche payments to make. Working with Greenspan, he kept interest rates implausibly low and ensured that regulatory safeguards were gunned down like victims in an L.A. drive-by shooting. The Glass-Steagall Act is a prime example. A piece of the Great Depression-era legislation that kept investment banks and commercial banks from committing fiscal incest, it was repealed—charged with being out of touch with the global financial structure. What it was out of touch with was an agenda to open the floodgates to unbridled speculation by banks that set the industry up for a financial Hiroshima.
Would you like to add to that?
When Rubin was co-chairman of Goldman, the firm underwrote billions of dollars in bonds for the Mexican government. When the Mexican peso tanked a few years later, Rubin, as Secretary of the Treasury, arranged a multibillion-dollar taxpayer bailout, which, according to reports, saved Goldman a cool $4 billion. Even today, Goldman’s former co-chairman is advising Obama behind the scenes and his acolyte Timothy Geithner is in charge of the U.S. Treasury.
But Geithner never worked for Goldman Sachs…
Geithner worked for Rubin at Treasury during the Clinton administration and was a Rubin favorite. He then snagged the powerful presidency of the New York Federal Reserve Bank. It was Rubin who got Geithner the gig at the New York Fed and it was Rubin who hooked him up with Obama, who appointed him as his Secretary of the Treasury. In addition to Rubin, another former Goldman chairman,the controversial Jon Corzine, has been a top economic advisor to the current American President Barack Obama.
That’s quite a link…
Yup. And there is more to come. Given that Goldman employees gave more money to Obama ($994,000) than any other commercial enterprise in the United States, and that the White House is awash in Goldmanites. Even with the White House under control, Geithner beefed up his Goldman staff at Treasury. He named yet another Goldmanite as his chief of staff. Mark Patterson was selected to help him run the government’s financial circus. Patterson gave up his plum position as the vice president for Government Relations at Goldman—meaning he was the investment bank’s chief lobbyist—to become the number two man at Treasury.
What about Henry Hank Paulson, the Treasury Secretary of the United States, when the financial crisis broke out?
Before the news of the financial crisis began to go mainline in 2007, a new Goldman CEO descended from his throne on Wall Street to come to Washington and help his government manage the nation’s financial affairs. We love you, Hank. Viewed from the board rooms of Wall Street, Henry Paulson’s blitzkrieg of the nation’s capital was nothing short of stunning: a George Patton(a famous American World War II General) in pinstripes—except Patton was fighting a real enemy, not one that he himself had created. At first, he used PR spin to calm the multitudes. As the crisis began to unravel, in August 2007 Paulson assured the American people that the subprime mortgage problems were nothing to be concerned about, that they would remain contained due to the strong global economy. The stock market peaked two months later followed by a crash that wiped out trillions. In a television interview on Meet the Press on August 10, 2008, Paulson stated that he would not be putting any capital into Fannie Mae or Freddie Mac. Three weeks later, he took them over and committed $200 billion in bailout funds. When I was growing up, we’d call this kind of guy a “bullshit artist.”
Can you get into a little more detail?
Perhaps nothing so demonstrated this scam as the government bailout of American International Group (AIG), the country’s largest insurance company. On September 16,2008, Paulson coughed up $85 billion of your tax dollars to take control of AIG. The $85 billion loan got the government 80 percent ownership of the insurance giant. Just what I always wanted from my government, a bankrupt insurance company. It turns out the $85 billion wasn’t enough. AIG has continued to hemorrhage losses and Uncle has now poured a total of $182 billion into the insurance company. Sticky constitutional issues aside, many have found it more than curious that when the government granted the loan, AIG turned right around and paid it out to the investment banks to which it owed money. The bank that got the largest payout was . . . of course, Goldman Sachs—a cool $13 billion. The money simply passed from your paycheck to the U.S. Treasury, from the Treasury to AIG and from AIG to Goldman (and other banks). Paulson made sure the transfers would occur without any objection from AIG or unseemly negotiations with the banks. To do this, he tapped Goldman Sachs board member Ed Liddy to be the new CEO of AIG. The good-hearted Mr. Liddy took the gig for a dollar a year in salary from AIG. But he held on to his $3 million in Goldman stock.
That was one round about transaction…
Yup. Goldman made billions from AIG earlier as well. AIG didn’t know this. Neither did Goldman’s clients. You see, despite the fact that they had collected enormous fees selling financial products that were “insured” by AIG, Goldman simultaneously sold AIG short. You get this? On the one hand, they sold financial instruments to their clients, which carried high investment ratings because AIG insured the buyer against loss. At the same time, they made investment “bets” for their own account against AIG. Estimates are that they made $4.7 billion betting against AIG while selling the AIG-guaranteed products to their clients.
Anything else that you would want to point out?
Paulson pushed the Troubled Asset Relief Program (TARP) through the House and Senate—winding up with a cool $700billion to “save” the banks. Congress’s actions remind me of a bad Godzilla movie, with masses of panicked Japanese citizens fleeing the fire-breathing monster, which is lumbering through the city toppling buildings and devouring cars. The legislation drafted by our elected officials sounds like something issued to Stalin by the Politburo. They granted Paulson complete dictatorial powers over the bailout money. The TARP read in part: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”
But where does Goldman fit in here?
Calling the multibillion-dollar bailout a “stimulus” program is but a cruel joke. This was nothing more complicated than a coup—a transfer of hundreds of billions of dollars from American taxpayers into the Armani-clad arms of major Wall Street banks. You won’t be surprised to learn, I’m sure, that Goldman Sachs got a cool $10 billion of TARP funds. And if you followed the billions pouring from your paychecks to Wall Street, you might remember that Bank of America at first received $25 billion. Then, in the midst of the chaos, they agreed to purchase Merrill Lynch. As it turned out, however, Merrill’s losses were $15 billion more than Bank of America had expected. This was due in part to $4 billion in bonuses paid out by Merrill’s CEO, John Thain, who pushed the bonuses through his books just before the Bank of America deal closed. Bank of America was taken by surprise by the losses and the purchase of Merrill Lynch started to go shaky, to which Comrade Paulson coughed up another $20 billion of your tax dollars. You guys are so cool bailing out these banks. I mean it. It brings tears to my eyes. Oh, I should mention that John Thain, the guy who pushed through the last-minute billions in bonuses, had been the president and co-chief operating officer at Goldman Sachs before becoming the president of Merrill Lynch.
So Goldman Sachs is everywhere?
Yup. Pretty much. Joshua Bolten, was the Chief of Staff of former President George Bush. Bolten had become Chief of Staff in April of 2006 and is credited with persuading the President to recruit Paulson as the Treasury Secretary. No surprise, since Bolten had been the executive director, Legal & Government Affairs for Goldman Sachs International before joining the Bush 2000 presidential campaign. The president of the World Bank is Robert Zoellick. Prior to joining the World Bank, Zoellick served as vice chairman, international, of the Goldman Sachs Group. Incest doesn’t begin to say it. From the White House to Treasury, from the New York Fed to AIG, from the Commodity Futures Trading Commission to the New York Stock Exchange, Goldman is there.
You talk about 19 men controlling the financial affairs of the whole world. Who are these people?
They are the Board of Directors of the Bank for International Settlements. They are listed on the Bank’s website, but Helicopter Ben Bernanke and Tim Geithner are on the Board, as was Greenspan. And it is the newly created Financial Stability Board, operating as an arm of the Bank for International Settlements, that now structures and dictates the rules and regulations to be carried out by the central banks of the world. And given the fact that central banks essentially operate independently of their national congresses or parliaments, the FSB now controls the monetary policy of the planet. It is now, for all practical purposes, the Politburo of international finance.
Where is Goldman Sachs in this?
Who is the chairman of this little known entity based in Basel, Switzerland? Mario Draghi. Draghi was a partner at Goldman Sachs until, like Henry Paulson, he left Goldman in 2006. Paulson took over the U.S. Treasury and Draghi became the governor of the Bank of Italy (Italy’s central bank) and in April of this year, chairman of the Financial Stability Board. Draghi is also a member of the board of directors of the Bank for International Settlements. In fact, the BIS board reads like a Goldman reunion committee. Mark Carney had a 13-year career with Goldman Sachs, where he became the managing director of Investment Banking before becoming the governor of the Bank of Canada and a member of the BIS board. William Dudley, president of the New York Fed and former partner at Goldman Sachs, is also a member of the board, along with Draghi.
So they are there everywhere…
Yup. Gary Gensler the current head of the Commodities and Futures Trading Commission in the United States spent 18 years at Goldman Sachs. In May of 2007, the granddaddy of stock markets, the New York Stock Exchange (NYSE), bought Euronext (a pan-European stock exchange with subsidiaries in Belgium, France, Netherlands, Portugal and the United Kingdom), which, now branded as NYSE Euronext, operates the largest securities exchange on the planet. To run the show, the newly combined entity brought in Duncan Niederauer and appointed him chief executive officer. Niederauer had been a partner and managing director at Goldman Sachs before joining NYSE Euronext. And there you have it. Complete financial control of U.S. financial policy and markets, from the White House and Treasury to the New York Fed, the New York Stock Exchange and the Commodity Futures Trading Commission (Control of the World Bank along with the most powerful member of the International Monetary Fund (the US Treasury Secretary Timothy Geithner), and at the top of the fiscal food chain, the Bank for International Settlements and its Financial Stability Board.
(The interview was originally published in the Daily News and Analysis(DNA) on June 25,2012. http://www.dnaindia.com/money/interview_how-government-sachs-rules-the-world_1706239)
(Interviewer Kaul is a writer and can be reached at [email protected])