Between February 13 and
February 23, 1933, the Senate Committee on Finance held hearings investigating
"the present economic problems of the United States with a view to
securing constructive suggestions with respect to the solution of such
problems." Among the dozens testifying were Winthrop Aldrich (Chairman of
Chase bank), Irving Fisher and the president of First Security Corporation in
Ogden, Utah, a man by the name of Marriner Eccles.
Mr. Eccles would become
Chairman of the Federal Reserve Board of Governors by November 1934, due in
large part to his theoretical work which formed the basis of the testimony he
gave to the Senate. In another prescient example of how similar circumstances
are between then and now, he spoke what sounds eerily appropriate to any
discussion about the lack of recovery after the Great Recession. Among his
chief observations about the state of monetary affairs at the
"bottom" of the Great Depression was:
"Why resort to inflation of the sort referred to when prices can be increased and business revived on the basis of our present money system? We have nearly one and a half billion currency more in circulation at the present time than we had at the peak of 1929, and under our present money system we are able to increase this by several billion more without resorting to any of the three inflationary measures popularly advocated."
He was pushing back against
the notion that there had to be an appeal to inflationary monetary policy in
order to revive the collapsed economy. To his view, the Federal Reserve had
created enough "reserves" by 1933 for the economy to recovery without
resorting to what might be thought of as a primitive version of quantitative
easing (QE). In his opinion, money stock was not the problem (at least for the
recovery, it was, obviously, too little, too late for the collapse).
The "inflationists"
had been agitating for more aggressive monetary responses, in many ways
foreshadowing the "doves" that exist within the Federal Reserve
today. Eccles, however, was blunt in his assessment of where government policy
needed to be concentrated:
"I repeat there is plenty of money to-day to bring about a restoration of prices, but the chief trouble is that it is in the wrong place; it is concentrated in the larger financial centers of the country, the creditor sections, leaving a great portion of the back country, or the debtor sections, drained dry and making it appear that there is a great shortage of money and that it is, therefore, necessary for the Government to print more."
There was sufficient money
stock available to foster economic recovery, what was lacking was flow. Money
at that time had been created by the Federal Reserve and pushed out into the
big banks, ultimately dying there; money circulated no further. The financial
system had re-oriented itself in favor of liquidity preferences and far tighter
lending standards, nullifying the impacts of additions to the nation's money
stock.
This testimony has been given
a timeless element due to the rhythmic nature of human endeavors, as in history
repeats, rhymes or just happens to reappear in various cycles. Eccles' chief complaint
of 1933 sounds exactly as if it would fit in 2012. Despite trillions in QE's
and Twists, the Fed's expansion of the money stock has done little to advance
the cause of recovery. Money stock does not equal money flow; channels and
methods matter.
Marriner Eccles in 1933
advocated what would now be considered a Keynesian approach, going so far as to
quote Dr. William Foster in that Senate testimony. Dr. Foster, along with
Waddill Catchings, was Keynes before there was Keynes, popular in the 1920's for
advancing a theory of "underconsumption" which caught the fancy of
both Herbert Hoover and FDR. The underconsumptionists believed that unbridled
capitalism was incompatible with a modern, mass produced economy. The
government's guiding hand was necessary to direct monetary flow into economic
sectors when necessary.
Eccles even went so far as to
quote Foster in front of the Senate as favorably comparing the Soviet Union's
philosophy on the labor "surplus":
"This much, in fairness, we must say for the Russian plan. If anywhere in Russia they had as many available trained carpenters and masons and bricklayers and engineers and architects and all the rest, and as much available steel and lumber and brick and all the other building materials as we have here, they would not sit around and stupidly hand out charity to the unemployed. They would use the surplus men and the surplus materials, and they would clean out these festering sores, and make decent dwelling places for the people. Incidentally, there would be no unemployment. Now, what can be done under communism or socialism, can be done under capitalism in the United States, if we have sense enough to set up an adequate flow of currency and credit in the right channels."
In other words, it was the
responsibility of the government, in a mass produced economy, to direct money
to smooth out or replace the inevitable times when an ostensibly capitalist
system would fail to match modern economic demands for circulation or flow.
This was as much economic necessity as any appeal to "fairness" in
their minds.
In terms of systemic theory,
this top-down approach is compatible with capitalism due to the philosophical
divide between macro and micro resource allocation. The powers that be will
influence, more heavily as the decades of the 20th century progressed, macro
"variables" but leave ultimate credit and money allocations to the
assumed markets of the micro world. Even the redistribution of money through
the federal government adheres to this "principle" as it simply assumes
or takes on the role of an additional money flow channel.
Earlier this week the European
Central Bank (ECB) conducted its first "sterilization" auction in the
wake of its SMP restart. As of the week of September 21, the SMP had
accumulated €208.83 billion in sovereign bond purchases. According to the terms
of the restart, these "flows" are required to be sterilized by an
auction of 7-day fixed term deposits. On Wednesday, September 26, the ECB
auctioned deposits with a maximum posted interest rate of 0.75%. It ended up
being tendered with €385 billion in bids at a weighted average allotted yield
of 0.01%.
That meant that demand was so
strong for the deposit account, financial firms are accepting a zero return on
7-day cash. But the overall flow picture of the European system is more
complicated than that. Access to the deposit account creates deposit
"certificates" which are, surprise, eligible collateral in the
various lending schemes with the ECB. By purchasing peripheral sovereign bonds from
financial firms and then sterilizing those purchases, the ECB is intermediating
not only the flow of euros between those depositors and peripheral bond
holders, but also, in essence, intermediating and transforming market
collateral. The act of purchasing sovereign bonds through the front door of the
SMP removes "bad" collateral from the system which is then
replenished by an equal amount of the "good" collateral of deposit
certificates through the back door.
In all of this risk
transformation, the markets are supposed to take informational cues about how
to allocate or flow only credit money. By establishing what is a convoluted and
sometimes misunderstood risk transformation of collateral, the ECB wants the
credit markets to re-orient perceptions of riskiness or reward possibilities of
those markets. The ECB socializes the potential for credit-induced losses while
at the same time opening, as an unlimited buyer of that paper at any price,
potential for price appreciation. The entire mechanics of risk/return are upended
as market agents become nothing more than conditioned central bank agents.
Here in the US, in response to
the various QE's, the spread of mortgage rates over treasury rates has
absolutely collapsed. Mortgage spreads represent a measure of perceived risk in
that market, so they are an import indication of risk expectations. Between
1995 and 2007, the full housing bubble period, mortgage spreads ranged from 100
to 200 basis points (1% to 2%). In the initial crisis period, mortgage spreads
rose back to the upper end of that range as markets began to abhor mortgage
credit. By the beginning of QE 1, mortgage spreads had collapsed below the
lower end of the historical range under 100 basis points. With QE 3, however,
mortgage spreads have fallen still further from around 60 basis points in early
September to their recent level of just a few basis points, or near zero.
These risk and information
transformations go well beyond the historical and theoretical notions of
top-down, macro-influence of markets to circumventing and bypassing markets
altogether. Despite the appearance or façade of adhering to the historical
impulses and the common thread of economic evolution from Eccles on down, the
action of central banks today actually bear very little resemblance to that of
1933, or even 2003. Marriner Eccles, the good underconsumptionist that he was,
advocated the federal government assist the marketplace in filling the hole in
what is now known as aggregate demand through fiscal means; not supplanting it
entirely.
Central banks have performed a
quiet coup upon the most important markets in the global economy, and have done
so in the name of economic health that grows more worrisome by the day. There
is a disconnect or dissonance at the center of monetary authority globally (the
vital economic theory and philosophy that connects all these central bank
actions) that prevents recognition of what should be obvious. There is no
separation in the macro and the micro. Markets are the economy. Intervening in
the name of "macro" variables upends the very processes by which an
economy necessarily functions.
Even Eccles saw the
fundamental shortfall in a monetary system that attached too much importance on
the use of credit and debt as a means or channel for monetary intervention.
Again, in his Senate testimony he noted that:
"This maldistribution of
our money supply is the result of the relationship between debtor and creditor
sections- just the same as the relation between this as a creditor nation and
another nation as a debtor nation-and the development of our industries into
vast systems concentrated in the larger centers."
Essentially he advocated using
fiscal means to, ironically, create a channel of decentralization. Among the
primary reasons for doing so was because the fiscal deployment of real
resources (such as work programs) would push money into the real economy
without attaching any liability to it. That money would enter the hands of the
"surplus" labor as free and clear, unencumbered by the strain of credit
covenants and future repayments. That money represented unfettered potential as
opposed to temporary and fleeting possession.
There is admittedly some
logical fallacy here in my appealing to past authority, particularly a figure
at the forefront of the philosophical roots that form the basis of current
interpretation at the policymaking level. Marriner Eccles was at the epicenter
of what would advance the Keynesian view into the mainstream, so much so that
the current headquarters building of the Federal Reserve in Washington is named
for him. But there is more to it than that logical fallacy, there is so much
common sense to that original viewpoint that has been lost and overwhelmed by
an equal fallacy, the appeal to technological advancement as representing only "progress".
Current central banks create
and deploy all these massive resources into what are nothing more than schemes
to transform perceived risks of credit and debt, some of which are direct
credit transformations and intermediations. As I have said on numerous
occasions, there is no money in monetary policy anymore. The economic problem
is not a shortage of money stock, nor even a shortage of credit (though that is
the symptom currently), but a shortage of unencumbered means to circulate that
stock of money; jobs and wage income, or even asset income through interest and
dividends. It is a shortage of true wealth capacity, eroded by the constant
manipulation of paper credit money on the real economy and the overgrowth of
the financial economy. Echoing what Mr. Eccles said in 1933, there is more than
enough money available today to foster a recovery. It needs only to be deployed
sensibly into the real economy as unencumbered transfers in the creation of
true wealth.
To do that requires the
ability to allocate real resources effectively and efficiently. Where I diverge
dramatically from Eccle's underconsumption/aggregate demand philosophy is in
the belief that government is a viable option for that circulation. I think
history, including recent history (99-weeks of unemployment, SNAP at record
levels, Social Security transfers for the epidemic of "disabled",
etc.), shows quite clearly that government payments and transfers do not have
the same productive impact on the free flow of unencumbered money. Only wage or
asset income yields the level of productivity needed to break the economy out
of this heavy-handed manipulation and appeal to growing encumbrance.
Somewhere, somehow, monetary
authorities around the world do not seem able to grasp this idea that further
encumbering their respective economies is the absolute wrong path, no matter
how much risk transformation takes place. These economies yearn to be free from
the chains of debt which have been placed upon them from decades of previous
manipulations and monetary interventions. The monetary answer cannot always be
more debt. Even the forerunners of today's policy making theories understood
that notion quite clearly. Unfortunately, as the global central bank
"panic" of September 2012 demonstrates, there is no going backwards
in the academic world of monetary "progress" until all that remains
is the residue of central bank dominance upon the ruin of global economies.
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