Murphy's Financial Law
The United States’ finance policy is following in Greece’s footsteps.
In Greece, gloomy predictions are a hard sell. The Greek sun, the summery climate, and the deep blue sea make such theorizing seem panicky, melodramatic, and otherworldly. That strangeness is not just felt by the hearer of such prognoses; the sayer himself feels conflicted and wavering, a God-forsaken foreigner in his own land.
This vast natural conspiracy was augmented back in 2005. On top of everything else, Greece had hosted the 2004 Olympic Games and won the 2004 Euro soccer championship. The economy was humming along. Brand new shopping malls, bridges, tunnels, and motorways were the physical testaments of an age of prosperity.
Even if I had translated, printed and distributed my gloomy 2005 “Letter from Greece” article to all Greeks, I wouldn’t have made a dent in the national mood of prosperity and progress. Only five years later, nothing anyone could say or write would reverse the nation’s feelings of despair and anger. Greece’s economy in 2010 was in a de facto state of bankruptcy. The massive social and institutional decadence described in the “Letter from Greece” had manifested in a rather spectacular way. The speed and ferocity of the collapse made Hemingway’s path to bankruptcy, “gradually and then suddenly,” seem a rather apt description of what had occurred.
Consider an important difference between America and Greece. For some time now, the average American has been aware that things have gone wrong. This is not just a reflection on the present administration, but a deeply felt and long-standing judgment on the state of the country. But here is an important similarity: Both countries’ ruling classes are equally juvenile, self-centered, and disconnected from the consequences of their beliefs and actions.
It would be hard to design a policy as catastrophic and self-serving as the easy-money policies of the last three decades. What was initially termed as the “Greenspan put,” the bailing out of investors by liquidity injections from the Fed, eventually morphed into perennially and artificially low interest rates with quantitative easing. Easy money, in various forms, became the fentanyl of our ruling class.
It enabled a ruling class that had lost any sense of constraint and any meaningful consideration of trade-offs. Easy money could paper over any distress signal, and somehow always ended up increasing the power, influence, and wealth of our ruling class.
Since 2001, the U.S. national debt has more than doubled in proportion to the economy. Since 2007, and for the 15 years that followed, the growth in the balance sheet of the Fed nearly equaled the growth of the whole economy. In a 2010 op-ed in the Washington Post, the then-chairman of the Fed, Ben Bernanke, asserted that his easy money policies would “promote economic growth.” “Lower mortgage rates,” he predicted,
will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.
In fostering the housing bubble that popped in 2008, the Fed had pushed a significant part of the working class into a financial trap that cost them their housing, savings, and years lost trying to recover from bankruptcies and foreclosures. In the years that followed, easy-money policies led the middle class to experience the “wealth effect,” where it felt it could spend money it had never saved. Higher stock prices had the same “wealth effect” for everyone involved, and whenever the Fed attempted to raise rates, investors would have a “taper tantrum” and start a sell-off.
In a September 2012 Federal Open Market Committee meeting, Richard Fisher, the then-president of the Federal Reserve Bank of Dallas, noted that “small and medium-sized businesses are job creators, and yet the soundings…tell us that over 90 percent of those businesses are either not interested in borrowing or, as I mentioned yesterday, have no problem accessing cheap financing. Monetary policy is not on their radar as a concern, except that it raises fears among some of future inflationary consequences. Their principal concern…is with fiscal and regulatory uncertainty.”
When it came to large corporations, Fisher said:
I asked my CEO contacts if their cost of borrowing were to decrease by some 25 basis points or more, how they would react. Would this induce them to spend more on expanding payroll or job-creating cap-ex? And the answer from 9 out of 10 was, you could cut the cost of borrowing by 1 full percentage point and we’ll use it to buy back stock.
In an era of meager investment opportunities, low interest rates induced a tsunami of stock buybacks that reached an astronomical 5.3 trillion dollars between 2010 to 2019.
None of the suppositions of the Bernanke op-ed came to be true. None of these suppositions should have been considered true at the time that they were made either. Why did America need its central bank to stimulate growth? Why did the Fed lower rates for corporate bonds or mortgages? Why did the Fed repeatedly have to prop up the stock market? You know things have gone wrong when few, if any, are asking the most obvious questions.
In that September 2012 meeting, Fisher said, “using monetary policy to overcome bad fiscal and regulatory policy is, to my mind, not only faulty but a pyrrhic strategy.” Monetary policy was a cover-up for the American economy’s stagnation. It was a way for our ruling class to hide the complete failure of its progressive economic agenda.
That this cover-up also masked a tremendous transfer of wealth that the ruling class granted to itself was an extra benefit. The primary beneficiaries of those $5.3 trillion in share buy-backs were those on top, since, according to CNBC, those on the “top 10% of households by net worth control 87.2% of equities” in the U.S.
While our ruling class was artificially inflating its own assets, it was also supporting a set of policies that subjected all those below them to the most severe pressures of globalization. Offshoring eliminated millions of good-paying middle-class jobs. Open borders put downward pressure on the wages of the working class. The last three decades have been a period of ruthless class warfare.
This socialism-for-the-rich was reflected in Silicon Valley Bank’s balance sheet, which followed the ebbs and flows of easy-money policies. In 2016, Silicon Valley Bank had $45 billion in assets. By 2020, it had $102 billion; in 2021, $189 billion; and in 2022, $209 billion. This was the product of quantitative easing. Easy money funded stock buybacks and forever-unprofitable unicorns. It allowed Twitter to lose money every year running a vast bureaucracy of censors. Money to burn in order to satisfy the woke obsessions of our ruling class was preferable to a profitable, broadly liked, and trusted application.
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One day, all this folly will seem to hit rock bottom and come to an end, but the burdens of this massive misallocation of labor and capital will stay with us for much longer. Wealth can be lost and made again. But the way an economy runs also socializes those who rule and are ruled. An economy is a moral order, and the values, principles, and habits it imbues on its members are hard to amend and revise.
More than a decade after the financial crisis, Greece has been run by the same political class that brought it the biggest catastrophe in its recent history. Greece presently owes much more debt than it did in 2010. The difference today is that the average Greek has to work from January 1st to July 20th to pay for the government’s spending, debt, and deficits. The political class simply transferred the collapse of public finances to the private sector, and proceeded to accumulate more debt than ever before.
Something similar could happen in the U.S., and it’s not just a possibility. If things proceed according to the present course, it’s inevitable. From the forever wars to financial crises to Covid-19, competence, we realize, is not the strong suit of our ruling class. They likely will not be able to manage that which they have sown. All their solutions will at best have diminishing returns. For a long time, they have not made things better, and it appears they never knew how anyway.