What you’re vacillatin’ between

Francis Paschal

Francis Paschal

When I was a first-year law student at Duke many years ago, my Civil Procedure professor was the delightfully named J. Francis Paschal. Professor Paschal seemed to like to portray himself as a bit of a good ol’ boy, with a protruding gut, truly dreadful sports jackets, hair slicked and parted just off-center, and a drawl as thick as molasses on a cold day (if not nearly so sweet). That image could not mask a keen mind and a sharp wit. Nor did it hide his erudition — in addition to his credentials in the law, Professor Paschal had a Princeton Ph.D. too.

The good professor led his classes using the Socratic conventions of the day. A student was called upon to answer a series of penetrating and perplexing questions supposedly designed to ferret out the nuances of some legal principle or another but which, in reality, served to demonstrate to a class full of bright and full-of-themselves college graduates that they were out of the minors and into the intellectual big leagues. If we were going to compete at that level, we needed to up our collective game considerably.

One day fairly early in the first semester Professor Paschal called on a woman in the row ahead of me (who I shall kindly refer to — using a pseudonym since she is now a Deputy Attorney General — as “Frieda Clancy”) and asked a typically impossible question. SInce Frieda was a friend, I happened to know that her extremely difficult predicament was actually utterly impossible because she was not prepared for class.  In fact, it wasn’t just that she wasn’t fully prepared (meaning that she had read the required case, all the cases cited therein, the case comments, casebook notes and citations, relevent hornbook and law review materials and anything else we could think of that might be relevant). She wasn’t prepared at all. She hadn’t even read the case at issue.

This was not likely to turn out well. Continue reading


Bernanke Speaks

Fed Chairman Ben Bernanke gave a speech on the economy yesterday. He was clear in outlining his employment objectives and in his commitment to keeping interest rates low even after the economy begins to improve (at least through mid-2015).  In general, Wall Street loved itMatt Yglesias loved itJoe Weisenthal loved it.  Of course, it makes sense that Wall Street would generally be supportive.  Bernanke’s policy tract is designed to support asset prices and keep the cost of capital low.  Win-win.

In the speech Bernanke made the case that the Fed is not enabling fiscal profligacy (despite all evidence to the contrary), is not monetizing the debt (really?), is capable of handling inflation when the time comes (we’ll see), and is highly transparent and open (that’s why he doesn’t want to be audited). He also asked Congress to address the “fiscal cliff,” just not yet.  Jon Stewart dealt with an earlier version of claims of this sort here.

Bernanke also tried to debunk the idea that the Fed’s interest rate policy is not screwing savers.  In this regard he focused on the need to deal with the financial crisis and the ongoing economic weakness.  He then went on to argue that because savers “wear many economic hats,” low rates need to be viewed in context.  In Bernanke’s view, policies leading to a stronger economy trump all other concerns.

The best and most comprehensive solution is to find ways to a stronger economy. Only a strong economy can create higher asset values and sustainably good returns for savers. And only a strong economy will allow people who need jobs to find them. Without a job, it is difficult to save for retirement or to buy a home or to pay for an education, irrespective of the current level of interest rates.

This viewpoint carefully ignores the basic economic principle that incentives work.  When savings returns are less than zero (after inflation) and close to zero nominally, we can’t expect people to save.  Indeed, the personal-saving rate stood at just 3.7% in August 2012. That’s up from the 1.5% low of 2005, but half the 7.5% average recorded in the last three decades of the twentieth century. As my friend Joe Calhoun points out, Bernanke wants us to spend today — and not on stuff with guarantees attached. Meanwhile “[w]e’re running out of future from which to borrow” in order to pay for what we buy.  

What’s worse, even if we conceded that it’s okay to screw savers and mortgage the future to get the economy moving, we simply can’t expect the economic recovery Bernanke’s policies are supposed to achieve unless and until the economic benefits the Fed doles out to major banks and major corporations via lower interest rates and bond purchases and to banks and the well-to-do via frothy markets trickle-down to the masses. Do we have good reason to expect that to happen?  For example, the S&P has risen roughly 80 percent since the lows of 2009 with only meager economic improvement and dreadful ongoing unemployment.

The overall idea behind all this is obviously to “stimulate demand.” Only once demand is restored will companies begin hiring again, or so this thinking goes. Yet despite the Fed’s best efforts, from the first quarter of 2008 through the second quarter of 2012, annualized growth in real consumption spending has averaged a mere 0.7% — all the more extraordinary when compared with the pre-crisis trend of 3.6% in the decade ending in 2007. Recent data have been terrible too.

Following a decade of profligate spending fueled by debt and credit bubbles, American households (fearful for their jobs and nervous about the future) are simply trying to repair the damage to their household balance sheets.  The overall level of household indebtedness is at 113% of disposable personal income as of mid-2012.  That’s down from its pre-crisis peak of 134% in 2007, but still well above the 1970-1999 norm of around 75%.

Even so, the Fed still tries to get demand going by – you guessed it – offering lower interest rates and supporting asset prices.  Déjà vu all over again.

Savers will continue to get screwed.  Bernanke essentially admits it.  Meanwhile, those with first access to money (think banks, Fortune 500s and the wealthy) are the primary beneficiaries of the Fed’s largesse.  Earlier rounds of quantitative easing haven’t helped much (if at all).  Bernanke pleaded his case, but is there any reason to think that the benefits of the Fed’s free-money policies will trickle-down to the general population?

Just askin’.

Here We Go Again

Last week was that the Federal Reserve (along with other central banks) provided liquidity swap lines to European banks, allowing them to borrow U.S. dollars at the paltry rate of 0.5 percent interest. Oh that you and I had that opportunity.  The Fed received promises of euros as collateral. Let’s hope that the euro still exists when these lines come due.

The reason European banks seek dollars in the first place is that nobody wants to borrow euros now because of the risk to the currency. Accordingly, for all practical purposes, American taxpayers have made those loans, which allow European banks to make loans in dollars rather than in euros. If the loans succeed, the European banks reap the benefits.  If they don’t, we’re on the hook. Perhaps that is why the Fed’s announcementis written in language only a bureaucrat could love.

The Fed didn’t say how many U.S. dollars have been offered to European governments, but the last time transactions of this sort occurred, Fed swaps to Europe peaked at about $580 billion. In the meantime, as Bloomberg has reported, the Fed has also been providing banks all over the world – including major U.S. banks – with $13 billion in secret loans.

A Fed apologist might say that a global financial crisis needs to be averted and that, if the economy rebounds and the euro stabilizes, there will be economic growth and no losses to taxpayers. Yet in this best-case scenario, the European banks that helped create this mess get access to huge amounts of dollars for a mere half-percent courtesy of us and get to keep any resulting gains for themselves, while the typical American pays 4-20 percent interest to borrow, if we can get financing at all.  In the worst-case scenario, their losses accrue to us.

These actions by the Fed are said to pose little risk to the U.S. taxpayer because the foreign central banks with which the Fed is transacting business are deemed trustworthy.  Big borrowings.  Privatized gains.  Socialized losses.  Haven’t we heard that before somewhere?