Federal Reserve

Wild and Crazy Monetary Central Planners

By David Stockman  |  January 13, 2020

The robb’d that smiles, steals something from the thief; he robs himself that spends a bootless grief.

–William Shakespeare, Othello (~1603-04

What if they audited the Fed?

It’s a good question.

But is there anything more absurd than what our monetary central planners are doing in broad daylight, in real time?

In other words, I don’t need no stinking audit to tell me what they’re up to stinks to high heaven.

At the same time, the Federal Reserve retains its capacity to astonish; would you believe they’re about to wade into “climate change”… of course you would.

Here’s the second part of my most recent talk with the folks at Doug Casey’s International Man project…

International Man: There are increasing calls for central banks to combat climate change. The IMF, the European Central Bank, and several others have chimed in. What does this mean, and why are central bankers suddenly so keen on this topic?

David Stockman: This is beyond stupid. What could the central banks possibly do to help the global economies adjust to climate change? Climate change may or may not be happening, and if it is, it’s due to planetary forces that central banks have absolutely no power to impact or counteract.

In my view, it’s one of the many hoaxes going on. It does remind you of how far out modern Keynesian central banking has become. They only have one tool: They can try to falsify interest rates, and they do that by injecting flat credit and liquidity into the market.

That’s all they can do. They have no other ability to drive the $85 trillion global economy, or the $21 trillion domestic economy.

They have a crude instrument. As they say, when your only instrument is a hammer, everything looks like a nail. That’s the case with the Fed.

The only thing they can do is inflate financial asset prices on Wall Street and other financial markets. If they can’t even drive the macroeconomy to hit their inflation targets, how are they going to redirect the macroeconomy to use more green energy?

It’s so idiotic that it doesn’t merit any further discussion.

These central banks are the all-time champions at mission creep.

They have added mission after mission, including inflation at 2%, as they measure it, and now they want another mandate.

They want another reason to enhance their power, when, already, they are the most powerful state institutions in the world, and they’re in the process of wrecking prosperity everywhere.

International Man: If Rand Paul finally gets his audit of the Federal Reserve, what do you think they’ll find?

David Stockman: What he’s going to find is just more detail on the absurdities of what they’re doing already.

I think one that you would look into is this policy called “interest on excess reserves” (IOER). They targeted that number at 1.55% right now. There’s about $1.5 trillion of excess reserves in the banking system.

So, they’re paying out to the banks upwards of $23 billion a year in order to keep excess funds on deposit at the Fed, rather than putting it to work in the macroeconomy.

How stupid is that?

They are blindly fixated on commanding the money market rate. The federal funds market has disappeared. Ben Bernanke basically destroyed that. There’s nothing left there.

Since they know that the federal funds rate is pretty much nothing in the broad money markets—which are dominated by the repo markets, they have come up with IOER to show that they can make an interest rate happen.

It’s crazy. This is what you get from modern central banks.

We have to ask, “Why don’t they just get out of the way and let those reserves either stay on deposit at the Fed, or let them flow into the repo market, the money market, or the commercial paper market?”

So, that’s one area that a thorough audit of the Fed could get at.

The second one that I think would be even more interesting, if it were done properly, is to recognize that they’ve created a bloated balance sheet. They’re back at it again – it peaked at $4.5 trillion from a base of $900 billion, at the time of the crisis in 2008.

They rolled it back a little bit under the short-lived “quantitative tightening” (QT).

The minute the stock market had a moderate hissy fit last fall and last Christmas, they immediately dropped the project, announced the end of QT in August and started back the other way.

So, now they’re back up to $4 trillion and rising rapidly.

The reason I’m mentioning this is that you have $4 trillion of assets at work earning the interest rates that Uncle Sam is paying on 10-year paper, the interest rates that Freddie Mac and Fanny Mae are paying on their longer-term securities – all of this money is coming into the Fed.

The cost of their liabilities is practically nothing because they’ve been created from thin air by hitting the button on the digital printing press. Other than the $23 billion that they’re paying out in this phony IOER scheme, basically, they have cost-free liabilities and a $4 trillion balance sheet that’s earning interest.

Now, the reason I’m bringing this up is it brings in a massive profit. A lot of it that gets cycled back to the Treasury, which is another circular scheme of stupidity. But it also gets used for a big fat, juicy payroll for some 20,000 people – including several thousand economists.

It’s not only these people on the payroll, but there are all kinds of contract research they fund from the massive profits they generate from printing money. That means that a substantial share of the academic economists in the United States is on the payroll of the Federal Reserve. They lick the boots of the guy who’s signing the checks.

The system is bad enough the way it is – between the political process, the dominance of statism, interventionism, and Keynesianism. But, now, even the academic economists on the payroll are being paid to find that the Fed is doing a wonderful job and should be doing even more.

If we have an audit, we ought to find out the name and serial number of every damn economist that’s on their payroll or that’s getting contract research and ignore them – because they’re saying what the master wants to hear.

Check This Math

I’ll say it again: This is the most politicized market in history. And the Tweeter-in-Chief is still in charge. So, the situation is changing almost by the minute.

It’s “Impeachment!” in Imperial Washington and all over the Mainstream Media. It’s “Easy Money!” on Wall Street and across Bubblevision.

And it seems as if the whole world has, indeed, gone mad.

Amid this chaos, prices will continue to rise and fall, trends will continue to develop and dissipate.

Well, The Stockman Letter is made for times like these. And we’ve updated our design to help us better navigate to not only the safest harbors but also the most promising opportunities.

The stakes are as high as they can be heading into 2020. Markets appear to be straining, catching up to an economy that’s been weak and getting weaker for years.

The Donald is tied up in the day-to-day movements of the major stock indexes like no president before him. The increasingly desperate incumbent will do anything he must to hold the White House.

It’s a major tipping point. And there’s no telling what the Donald’s great disruptions could do to your wealth.

You’ve got to be nimble to win in this market, and we’d like to help you do that

To common sense.

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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