The Great Disorder
It will be extremely difficult for well-compensated financial professionals to admit that “the financial assets by which we have all gotten very comfortable have reached a point of inflection and what has worked for the past four decades will no longer work or will work with difficulty, and that everything that you know must now be reappraised” - Jim Grant
Fed Publicist Nick Timiraos in the WSJ:
“Congressional Democrats passed legislation in 1977 and 1978 setting forth the Fed’s present-day mandate to maintain low inflation and maximum employment.”
This is FALSE. The mandate is for “stable prices.”
“The Federal Reserve Reform Act of 1977, for one, does not say ‘price stability.’ It does in particular not say ‘a stable rate of inflation.’ It says ‘stable prices.” - Alex J. Pollock, President and Chief Executive Officer of the Federal Home Loan Bank of Chicago from 1991-2004
The Fed Board of Governors 2021 annual report is out! They're doing great! (The Boston & Dallas Fed President salaries are $0 because they had to leave due to scandal during the year)
These figures do NOT include the Eccles Building. Anyone have those?
Fifteen-hundred employees at the Richmond Fed!
Eleven-hundred and fifty at the lousy Cleveland Fed!
Two-thousand fifty-four at the Kansas City Fed!
What do they do besides virtue signal?
No wonder unemployment is so low. The village idiot can get a cake Fed job.
So Kashkari makes $448k, plus bonus, pension, fat benefits, massages etc. - fine, you have to pay up for someone as wrong as him. These 12 branches have 20k+ employees, including 1,833 "other officers" who average $261k - just in salary.
FUN FACT: The Fed's 2021 "Office of Employee Benefits" has 46 full-time employees, plus 17 "other officers," averaging $296,282 - just in salary. Over 1/4 of these employees are management!
Everyone’s a Landlord—Small-Time Investors Snap Up Out-of-State Properties
They bought at the height of the housing frenzy. Now they’re ‘house rich, cash poor’
Higher Interest Rates Led to Wider Mortgage Credit Box Rising interest rates and higher home prices erode home buyer affordability as fewer buyers can afford higher home mortgage costs. As a result, the diminishing demand from borrowers may lead to expansion of mortgage credit availability and mortgage risk as more borrowers are considered who may have not otherwise qualified for a mortgage when demand was higher.
Palos Verdes Peninsula, 1993: It’s a Buyer’s Market as Peninsula Home Prices Tumble “In what one broker described as the “shocker of all shockers,” for the first time since 1987, a house on the peninsula has been put up for sale for a sliver under $300,000, a milestone considering that the low mark hovered around $500,000 just three years ago. It’s no fire sale, but a hallmark nevertheless in an area with some of the nation’s priciest houses.” [30-year mortgage rates were around 7.4% at the time - RH]
NAR Profile of Home Buyers and Sellers (2021) Average age of a first-time buyer is 33, up from 29 in 1981. Average age of a repeat buyer is 56, up from 36 in 1981.
Chinese Investors Buy $6.1 Billion Worth Of US Homes In Past 12 Months Chinese investors purchased nearly a third (31%) of their homes in California.
Love the headline: Pace of Rent Increases Continues to Slow
Is this STRONG labor market just minimal wage jobs? Good question I’ve wondered about.
The average new vehicle loan amount increased 13.21% year-over-year to reach $40,290 in Q2 2022, with a monthly payment of $667 compared to $582 in Q2 2021. Average used vehicle loan amounts saw a sharper increase of 18.66% year-over-year, clocking in at $28,534, with an average monthly payment of $515, an increase from $440 in Q2 2021…
The average loan term for new vehicle loans remained flat going from 69.45 to 69.46 months from Q2 2021 to Q2 2022; average used vehicle loan terms grew from 66.14 months to 68.01 months, year-over-year. [Almost six years! - RH]
Note that the U.S. “median wage” in 2020 was $34.6k.
From The Great Disorder by Feldman (1993)
“In many respects, the Reichsbank was one of Germany’s most modernizing institutions, and it strove assiduously to create a modern currency system. In our age of paper money with its accompanying kaleidoscope of paper, plastic, and electronic credit instruments, it is difficult to imagine an industrial society, like the German Empire before 1914, in which 52 to 65 percent of monetary circulation consisted of coinage. The daily transactions of most Germans were conducted with ten- and twenty-mark gold coins; one- to five-mark silver coins; five-, ten-, and twenty-five-pfennig nickel coins, and one- and two-pfennig copper coins. The Reichsbank, which had been assigned the task of “regulating the circulation of money in the entire territory of the Reich, facilitating currency transactions, and caring for the utilization of available capital,” viewed this dependence on coinage with increasing disapproval. The dependence on coins and even on cash transactions with paper money was proving to be an ungainly way of doing business. As international tensions mounted in the prewar years, the Reichsbank also considered the excessive circulation of coinage dangerous because it could act as an extreme brake on the Reichsbank’s ability to satisfy government liquidity requirements in the event of war. Thus, economic and military considerations went hand in hand as motives for Reichsbank policy…
By the end of 1914, the Reichsbank gold holdings reached two billion marks, but Germany’s citizens were reminded by a broadsheet that five billion in gold had been coined and that it was their “holy duty” to give their gold to the Reichsbank. The public was also reminded that “every pfennig that is cleared without the use of cash is a weapon against the economic war of annihilation conducted by our enemy.” [Note that FDR’s Executive Order 6102 banned private gold ownership and defaulted on gold certificates in 1933 - RH[
A particular effort was made to get schoolchildren to campaign among parents and their elders and thus assist in the national quest for gold. Instructive little brochures were produced with stories illustrating how bright children, properly instructed by their teachers, could extract the golden treasures hidden by shortsighted adults. Reading a brochure like “The Goldseekers at Work,” one wonders if the famed authoritarian upbringing of German children was not being sacrificed to Mammon by the Reichsbank.
It tells the story of three Gymnasium students who verbally harass a fictional elderly grain merchant, Bernhard Lehmann, into turning in his gold for paper money and perform this patriotic deed during school hours with the approval of their teacher. It had apparently become acceptable, even charming, to tell Herr Lehmann that he was a “betrayer of the Fatherland” and “unthinking” because of his reluctance to part with the precious metal…[Nothing new under the Sun - RH]
The plot thickens as Lehmann asks, “Actually, what prevents the Reichsbank from printing more money than three times its gold holdings?” but remains unconvinced when he is told that this would violate the law. He argues skeptically that, “If the law does not suffice anymore, then another will be made, as now occurs with fabulous speed. And then the Reichsbank will give out four or five times as much paper with all the advantages you mentioned also being there.” Undaunted, Schonfeld rises to the challenge, asking Lehmann if he would lend his money to someone with insufficient resources, even at a high interest rate. When Lehmann responds in the negative, his mind is prepared for the crucial lesson in the higher realms of state finance:”
You see, Herr Lehmann, that’s the way it is. And it is just that way with paper money. Why does everyone take paper just as readily as gold, although, for example, even a thousand mark bill is nothing more than a scrap of paper? Because he knows that the Reichsbank is in a position to give gold for it at any moment, because he knows that he can count on the Reich. What would happen if the Reich began to print notes without paying attention to its gold stock? It would immediately suffer a loss of confidence. The notes would no longer be accepted, especially abroad, or if accepted, then it would be like those profiteers who supply 750 marks or less worth of goods for the 1000 marks you pay them. A mark would only be worth 75 pfennig abroad or, as one would say, the mark has a low value (exchange rate). Every trading operation with foreign nations for such a state, therefore, means a huge loss. So it is with Russia now, which has frequently made a law like the one you have proposed and has printed banknotes without restraint…[Think about this passage, and then think about today’s monetary system, where no one any longer even pretends money is backed by anything except force - RH]
“As one might expect, the story ends with Lehmann cheerfully and appreciatively surrendering his hard-earned gold and the youngsters getting the next day off from school for their achievement…
Havenstein was not printing money for the sheer pleasure of it, and he was not free to simply stop the presses. The money supply was increased to make possible the deficit financing of the budget, and the fact that this was done, the manner in which it was done, and the extent to which it was done were all the result of political and socioeconomic decisions taken by the government or of constraints felt by the government as a consequence of real or feared actions and reactions on the part of the groups and classes of which German society was composed. From the very outset, the significant determinants of the German inflation were structural ones.”
From Lords of Finance by Ahamed…
Von Havenstein faced a very real dilemma. Were he to refuse to print the money necessary to finance the deficit, he risked causing a sharp rise in interest rates as the government scrambled to borrow from every source. The mass unemployment that would ensue, he believed, would bring on a domestic economic and political crisis, which in Germany’s current fragile state might precipitate a real political convulsion. As the prominent Hamburg banker Max Warburg [brother of ‘Father of the Fed Paul Warburg - RH], a member of the Reichsbank’s board of directors, put it, the dilemma was “whether one wished to stop the inflation and trigger the revolution” or continue to print money. Loyal servant of the state that he was, Von Havenstein had no wish to destroy the last vestiges of the old order.
Alternatively, if by standing firm against the government he forced it to raise taxes or cut domestic expenditures, he would be accused, particularly by his nationalist friends on the right, of being a tool of the blood-sucking Allies, who all along had been insisting that Germany could pay reparations if it would only cut its domestic expenditures and raise taxes. In effect, Von Havenstein would be in the position of doing the Allies’ dirty work—he just could not bring himself to act as the collection agent for his country’s enemies.
Faced with these confusing and competing considerations, Von Havenstein decided to play for time, supplying the government with whatever money it needed. Contrary to popular myth, he was perfectly aware that printing money to finance the deficit would bring on inflation. But he hoped that it would be modest [eg., 2%], and that in the meantime, something would turn up to induce the Allies to lower their demands or at least agree to a moratorium on actual payments, giving Germany some breathing space.
It was a total miscalculation. Von Havenstein failed to recognize that experimenting with the currency was like walking a knife-edge. A moderate degree of inflation does not remain moderate for long. At some point the public loses confidence in the authority’s power to maintain the value of money, and deserts the currency in panic. Germany passed this tipping point in the middle of 1921. [THIS is hyperinflation - a panic out of a currency, not ‘very high inflation. - RH]
Instead of admitting that he had made a terrible mistake, Von Havenstein, with his dogged Prussian sense of duty, dug in his heels, refusing to change any of his policies and continuing to print as much money as the government “needed.” The inflation had initially been beneficial to private business because it had the effect of wiping out their debts. By 1923, however, the crisis had moved to a new stage, and without a functioning currency, commerce became impossible.
Unemployment, which had hovered around 3 percent suddenly shot up to 20 percent in the fall of 1923. In order to maintain some illusion of solvency, Von Havenstein began to pump Reichsbank money directly to private businesses. He hid behind the claim that, but for reparations, there would be no inflation in Germany and therefore put the blame for the inflation on the rapacious demands of foreigners [Putin’s price hikes!! - RH].
He began arguing that the inflation had nothing to do with him, that he was a passive bystander to the whole process, that his task was simply to make enough money available to grease the wheels of commerce, and if business required a trillion more marks, then it was his job to make sure they were run off the presses and efficiently distributed around the country. [History repeats exactly - RH]
Some color on Max and his brother Paul Warburg, from The Creature From Jekyll Island…
Paul Moritz Warburg was a leading member of the investment banking firm of M.M. Warburg & Company of Hamburg, Germany, and Amsterdam, the Netherlands. He had come to the United States only nine years previously. Soon after arrival, however, and with funding provided mostly by the Rothschild group, he and his brother, Felix, had been able to buy partnerships in the New York investment banking firm of Kuhn, Loeb & Company, while continuing as partners in Warburg of Hamburg. Within twenty years, Paul would become one of the wealthiest men in America with an unchallenged domination over the country's railroad system.
At this distance in history, it is difficult to appreciate the importance of this man. But some understanding may be had from the fact that the legendary character, Daddy Warbucks, in the comic strip Little Orphan Annie, was a contemporary commentary on the presumed benevolence of Paul Warburg, and the almost magic ability to accomplish good through the power of his unlimited wealth.
A third brother, Max Warburg, was the financial adviser of the Kaiser and became Director of the Reichsbank in Germany. This was, of course, a central bank, and it was one of the cartel models used in the construction of the Federal Reserve System. The Reichsbank, incidentally, a few years later would create the massive hyperinflation that occurred in Germany, wiping out the middle class and the entire German economy as well
And while we’re at it, this is who really founded the Federal Reserve, in a meeting still shrouded in secrecy:
The seven men who attended the secret meeting on Jekyll Island, where the Federal Reserve System was conceived, represented an estimated one-fourth of the total wealth of the entire world. They were:
1. Nelson W. Aldrich, Republican "whip" in the Senate, Chairman of the National Monetary Commission, father-in-law to John D. Rockefeller, Jr.;
2. Henry P. Davison, Sr. Partner of J.P. Morgan Company
3. Charles D. Norton, Pres. of 1st National Bankof New Yark
4. A. Piatt Andrew, Assistant Secretary of the Treasury;
5. Frank A. Vanderlip, President of the National City Bank of New York, representing William Rockefeller.
6. Benjamin Strong, head of J.P. Morgan's Bankers Trust Company, later to become head of the System;
7. Paul M. Warburg, a partner in Kuhn, Loeb & Company, representing the Rothschilds and Warburgs in Europe.
As an aside, note that ‘Father of the Fed’ Paul Warburg - in 1930, seven years after the German hyperinflation - cited the Reichsbank as his model.
And here’s Carter Glass explaining in 1913 that the Reichsbank and private ownership was model for Fed:
“When the Aldrich plan was before the country, the European bank which its sponsors most often cited as a helpful example for the United States and the one to which they gave more attention in their report than to all the others combined, was the Imperial Bank of Germany. The following brief description of the control of the Reichsbank is taken from an interview with two of its officers, which was published by the monetary commission:”
[The capital] is all private ownership.... The government owns no shares. [In our organization] we have, so to speak, three boards: first, the Curatorium; second, the Direktorium (president and directors);third, the Central Ausschuss [or Central Committee]. The Curatorium is composed of five members. The chairman is the Chancellor of the Empire. The Emperor appoints the second member, and it has been the custom to appoint the Prussian Minister of Finance. The Bundesrath [the upper house of the imperial legislature] appoint from among their own number three members, which completes the Board…In the Chancellor lies supreme power although he has exercised it but once in the history of the bank.
It's pretty funny how indignant Carter Glass is here in 1927 at those suggesting that Federal Reserve notes might somehow be inflationary, or "fiat."
That could never happen, right?
Fiat money! Why, sir, never since the world began was there such a perversion of terms; and a month ago I stood before a brilliant audience of 700 bankers and business men in New York City, and there challenged the president of the National City Bank to name a single lexicographer on the face of the earth to whom he might appeal to justify his characterization of these notes. I twitted him with the fact that not 1 Percent, of the intelligent bankers of America could be induced to agree with his definition of these notes, and asked him to name a single financial writer of the metropolitan press of his own town, to whom he might confidently appeal to justify his absurd charge. “Fiat money” is an irredeemable paper money with no specie basis, with no gold reserve, but the value of which depends solely upon the taxing power of the Government emitting it. [Gross! - rh]
This Federal reserve note has 40 per cent, gold reserve behind it ; has 100 per cent, short-term, gilt-edge commercial paper behind it, which must pass the scrutiny, first, of the individual bank, next of the regional reserve bank, and finally of the Federal Reserve Board. In addition to this, it constitutes a first and paramount lien on all the assets o f the regional reserve bank, including the double liability of the member banks ; and, superadded to this, it has behind it the taxing power, the credit, and the honor of a Nation of free people. There is not a semblance of fiatism about these notes
How far we have fallen.
From an article in The Century Magazine, May 1915
PAUL M. WARBURG is probably the mildest-mannered man that ever personally conducted a revolution. It was a bloodless revolution; he did not attempt to rouse the populace to arms. He stepped forth armed simply with an idea. And he conquered. That is the amazing thing. A shy, sensitive man, he imposed his idea on a nation of a hundred million people. [that’d be us - RH]
Another nugget: Current Secretary of State Antony Blinken's biological father Donald was one of the co-founders of Warburg Pincus.
Easily one of the most ridiculous panels of all time: The Crisis of the Middle Class: Davos Panel (2017)
IMF Managing Director Christine Lagarde, Italian Economy and Finance Minister Pier Carlo Padoan, Harvard University President Emeritus Larry Summers, Bridgewater Chairman Ray Dalio, and Brazillian Finance Minister Henrique Meirelles discuss the global challenges facing the middle class with Bloomberg's Francine Lacqua on the Crisis in the Middle Class panel at the World Economic Forum in Davos on Wednesday.
I couldn’t pick a more absurd panel if I tried. No one remotely middle-class here.
FOMC meetings are driven by a desire to form a consensus with the other smart people around the table, so that each of you is recognized by the other members of the consensus as being smart enough to be a member of the consensus. It’s the precise opposite of the old Groucho Marx joke: “I don’t want to be a member of any club that would have me as a member.” Every FOMC member desperately wants to be a member of the club that would have him or her as a member, because it means that you’ve been recognized as one of the smart kids. The internal political dynamic of academic cultures like the Fed, at least at the highest levels of Governor to Governor interaction, is NOT antagonistic or divisive. On the contrary, it’s cooperative and consensus-forming.
- Ben Hunt
The current Federal Reserve is an echo chamber with no biodiversity. Senior staff there is 100% PhD Economists. And they got their jobs, they maintain their positions, and they get promoted by producing research that backs up what the Chairman and the FOMC have already decided. And I believe that is a big change from back in the '80s when, to start with, the FOMC and the Board of Governors was a mix of people, not all PhD Economists. And the staff itself wasn't a bunch of PhD economists. And the marching orders, at least when chairman Volcker was there, was to find the right answer. And that was a clearly defining thought process for the Fed.
And I can remember very distinctly when I went in May of 1982 to DC to interview for jobs there-- who was it-- Alice Rivlin at CBO. And it was pretty clear that there was a lot of politics involved in the analysis that CBO economists would do. I got to interview with Larry Kudlow at the CEA. And it was not only obvious, it was stated, that the job there was to back up what the White House said. And the Fed, in their own opinions and opinion of everyone else in DC, was out there actually trying to come up with the right answer.
And I think over the last 30-something years, the Fed has become like the rest of the economic organizations in Washington DC, where they're given an answer and they justify it.
But it's worse than that, because they've wrapped it in some pretty complex computer models. Dynamics stochastic general equilibrium model in particular, which ignores the financial sector. So that DSGE didn't see the last financial crisis coming because they ignore the financial sector.
I tried to point out to people at the Fed back in '05 and '06 and early '07, that we should pay attention to it. The mortgage market had grown from 2 and 1/2 trillion in the United States to over 10 in the space of nine years, whereas US GDP had only increased by like 20%. And they thought that that didn't matter at all.
And I think it's only been worse since then. It hasn't gotten any better. They have not learned. They don't keep track of their type II error. And the staff has closed ranks. And they support guys that support the Fed line.
- Alan Boyce, Former Fed economist and bond trader (2016)
Our media fact-checkers…
I’ve been angry about the Fed’s actions on many occasions, but when you showed that we’re paying 20k+ employees $2.6B, I had a wave of apoplectic rage sweep over me. I had ZERO clue that we paid a bunch thieves and short-yellow-bus employees that much money. Obscene doesn’t begin to describe what the Fed has become. God. Damn. Them.
I have a family member who owns a retail shop, (not going to provide more details) and when a big-wig banker entered his shop and was bragging, my family member very cordially told him that he was not welcome in his shop, and that his line of business in no way equaled the proprietorship that he worked to build all his life, and showed him the door. These people need to be shown the door. And if they do not exit in decorum, I fear that there will be a more or less regime change, much like in Germany in the 20's...we are witnessing the end game. Sir, thank you! And thank you again!