Federal Reserve

It’s Just the Chain of Command

By David Stockman  |  July 2, 2018

The Hierarchic Qualm: The sword kills. But the arm moves the sword. Is the arm to blame for murder? No. The mind moves the arm. Is the mind to blame? No. The mind has sworn an oath to duty, and that duty moves the mind, as written by the Throne. So it is that a servant of the Throne is blameless.

– Seth Dickinson, The Traitor Baru Cormorant (2015)


You can’t completely blame the boys and girls on Wall Street for thinking the Federal Reserve both omniscient and omnipotent.

Why should the stock market ever suffer the correction it warrants, much less any double-digit drawdown whatsoever?

And what’s this “business cycle” nonsense? Yes, we can recover forever…

The most powerful monetary central planner in the world makes everything all better… even before it happens.

That’s the kind of gospel we’re preached every day.

It emanates from the Eccles Building, the temple set apart from the Capitol, the White House and the other more alluring monuments dotting the Imperial City.

And it permeates the groupthink, from Washington to Wall Street.

And – still – the Federal Reserve has done nothing for Main Street.

Indeed, our monetary central planners have done much to impair the real economy during the last 11 years.

It’s not hard to understand their true interests.

Let’s consider the case of Bill Dudley, the recently departed president of the Federal Reserve Bank of New York.

Dudley occupied one of the top slots at Goldman Sachs in 2007.

That’s when Tim Geithner, who was then head of the New York Fed, hired him to run the department that buys and sells government debt.

Geithner, of course, was President Obama’s first Treasury Secretary.

Dudley was Wall Street’s viceroy on the Federal Open Market Committee.

In an interview upon his mid-June departure, The Wall Street Journal described Dudley as “confident the economy has a bright future ahead of it.”

He said “lots of things are in good places” when it comes to the economy and the financial system.

He’s taken a bow.

And he’s exited for what will surely be ridiculously greener pastures on a different stage along the Acela Corridor.

That’s even for a guy who was one of the highest-paid in “government,” at close to half a million dollars a year.

Just to close that other, similar loop, Geithner is the number one guy at Wall Street firm Warburg Pincus.

And he’s getting financing for his ventures through “too big to fail” (because we’re here to save them from themselves for our future fortunes) banks like JPMorgan.

Meanwhile, more than 100 million working-age Americans are not holding jobs. And, of that group, only 45 million are retired.

That’s 55 million forgotten Americans.

There are about 420 billion potential labor hours available among adults 20 to 68 years of age.

But just 255 billion of them are actually “filled,” according to the Bureau of Labor Statistics.

By this measure, the unemployment rate is 39%.

The tools of central banking – interest rate pegging, debt monetization – have only the remotest connection to the factors that drive labor markets.

In fact, they’ve created our globally uncompetitive domestic cost/price/wage structure.

America is also living high on the hog. We consume far more than we produce, enabled by an unsustainable dependence on foreign capital.

America is also a demographic time-bomb. That’s the impact of 78 million retired Baby Boomers blowing up the Welfare State.

An increasingly enfeebled domestic economy will devote more and more output to just paying the interest on its debt held by foreign governments and investors.

High consumption today is being stolen from the future. It’s recorded in America’s rising external debt.

But that’s a “so what” stat to our Keynesian overlords. They focus on “flows,” not balance sheets, and consumption, not production, as the keys to growth.

Wall Street neither knows nor cares about the imbalances such thinking creates in the real world.

That burden – always – falls on Main Street.

But people are beginning to understand it’s not awesome out here.

Lots of things are in fact in bad places.

That’s why the Donald’s in the Oval Office.

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR