Biden's approval is down. Student debt forgiveness won't help.

Published in The Week.

There's a strong case for helping these Americans, who bear the costs of higher education but enjoy none of the benefits — and for making universities risk their own money on the financial trajectory of their students. But concentrating benefits on an already successful group is a slap in the face to precisely the non-professional, older, and more rural voters whom Democrats need to court.

Read the full piece here.

Federal Housing Regulators Have Learned and Forgotten Everything

Published in Law & Liberty and in Real Clear Markets.

Should the government subsidize buying houses that cost $1.2 million? The answer is obviously no. But the government is going to do it anyway through Fannie Mae and Freddie Mac. The Federal Housing Finance Authority (FHFA) has just increased the size of mortgage loans Fannie and Freddie can buy (the “conforming loan limit”) to $970,080 in “high cost areas.” With a 20% down payment, that means loans for the purchase of houses with a price up to $1,212,600.

Similarly, the Federal Housing Administration (FHA) will be subsidizing houses costing up to $1,011,250. That’s the house price with a FHA mortgage at its increased “high cost” limit of $970,800 and a 4% down payment.

The regular Fannie and Freddie loan limit will become $647,200, which with a 20% down payment means a house costing $809,000. The median U.S. price sold in June 2021 was $310,000. A house selling for $809,000 is in the top 7% in the country. One selling for $1,212,600 is in the top 3%. To take North Carolina for example, where house prices are less exaggerated, an $809,000 house is in the top 2%. For FHA loans, the regular limit will become $420,680, or a house costing over $438,000 with a 4% down payment—41% above the national median sales price.

Average citizens who own ordinary houses may think it makes no sense for the government to support people who buy, lenders that lend on, and builders that build such high-priced houses, not to mention the Wall Street firms that deal in the resulting government-backed mortgage securities. They’re right.

Fannie and Freddie, which continue to enjoy an effective guarantee from the U.S. Treasury, will now be putting the taxpayers on the hook for the risks of financing these houses. Through clever financial lawyering, it’s not legally a guarantee, but everyone involved knows it really is a guarantee, and the taxpayers really are on the hook for Fannie and Freddie, whose massive $7 trillion in assets have only 1% capital to back them. FHA, which is fully guaranteed by the Treasury, has in addition well over a trillion dollars in loans it has insured.

By pushing more government-sponsored loans, Fannie, Freddie, its government conservator, the FHFA, and sister agency, the FHA, are feeding the already runaway house price inflation. House prices are now 48% over their 2006 Housing Bubble peak. In October, they were up 15.8% from the year before. As the government helps push house prices up, houses grow less and less affordable for new families, and low-income families in particular, who are trying to climb onto the rungs of the homeownership ladder.

As distinguished housing economist Ernest Fisher pointed out in 1975:

[T]he tendency for costs and prices to absorb the amounts made available to prospective purchasers or renters has plagued government programs since…1934. Close examination of these tendencies indicates that promises of extending the loan-to-value ratio of the mortgage and extending its term so as to make home purchase ‘possible for lower income prospective purchasers’ may bring greater profits and wages to builders, building suppliers, and building labor rather than assisting lower-income households.

The reason the FHFA is raising the Fannie and Freddie loan-size limits by 18%, is that its House Price Index is up 18% over the last year. FHA’s limit automatically goes up in lock step with these changes. These increases are procyclical acts. They feed the house price increases, rather than acting to moderate them, as a countercyclical policy would do. Procyclical government policies by definition make financial cycles worse and hurt low-income families, the originally intended beneficiaries.

The contrasting countercyclical objective was memorably expressed by William McChesney Martin, the longest-serving Chairman of the Federal Reserve Board. In office from 1951 to 1970, under five U.S. presidents, Martin gave us the most famous of all central banking metaphors. The Federal Reserve, he said in 1955, “is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.”

Long after the current housing price party has gotten not only warmed up, but positively tipsy, the Federal Reserve of 2021 has, instead of removing the punch bowl, been spiking the punch. It has done this by, in addition to keeping short term rates at historically low levels, buying hundreds of billions of dollars of mortgage securities, thus keeping mortgage rates abnormally low, and continuing to heat up the party further.

In general, what a robust housing finance system needs is less government subsidy and distortion, not more.

In fact, the government has been spiking the housing party punch in three ways. First is the Federal Reserve’s purchases of mortgage securities, which have bloated its mortgage portfolio to a massive $2.6 trillion, or about 24% of all U.S. residential mortgages outstanding.

Second, the government through Fannie and Freddie runs up the leverage in the housing finance system, making it riskier. This is true of both leverage of income and leverage of the asset price. It is also true of FHA lending. Graph 1 shows how Fannie and Freddie’s large loans have a much higher proportion of high debt-to-income (DTI) ratios than large private sector loans do. In other words, Fannie and Freddie tend to lend more against income, a key risk factor.

Graph 1: Percent of loans over 43% DTI ratio

Source: Fisher, Lynn M., et al. “Jumbo rates below conforming rates: When did this happen and why?.” Real Estate Economics 49.S2 (2021): 461-489.

Fannie and Freddie also make a greater proportion of large loans with low down payments, or high loan-to-value (LTV) ratios, than do corresponding private markets. Graph 2 shows the percent of their large loans with LTVs of 90% or more—that is, with down payments of 10% or less—another key risk factor.

Graph 2:  Share of loans with LTV ratios over 90%

Source: Fisher, Lynn M., et al. “Jumbo rates below conforming rates: When did this happen and why?.” Real Estate Economics 49.S2 (2021): 461-489.

Now—on top of all that– the FHFA, by upping the loan sizes for Fannie and Freddie, is bringing to the party a bigger punch bowl. That the size limit for Fannie and Freddie is very important in mortgage loan behavior, we can see from how their large loans bunch right at the limit, as shown by Graph 3.

The third spiking of the house price punch bowl consists of the government’s huge payments and subsidies in reaction to the pandemic. A portion of this poorly targeted deficit spending money made its way into housing markets to bid up prices.

A key housing finance issue is the differential impact of house price inflation on lower-income households. AEI Housing Center research has demonstrated how the spiked punch bowl has inflated the cost of lower-priced houses more than others. This research shows that rapid price increases crowd out low-income potential home buyers in housing markets. Thus, as Ernest Fisher observed nearly 50 years ago, government policies that make for rapid house price inflation constrain the ability to become homeowners of the very group the government professes to help.

In general, what a robust housing finance system needs is less government subsidy and distortion, not more. The question of upping the size of Fannie and Freddie loans, and correspondingly those of the FHA, is part of a larger picture of what the overall policy for them should be. Should we favor making their subsidized, market distorting, taxpayer guaranteed activities even bigger than the combined $8 trillion they are already?  Should they become even more dominant than they are now?  Or should the government’s dominance of the sector and its risk be systematically reduced?  That would be a movement toward a mortgage sector that is more like a market and less like a political machine.

In short, what about the future of the government mortgage complex, especially Fannie and Freddie: Should they be even bigger or smaller?  We vote for smaller.

How might this be done? As a good example, Senator Patrick Toomey, the Ranking Member of the Senate Banking Committee, has introduced a bill that would eliminate Fannie and Freddie’s ability to subsidize loans on investment properties, a very apt proposal. It will not advance with the current configuration of the Congress, but it’s the right idea. Similarly, it would make sense to stop Fannie and Freddie from subsidizing cash-out refis, mortgages that increase the debt on the house. Another basic idea, often proposed historically, but of course never implemented, would be to reduce, not increase, the maximum size of the loans Fannie and Freddie can buy, and by extension, FHA can insure.

In the meantime, the house price party rolls on. How will it end after all the spiked punch?  Doubtless with a hangover.

Alex J. Pollock is a senior fellow at the Mises Institute and the author of Finance and Philosophy: Why We're Always Surprised. His five decades of financial experience include being the Principal Deputy Director of the U.S. Treasury’s Office of Financial Research and the president and CEO of the Federal Home Loan Bank of Chicago.

MORE BY THIS AUTHOR

Edward J. Pinto is an American Enterprise Institute (AEI) senior fellow and director of AEI’s Housing Center. The Center monitors the US markets using a unique set of Housing Market Indicators. Active in housing finance for over 40 years, he was an executive vice president and chief credit officer for Fannie Mae until the late 1980s.

MORE BY THIS AUTHOR

The Mystery of Banking

The bank has ten billion this year,

But the money is surely not here—

It’s been quite lent away,

Pending some future day,

So it’s only a promise , that’s clear.

Is it borrowers then with their share

Who have the bank’s money to spare?

Nope!  They’ve spent it all,

To get profits next fall,

So the money is clearly not there.

One may begin wondering where

Is this something not here and not there—

There’s a ten billion list,

But does money exist?

Such thoughts only lead to despair.

                             Alex J. Pollock, c. 1970

Waltzing

For your light feet and graceful steps

I offer praise and thanks,

I’d rather dance a waltz with you

Than own a hundred banks.

Sonnet

Since we will vanish, oh my one, my own,

Together with the burnt out candle’s flame,

And nothing, nothing, meriting the name

Of You or Me remain, though bright we’ve shown;

Since too no verses, certainly not mine,

Can hold the light or stand against the dark,

No lines recall a glow, no rhymes a spark,

And this is true, although you are divine—

Divine, I say, I also (if with scars),

Two miracles of thought, will, passion, breath,

But since stone blind to miracles is death,

Who snuffs as well as spirits, worlds and stars,

Therefore love me while we burn and be—

Thus purest logic, truest poetry.

Lines on Holbein’s “Dance of Death”

He stalks unseen through all our days,

While puffing self-importance, we

Tote up our wealth, dine richly fed,

Make speeches.  He, all mockery.

Sniggers as our flesh betrays.

We push from thought the end we dread,

He waits and grins in parody.

April in Chicago

The zephyrs turned to gusts and chills,

It’s snowing on the daffodils!

Too cold for any vernal fling,

Rough winds do shake Chicago’s spring.

Lines While Riding the Chicago L

Oh, you cannot make a poem out of riding on the L train,

Though you’re clever, Alexander, so my Muses will explain,

It’s for certain not a pleasure—it’s too boring to be pain,

It’s only jerky, crowded, noisy and obnoxiously mundane!

Moonbeams Needed

The daily tasks that never end,

Cling like cobwebs to our minds,

Entangle in a thousand strands

Our souls in lilliputian binds.

They hide the essence from our view,

Intruding even in our dreams,

We must escape! And freely rise,

Like Cyrano, upon moonbeams.

Social Distinction

“I think that I think,

And feel that I feel,

But,” sighed the philosopher,

“What’s really real?”

With eyebrows raised

Behind her mask,

Dame Nature sniffed,

“Who is he to ask?”

Herrick

Robert Herrick, cavalier free,

And ever perfect metrically,

Your loves were bold,

Your verse controlled.

In poetry a mistress’ knee

Can be a subject properly,

      If every rhyme

Arrives on time.

You were immoral we can see,

But still immoral gallantly—

Your sin? An ounce.

It’s style that counts!

Variation on Pope

Radiation wandered blind across the endless night,

God made the Eye, and there was light.

Liquidity

(with apologies to Shakespeare)

Tell me, where’s Liquidity bred,

In the world or in your head?

How begot, how nourish’ed?

      It’s in your mind and eye.

But when the FED so great and fair

Starts printing by the trillions there,

You know Big Brother’s taking care

      And you go out and buy!

Since 2008, Monetary Policy Has Cost American Savers about $4 Trillion

Posted in Audio Mises Wire.

After thirteen years with on average negative real returns to conservative savings, it is time to require the Federal Reserve to address its impact on savers.

Click here to listen.

No, the United States Has Not Always Paid Its Debts

Published in Reason:

In 1934, Roosevelt officially devalued the dollar by increasing the price of gold from $20.67 to $35. Although contemporary press accounts characterized the government's actions as an abrogation (see the Wall Street Journal on May 4, 1933), Treasury securities issued in June and August 1933 were oversubscribed and a February 1935 Supreme Court decision upheld the government's actions. While these actions are generally portrayed today as an attempt to halt gold hoarding or end price deflation, they also appear to have had a fiscal motivation. In fiscal year 1933, the ratio of interest expense to federal revenues reached 33.15 percent, the only time this ratio has exceeded 30 percent since the post-Civil War era. The Roosevelt administration needed more funds to implement New Deal programs and wanted the flexibility to issue new Treasury securities unimpeded by gold convertibility.

An Incredibly Misguided Nomination for Comptroller of the Currency

Published in Real Clear Markets:

The Biden administration has certainly made the most misguided nomination for Comptroller of the Currency in history with its nominee, Saule Omarova. Professor Omarova has published proposals displaying deep ideological commitments which make her obviously unacceptable for this key responsibility in the banking system. Even after this has become apparent, the Biden administration has very surprisingly not withdrawn her name and a Senate Banking Committee hearing on the nomination has been scheduled for this week, November 18.

Concerning this hearing, every Democratic senator on the Banking Committee should be asked in public:

- Do you subscribe to the proposals published by Professor Omarova?  

- Do you support taking all deposits away from private banks?   

- Do you support making the Federal Reserve in charge of "economy-wide credit allocation"? 

- Do you support making the Federal Reserve a deposit monopoly?  

- Do you support having the New York Federal Reserve Bank short investments it [somehow] decides are too expensive and buy to boost the price of investments it [somehow] decides are too cheap?  

- Do you support giving the government seats on privately owned companies' boards of directors, with the government having "disproportionate voting power"?  

All these remarkably unwise and naive proposals are explicitly made in her published articles.

Honorable Senators:  If you support these proposals, you should stand up and say so out loud, so everybody can hear you.  If you don't support them, you should obviously vote No on this nomination.

Risk, Uncertainty and Profit 100 Years Later

Published in Law & Liberty. Also appears in AIER.

The year 2021 marks the 100th anniversary of Frank Knight’s great book, Risk, Uncertainty and Profit (RU&P), which established uncertainty as a fundamental idea in economics and finance, and as a key to understanding enterprise, entrepreneurship, cycles of booms and busts, and economic growth. Viewed from the present, it also explains why faith in economic management by central banks will be disappointed, and why any idea that economies or financial markets are governed by “mechanisms” is deluded. Its ideas open the way to seeing that economies and financial markets are a different kind of reality than are machines, and thus why the econometric equations that seem so plausible in some times, at other times fail.

Knight lived from 1885 to 1972; RU&P was published in 1921 when he was 35. Although he subsequently had a long and distinguished career at the University of Chicago, where he influenced numerous future economists including Milton Friedman, RU&P is far and away his magnum opus, a book that “ended up changing the course of economic theory” and established Knight “in the pantheon of economic thinkers.” It might also be called “the most cited economics book you have never read.” Indeed, it is long, complex, and often difficult, but contains brilliant insights which do not go out of date. We may enjoy the irony that it arose from a contest by the publishers in 1917 in which its original text won second, not first, prize.

RU&P is most and justifiably famous for its critical distinction between Uncertainty and Risk, with the term “Knightian Uncertainty” immortalizing the author, at least among those of us who have thought about it. Although in common language, then and now, “It’s uncertain” or “It’s risky” might be taken to mean more or less the same thing, in Knight’s clarified concepts, they are not only not the same, but are utterly different, with vast consequences.

Knight set out to address, as he wrote in RU&P, “a confusion of ideas which goes down deep into the foundations of our thinking. The key to the whole tangle will be found to lie in the notion of risk or uncertainty and the ambiguities concealed therein.” So “the answer is to be found in a thorough examination and criticism of the concept of uncertainty, and its bearings upon economic processes.”

“But,” Knight continued, “Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated”—until RU&P in 1921, of course. They are “two things which, functionally at least, in their causal relations to the phenomena of economic organization, are categorically different.”

Specifically, risk means “a quantity susceptible of measurement,” but uncertainty is “unmeasurable,” and “a measurable uncertainty is so far different from an unmeasurable one that it is not in effect an uncertainty at all.” It is only a risk.

Another way of saying this is that for a measurable risk, you can know the odds of outcomes, although you don’t know exactly what will happen in any given case. With uncertainty, you do not even know the odds, and more importantly, you cannot know the odds.

When facing risk, since you can know the odds, you can know in a large number of repeated events what the distribution of the outcomes will be. You can know the mean of the distribution of outcomes, its variation, and the probability of extreme outcomes. With fair pair of dice, you know that rolling snake eyes (one spot on each die) has a reliable probability of 1/36. We know that the extreme outcome of rolling snake eyes three times in a row has a probability of about 0.00002—roughly the same probability of flipping a fair coin and getting tails 16 times in a row. Of course, even that remote probability is not zero.

With risk, by knowing the odds in this fashion, and knowing how much money is being risked, you can rationally write insurance for bearing the risk when it is spread over a large number of participants. It may take specialized skill and a lot of data, but you can always in principle calculate a fair price for insuring the risk over time, and the ones taking the risk can accordingly buy insurance from you at a fair price, solving their risk problem.

Faced with uncertainty, however, you cannot rationally write the insurance, and the uncertainty bearers cannot buy sound insurance from you, because nobody knows or can know the odds. Therefore, they do not and cannot know the fair price for bearing the uncertainty.

In short, an essential result of Knight’s logic is that risk is in principle insurable, but uncertainty is not.

Of course, you might convince yourself that the uncertainty is really risk and then estimate the odds from the past and make calculations, including complicated and sophisticated calculations, manipulating your guesses about the odds. There is often a strong temptation to do this. It helps a lot in selling securities, for example, or in making subprime loans. You can build models using the estimated odds, creating complicated series of linked probabilities for surviving various stress tests and for calculating the required prices.

It is the special function of the entrepreneur to generate unpredictable change and the economic profit or loss, progress or mistakes, that result from it.

Your analysts will certainly solve the mathematical equations in the models properly; however, under uncertainty, the question is not doing the math correctly, but the relationship of the math to the unknown and unknowable future reality. In the uncertainty case, your models will one day fail, because in fact you cannot know the odds, no matter how many models you run. The same is true of a central bank, say the Federal Reserve, running a complex model of the whole economy and employing scores of economists. Under uncertainty, it may, for example, in spite of all its sophisticated efforts, forecast low inflation when what really is about to happen is very high inflation—just as in 2021.

There is no one to ensure against the mistake of thinking Uncertainty is Risk.

Let us come to the P in RU&P: Profit. Every time Knight writes “profit,” as in the following quotations, and also as used in the following discussion, it does not mean accounting profit, as we are accustomed to seeing in a profit and loss statement, but “economic profit.” Economic profit is profit in excess of the economy’s cost of capital. When economic profit is zero, then the firm’s revenues equal its costs, including the cost of capital and the cost of Risk, so the firm has earned exactly its cost of capital.

In a theoretical world of perfect competition, prices, including the price for insuring Risk, would adjust so that revenues always would equal cost. That means in a competitive world in which the future risks are insurable, there should be no profit. We obviously observe large profits in many cases, especially those earned by successful entrepreneurs. Knight concludes that in a competitive economy, Uncertainty, but not Risk, can give rise to Profit.

It is “vital to contrast profit with payment for risk-taking,” he wrote. “The ‘risk’ which gives rise to profit is an uncertainty which cannot be evaluated, connected with a situation such that there is no possibility of grouping on any objective basis,” and “the only ‘risk’ which leads to a profit is a unique uncertainty resulting from an exercise of ultimate responsibility which in its very nature cannot be insured.” Thus, “profit arises out of the inherent, absolute unpredictability of things, out of the sheer brute fact that the results of human activity cannot be anticipated…a probability calculation in regard to them is impossible and meaningless.” Loss also arises from the same brute fact, of course. We are again reminded that human activity is a different kind of reality than that of predictable physical systems.

Economic progress, or a rising standard of living for ordinary people, depends on creating and bearing Uncertainty, but this obviously also makes possible many mistakes. These include, we may add, the group mistakes which result in financial cycles. We don’t get the progress without the uncertainty or without mistakes. “The problem of management or control, being a correlate or implication of uncertainty, is in correspondingly large measure the problem of progress.” The paradox of economic progress is that there is no progress without Uncertainty, and no Uncertainty without mistakes.

To have Uncertainty, there must be change, for “in an absolutely unchanging world the future would be accurately foreknown.” But change per se does not create an unknowable future and Uncertainty. Change which follows a known law would be insurable; so “if the law of change is known…no profits can arise.” Profits in a competitive system can arise “only in so far as the changes and their consequences are unpredictable.”

It is the special function of the entrepreneur to generate unpredictable change and the economic profit or loss, progress or mistakes, that result from it. He takes the “ultimate responsibility” of bearing uncertainty in business.

Knight clearly enjoyed summing up “the main facts in the psychology of the case” of the entrepreneurs, when the uncertainties “do not relate to objective external probabilities, but to the value of the judgment and executive powers of the person taking the chance.” The entrepreneurs may have “an irrational confidence in their own good fortune, and that is doubly true when their personal prowess comes into the reckoning, when they are betting on themselves.” They are “the class of men of whom these things are most strikingly true; they are not the critical and hesitant individuals, but rather those with restless energy, buoyant optimism, and large faith in things generally and themselves in particular.” This suggests that a kind of irrational faith is required for progress.

A former student of philosophy, Knight always was a very philosophical economist. On the last page of RU&P comes this true perspective on it all: “The fundamental fact about society as a going concern is that it is made of individuals who are born and die and give place to others; and the fundamental fact about modern civilization is that it is dependent upon the utilization of three great accumulating funds of inheritance from the past, material goods and appliances, knowledge and skill, and morale. . . . Life must in some manner be carried forward to new individuals born devoid of all these things as older individuals pass out.” We need to be reminded of this as we in our turn strive to increase the great funds of inheritance for those who will carry on into the ever-uncertain future.

For it is as true now and going forward as when RU&P was published one hundred years ago that, as Knight wrote, “Uncertainty is one of the fundamental facts of life.”

Since 2008, Monetary Policy Has Cost American Savers about $4 Trillion

Published by the Mises Institute,

With inflation running at over 6 percent and interest rates on savings near zero, the Federal Reserve is delivering a negative 6 percent real (inflation-adjusted) return on trillions of dollars in savings. This is effectively expropriating American savers’ nest eggs at the rate of 6 percent a year. It is not only a problem in 2021, however, but an ongoing monetary policy problem of long standing. The Fed has been delivering negative real returns on savings for more than a decade. It should be discussing with the legislature what it thinks about this outcome and its impacts on savers.

The effects of central bank monetary actions pervade society and transfer wealth among various groups of people—a political action. Monetary policies can cause consumer price inflations, like we now have, and asset price inflations, like those we have in equities, bonds, houses, and cryptocurrencies. They can feed bubbles, which turn into busts. They can by negative real yields push savers into equities, junk bonds, houses, and cryptocurrencies, temporarily inflating prices further while substantially increasing risk. They can take money away from conservative savers to subsidize leveraged speculators, thus encouraging speculation. They can transfer wealth from the people to the government by the inflation tax. They can punish thrift, prudence, and self-reliance.

Savings are essential to long-term economic progress and to personal and family financial well-being and responsibility. However, the Federal Reserve’s policies, and those of the government in general, have subsidized and emphasized the expansion of debt, and unfortunately appear to have forgotten savings. The original theorists of the savings and loan movement, to their credit, were clear that first you had “savings,” to make possible the “loans.” Our current unbalanced policy could be described, instead of “savings and loans,” as “loans and loans.”

As one immediate step, Congress should require the Federal Reserve to provide a formal savers impact analysis as a regular part of its Humphrey-Hawkins reports on monetary policy and targets. This savers impact analysis should quantify, discuss, and project for the future the effects of the Fed’s policies on savings and savers, so that these effects can be explicitly and fairly considered along with the other relevant factors. The critical questions include: What impact is Fed monetary policy having on savers? Who is affected? How will the Fed’s plans for monetary policy affect savings and savers going forward?

Consumer price inflation year over year as of October 2021 is running, as we are painfully aware, at 6.2 percent. For the ten months of 2021 year-to-date, the pace is even worse than that—an annualized inflation rate of 7.5 percent.

Facing that inflation, what yields are savers of all kinds, but notably including retired people and savers of modest means, getting on their savings? Basically nothing. According to the Federal Deposit Insurance Corporation’s October 18, 2021, national interest rate report, the national average interest rate on savings account was a trivial 0.06 percent. On money market deposit accounts, it was 0.08 percent; on three-month certificates of deposit, 0.06 percent; on six-month CDs, 0.09 percent; on six-month Treasury bills, 0.05 percent; and if you committed your money out to five years, a majestic CD rate of 0.27 percent. 

I estimate, as shown in the table below, that monetary policy since 2008 has cost American savers about $4 trillion. The table assumes savers can invest in six-month Treasury bills, then subtracts from their average interest rate the matching inflation rate, giving the real interest rate to the savers. This is on average quite negative for these years. I calculate the amount of savings effectively expropriated by negative real rates. Then I compare the actual real interest rates to an estimate of the normal real interest rate for each year, based on the fifty-year average of real rates from 1958 to 2007. This gives us the gap the Federal Reserve has created between the actual real rates over the years since 2008 and what would have been historically normal rates. This gap is multiplied by household savings, which shows us by arithmetic the total gap in dollars.

To repeat the answer: a $4 trillion hit to savers.

The Federal Reserve through a regular savers impact analysis should be having substantive discussions with Congress about how its monetary policy is affecting savings, what the resulting real returns to savers are, who the resulting winners and losers are, what the alternatives are, and how its plans will impact savers going forward.

After thirteen years with on average negative real returns to conservative savings, it is time to require the Federal Reserve to address its impact on savers.

Biden Pick for Bank Regulator Proposed Fed Take Over Banking, Manipulate Stock Prices

Published in the Epoch Times:

“If you have all of the deposits in the government bank, then all of the loans, or at least a very high percentage of the loans, are going to be there as well,” said Alex Pollock, former head of the Federal Home Loan Bank of Chicago and financial research executive at the Treasury who is currently a senior fellow at the classical liberal Mises Institute.

Controlling credit means the Fed—and de facto the federal government—would have a say in most major individual economic decisions, such as what factory or office tower gets built, who gets to build or buy a home, and even who gets to go to college or buy a car.
“If you’re politically correct, well, then you can get a loan; if you’re not, you can’t,” Pollock told The Epoch Times about the implications.

...

“She wants government to control the allocation of capital in the economy, which is a recipe for politicizing everything,” said David Burton, financial regulation expert at the conservative Heritage Foundation.

Pollock concurred: “It would become purely political.”

...

It isn’t clear what such price signals would be worth when the investors would be limited to options predetermined by the NIA, Pollock noted.

In fact, it isn’t clear how the Fed would determine what is or isn’t productive in a system in which credit flows are largely determined by the government. The ordinarily robust private credit to serve as a frame of reference would be largely absent and so the Fed would have to fall back on its own judgment.

“Nobody, especially a government bureaucracy, can know enough to do this,” Pollock commented in an email. “It is a totally naïve and, in fact, silly idea.”

At times, Omarova contrasted “productive” investment with speculative investment, which she called “misallocation of capital.”

But speculation “can be destabilizing or stabilizing,” Pollock said. Suppressing it by government mandate doesn’t necessarily heal the monetary woes. In fact, the current practice of the Fed buying up securities seen as safe, like government bonds and mortgage-backed securities, depresses yields on such instruments and pushes investors toward riskier assets, he said.

....

Pollock estimated that such an all-powerful Fed “would go on inflating the money supply by lending to the government itself (monetizing government debt) and to politically favored entities of all sorts.”

...

According to Pollock and several other economists, there are a number of problems with this view.

Let Me Vote Those Shares for You

Published in the Federalist Society.

BlackRock’s idea to give institutional clients more control over how shares of stock are voted could be a good step. Some, such as Alex Pollock, say that it is still a ladder with the first rung above the head of most investors.

The fundamental idea of owning stock in a corporation is that shareholders acquire, along with their investment, ownership rights in the company, including the right to vote on company questions commensurate with their investment. These questions can include composition of the board of directors, compensation for company executives, company auditors, and company investment and disclosure policies, among others.

As Alex Pollock notes in an October 13 letter to the editor of the Financial Times, BlackRock acknowledges, “The money we manage is not our own, it belongs to our clients.” Hence, BlackRock’s new policy idea.

. . .

BlackRock hopes to relieve some of that pressure by passing it on to investment funds that place their clients’ money with BlackRock. As Alex Pollock explains in his Financial Times letter, however, “BlackRock is handing zero voting power to the real owners of the shares which it manages as agent.” It is making it easier for others—the fund managers of your investments—to vote your shares, but they do not own your shares. You do, and the BlackRock proposal does not reach to you to learn what you think.

Your broker-dealer cannot vote your shares. In many cases, though, the managers of funds through which you own stock can. They can use your investments to vote as if they were their investments. That can give them a lot of financial and, increasingly, political clout. With your money, they can pursue their agenda, not yours.

Alex Pollock recommends in his letter that “All investment agents, both broker-dealers and asset managers alike, should have the same requirements: no voting of shares by the agents without instructions from the principals.” “From the principals” means from you, the shareholder. That is the requirement for broker-dealers. Why should it not apply to the fund managers who, without your money, would have nothing but their own?