The Fed’s “No Banker Left Behind” Program
By David Stockman, Budget Director under President Reagan and author of the bestseller, The Great Deformation: The Corruption of Capitalism in America. This article originally appeared on David Stockman’s Contra Corner.
The mainstream economics narrative is so far down the monetary rabbit hole that the blinding clarity of the chart below has no chance whatsoever of seeing the light of day. That’s because it dramatizes the real truth regarding all the Fed gibberish about “accommodation” and “stimulus”. Namely, that what lies beneath its “extraordinary measures”, such as ZIRP, QE, wealth effects and the rest of the litany, is a central banking regime that systematically destroy savers. Period.
Just take the simple case of a worker who joined the labor force in 1969 at $100 per week or $5,200 annually, and worked at the average non-supervisory weekly wage posted by the BLS every year through 2009. By that point he or she would have attained an ending wage of $600 per week or $31k annually, and a 40-year average annual income of about $20k in nominal terms. With a normal load of payroll and state and local withholding, the latter would have left about $15,000 per year on an after-tax basis.
Upon retirement this BLS tracking worker could have possibly accumulated $100,000 in a savings nest egg – but only if he or she had been completely atypical and set aside an average of 17% of after-tax income each and every year. Needless to say, that would have precluded nearly all everyday “luxuries” such as a regular new car, an occasional trip to Disneyland, a bass boat for weekend fishing and most other like and similar modest indulgences. Instead, deep thrift would have been the omnipresent watchword of this household.
Next, suppose that after 40 years of skimping and penny pinching this now retired household wished to keep it’s funds in safe and liquid 6 month CDs. Well, as shown below, according to the writ of Bernanke and Yellen, the interest earned last year on $100,0000 would have amounted to the munificent sum of $1.07 per day – before bank fees, inflation and taxes. Yes, after 40 years of thrift, our retiree could afford – from the entire return on his nest egg – a Starbucks cappuccino about once every three days!
Jim Grants aptly described the savers lot thusly:
“Savers are figuratively on their hands and knees and rooting around in bushes and between sofa seats for loose change on which to sustain themselves.”
There is a reason they call ZIRP financial “repression” – even though “oppression” might be a more suitable term. And no, despite the monetary bureau’s whining about too little inflation, the fact is that even at the systematically understated CPI, this worker’s life time nest egg would already be down to $92,000 in real purchasing power after only four years on the shuffleboard courts.
The point here is partly to lament the stupendous injustice of ZIRP, and to highlight that it is truly something new and terrible under the sun. Had out theoretical worker retired in 1996, for example, his interest earnings over the next four year would have been $5,000 per year on the same life time nest egg invested in six month CDs.
Now despite the monetary politburo’s noisy gumming about the mythical “deflation” threat, the gaping difference between earning $5,000 and $400 per year on the same principal amount is a matter purely of central bank policy. It has nothing whatsoever to do with market economics or any change in the underlying inflation trend. In fact, the average CPI gain during the four years after 1996 was 2.1% – or only a hairline different than the 1.9% per year that has prevailed since 2009.
And that gets us to the galling part. The policy apparatus of the state has subjected savers to brutal punishment for one reason alone. Namely, to enable the insolvent big banks of America to dig their way out of the deep hole they were in at the time of the financial crisis. By scalping false profits from the Fed’s regime of financial repression, they have, in fact, been able to return accounting profits to pre-crisis levels and beyond.
And here’s why. Thanks to the Fed, banks’ “cost of production” – that is, the funding cost of earning assets – has been practically eliminated.
Stated differently, ZIRP has enabled banks to carry $10 trillion of deposits at negative real interest rates. During the 72 month since ZIRP was officially embraced in December 2008, the CPI has risen by 12% (1.9% per annum). That compares to an average return on six months CDs over the same period of 0.4%. Call that a negative 1.5% real rate on the banks cost of funds.
This has been called the Fed’s “No Banker Left Behind” program and for good reason. Financial repression extracts at least $700 billion annually from bank depositors. At current tax and inflation rates, an honest free market would require at least a 4% deposit rate or 350 bps more than the average bank cost of funding shown above.
And that’s just for starters. As will be shown in Part II, banks – especially the giant Wall Street banks and financial supermarkets – have profited in many other ways from financial repression. These include hundreds of billions of mortgage banking profits that were skimmed from the mortgage “refi” boom of 2010-2013. When the Fed used QE to scoop up more than $1 trillion of GSE securitized mortgages and thereby drove home-mortgage rates to as low as 3.25% in 2012, banks led by Wells Fargo booked massive gains through the magic of “gain-on-sale” accounting.
The banks’ financial repression windfall also included the underwriting profits from the huge boom investment grade and junk bond issuance. This multi-trillion issuance frenzy over the last six years had very little to do with market economics or real asset investment; these news funds went overwhelmingly into stock buybacks, LBO’s, cash M&A deals and other forms of financial engineering.
And, it goes without saying, that the Fed’s massive buying of US treasury debt provided yet another form of windfall. Banks loaded up with government securities during the past five years, knowing that the Fed had a floor under bond prices, permitting them to scalp virtually risk free returns owing to their 0.4% funding costs.
So now comes the Big Lie. On the occasion of selling its remaining shares in Ally Financial, the WSJ faithfully peddled an unconscionable claim by the Obama ministry of untruth:
The Treasury Department said the 2008 Troubled Asset Relief Program has netted a small profit, returning $441.7 billion on the $426.4 billion invested in firms including Citigroup Inc., Bank of America Corp., General Motors Co., Chrysler and American International Group, Inc.
Really? The “small profit”, along with most of the so-called “recovery” of Uncle Sam’s $426 billion initial investment, was ground out of the backs of America’s savers and depositors; or it was scalped from the massive financial bubbles the Fed has generated in the Wall Street casino.
In short, under an honest monetary regime of market clearing interest rates, bank balance sheets would be far smaller. Likewise, deposit costs would be far higher, and opportunities to scalp profits from the global scramble for yield far less abundant. Part II will provide chapter and verse.
But the heart of the matter is this. The Fed and other central banks of the world have created trillions of fiat credit that is drastically mis-priced and would not even exist in a free market based on honest savings from current production and legitimate requirements for capital investment. Accordingly, the entire balance sheet and financial result of the commercial banking system is a bloated artifact of rampant central bank money printing and systemic financial repression.
TARP wasn’t “repaid” with a profit. It was simply perpetuated and morphed into a new form of destructive state subvention and malinvestment. By David Stockman, David Stockman’s Contra Corner.
It has been one heck of a downhill ride since June, culminating in a December dive. But this time, there is no polar vortex to blame. Read… Already Crummy US Economy Takes a Sudden Hit
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