Thursday, April 19, 2012

A modest proposal for the Federal Reserve

I found this over at Cafe Hayek, written by Sheila Baer. 

Are you concerned about growing income inequality in America? Are you resentful of all that wealth concentrated in the 1 percent? I’ve got the perfect solution, a modest proposal that involves just a small adjustment in the Federal Reserve’s easy monetary policy. Best of all, it will mean that none of us have to work for a living anymore.

For several years now, the Fed has been making money available to the financial sector at near-zero interest rates. Big banks and hedge funds, among others, have taken this cheap money and invested it in securities with high yields. This type of profit-making, called the “carry trade,” has been enormously profitable for them.

So why not let everyone participate?

Yep.  Bernanke prints the money.  Loans the money to friends at Zero interest.  Friends of Ben invest it at a higher interest rate.  Then profit.  Then repeat, over and over. 

In the meantime, any money that you 99% suckers have saved becomes devalued. 

1 comment:

Hot Sam said...

Didn't you see her tongue firmly in her cheek?

Banks create money by levering their financial capital. They mitigate risk through prudent underwriting and managing liquidity and other risks.

Lending $10,000,000 to you or me at near zero percent might generate $400,000 of income for us in a year, but not a lot of money creation to aid the economy through fiscal policy. Nor would we be able to mitigate the myriad of risks we would face unless, of course, we became a bank. But that's why we charter banks in the first place.

Guys like Romney pooled together about $60 million and made good investments. Two crucial points. One, they risked their own money. Two, they were either lucky or good. You don't hear about all the people who failed.

Bair knows or should know better than this. It's hard to believe she wrote that nonsense. If her point was to stop subsidizing banks, well, she's got a problem. She was a big advocate for banks increasing capital. And for them to either raise capital or build capital, they have to have retained earnings. With margins relatively low, loan growth low or negative, fees lowered by Didst-Frank, security yields low, etc, the carry trade is the only way for banks to generate retained earnings to build adequate capital. I'm not weeping for poor banks, but Bair's goals do not jibe.

Bair is not usually this dense, so either she fell and bumped her head, or she has become a petty populist now that she no longer has responsibility for what she says and does.