A book about the Federal Reserve and inflation

A timely book… The Lords of Easy Money: How the Federal Reserve Broke the American Economy (2022) by Christopher Leonard.


First, since this is a political book let’s look at the author’s background politics. He is particularly hostile to the Tea Party,

If the Tea Party had a single animating principle, it was the principle of saying no. The Tea Partiers were dedicated to halting the work of government entirely.

An aging population relied more and more heavily on underfunded government programs like Medicare, Medicaid, and Social Security,

The existence of these Deplorables kept the reasonable Democrats and Republicans in Congress from doing great work via government spending, thus putting pressure on the Fed to act. The Fed’s rash actions may thus be laid at least partly at the doors of the haters. Also, the best characterization of the world’s most expensive health care programs, as a percentage of GDP, is “underfunded”. Without the Tea Party, every Medicaid beneficiary would get a weekly gender reassignment surgery? The author expresses his dream that more American workplaces would become unionized.

What’s the scale of the Fed’s recent money-printing?

Between 1913 and 2008, the Fed gradually increased the money supply from about $5 billion to $847 billion. This increase in the monetary base happened slowly, in a gently uprising slope. Then, between late 2008 and early 2010, the Fed printed $1.2 trillion. It printed a hundred years’ worth of money, in other words, in little over a year, more than doubling what economists call the monetary base.

The amount of excess money in the banking system swelled from $200 billion in 2008 to $1.2 trillion in 2010, an increase of 52,000 percent.

Maybe the author and Simon and Schuster are using coronamath? What if they’d asked Wolfram Alpha about this ratio? The answer would be a 600 percent ratio or 500 percent increase, not 52,000 percent.

Whatever the percentage might have been, quantitative easing was going to be good news for the rich:

The FOMC debates were technical and complicated, but at their core they were about choosing winners and losers in the economic system. Hoenig was fighting against quantitative easing because he knew that it would create historically huge amounts of money, and this money would be delivered first to the big banks on Wall Street. He believed that this money would widen the gap between the very rich and everybody else. It would benefit a very small group of people who owned assets, and it would punish the very large group of people who lived on paychecks and tried to save money.

Perhaps no single government policy did more to reshape American economic life than the policy the Fed began to execute on that November day, and no single policy did more to widen the divide between the rich and the poor. Understanding what the Fed did in November 2010 is the key to understanding the very strange economic decade that followed, when asset prices soared, the stock market boomed, and the American middle class fell further behind.

According to the book, Ben Bernanke and Janet Yellen (U.S. Treasury Secretary today, at least until my prediction of Sam Bankman-Fried taking over comes true) were the Fed’s biggest cheerleaders for quantitative easing while Thomas M. Hoenig was the biggest opponent, partly due to concerns about inflation, but mostly because the “allocative effect” in which money would move from working class to rich and from people who did productive things to Wall Street.

[Bernanke is most notable for his 2007 statement: “We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”]

How does QE work?

The basic mechanics and goals of quantitative easing are actually pretty simple. It was a plan to inject trillions of newly created dollars into the banking system, at a moment when the banks had almost no incentive to save the money. The Fed would do this by using one of the most powerful tools it already had at its disposal: a very large group of financial traders in New York who were already buying and selling assets from the select group of twenty-four financial firms that were known as “primary dealers.” The primary dealers have special bank vaults at the Fed, called reserve accounts.II To execute quantitative easing, a trader at the New York Fed would call up one of the primary dealers, like JPMorgan Chase, and offer to buy $8 billion worth of Treasury bonds from the bank. JPMorgan would sell the Treasury bonds to the Fed trader. Then the Fed trader would hit a few keys and tell the Morgan banker to look inside their reserve account. Voila, the Fed had instantly created $8 billion out of thin air, in the reserve account, to complete the purchase. Morgan could, in turn, use this money to buy assets in the wider marketplace.

Bernanke’s initial goals were to create $600 billion via QE, with the justification that this would bring down unemployment. “Before the crisis [of 2008], it would have taken about sixty years to add that many dollars to the monetary base.”

The Fed’s own research on quantitative easing was surprisingly discouraging. If the Fed pumped $600 billion into the banking system, it was expected to cut the unemployment rate by just .03 percent.

Who had the best crystal ball?

Jeffrey Lacker, president of the Richmond Fed, said [in 2010] the justifications for quantitative easing were thin and the risks were large and uncertain. “Please count me in the nervous camp,” Lacker said. He warned that enacting the plan now, when there was no economic crisis at hand, would commit the Fed to near-permanent intervention as long as the unemployment rate was elevated. “As a result, people are likely to expect increasing monetary stimulus as long as the level of the unemployment rate is disappointing, and that’s likely to be true for a long, long time.”

[Richard] Fisher, the Dallas Fed president, said he was “deeply concerned” about the plan. Of course, he didn’t let pass the chance to use a nice metaphor: “Quantitative easing is like kudzu for market operators,” he said. “It grows and grows and it may be impossible to trim off once it takes root.” Fisher echoed Hoenig’s warnings that the plan would primarily benefit big banks and financial speculators, while punishing people who saved their money for retirement. “I see considerable risk in conducting policy with the consequence of transferring income from the poor, those most dependent on fixed income, and the saver to the rich,” he said.

What’s wrong with massive asset price inflation, as the Fed was trying to achieve? The author says that asset price bubbles are the typical drivers of both banking and market collapses. Example from the 1980s:

When Paul Volcker and the Fed doubled the cost of borrowing, the demand for loans slowed down, which in turn depressed the demand for assets like farmland and oil wells. The price of assets began to converge with the underlying value of the assets. The price of farmland fell by 27 percent in the early 1980s; of oil, from more than $120 to $25 by 1986. The collapse of asset prices created a cascading effect within the banking system. Assets like farmland and oil reserves had been used to underpin the value of bank loans, and those loans were themselves considered “assets” on the banks’ balance sheets. When land and oil prices fell, the entire system fell apart. Banks wrote down the value of their collateral and the reserves they were holding against default. At the very same moment, the farmers and oil drillers started having a hard time meeting their monthly payments. The value of crops and oil were falling, so they earned less money each month. The banks’ balance sheets, which once looked stable, began to corrode and falter.

This was the dynamic that so often gets lost in the discussion about the inflation of the 1970s and the collapse and recession of the 1980s. The Fed got credit for ending inflation, and for bailing out the solvent banks that survived it. But new research published many decades later showed that the Fed was also responsible for the whole disaster.

Why don’t people get nervous when an asset bubble is inflating?

When asset inflation gets out of hand, people don’t call it inflation. They call it a boom. Much of the asset inflation of the late 1990s was showing up in the stock market, where share prices were rising at a level that would have been horrifying if it was expressed in the price of butter or gasoline. The entire Standard & Poor’s stock index rose by 19.5 percent in 1999. The Nasdaq index, which measured technology stocks, jumped more than 80 percent.

When asset bubbles burst, the Fed is right there:

Over the next two years [after the dotcom crash of 2000], the Federal Reserve’s state of emergency became almost permanent. The rate cuts of 2001 remained in place, with the cost of short-term loans staying below 2 percent until the middle of 2004.

As with coronapanic, dramatic efforts for short-term relief lead to long-term disaster:

If there was one thing Hoenig had learned, it was that the Fed’s leaders, who were only human, tended to focus on short-term events and the headlines that surrounded them. But the Fed’s actions were expressed in the real world over the long term, after they had time to work their way through the financial system. When there was turmoil in the markets, the Fed leaders wanted to take immediate action, to do something. But their actions always played out over months or years and tended to affect the economy in unexpected ways.

The book was written before the Silicon Valley Bank collapse, but does this sound familiar?

The Fed was essentially coercing hedge funds, banks, and private equity firms to create debt and do it in riskier ways. The strategy was like a military pincer movement that closes in on the opponent from two sides—from one direction there was all this new cash, and from the other direction there were the low rates that punished anyone for saving that cash.

Before the financial collapse that started in 2007, the reward for saving money in a 10-year Treasury was 5 percent. By the autumn of 2011, the Fed helped push it down to about 2 percent.I The overall effect of ZIRP [zero-interest-rate policy] was to create a tidal wave of cash and a frantic search for any new place to invest it. The economists called this dynamic the “search for yield” or a “reach for yield,” a once-obscure term that became central to describing the American economy.

Then, as now, the nation’s problems started in San Francisco:

One of Bernanke’s secret weapons in the lobbying effort was his vice chairwoman, Janet Yellen, the former president of the San Francisco Fed. Yellen was an assertive and convincing surrogate for Bernanke, and she championed an expansive use of the Fed’s power.

“Janet was the strongest advocate for unlimited” quantitative easing, [Elizabeth] Duke recalled. “Janet would be very forceful. She is very confident, very strong in promoting the point of view.” Yellen and Bernanke were convincing, and their argument rested on a simple point. In the face of uncertainty, the Fed had to err on the side of action.

If it is any comfort, the Europeans are even dumber and more devoted to cheating with money instead of working harder than we are:

In Europe, the financial crisis of 2008 had never really ended [by 2012]. The debt overhang in Europe was simply astounding. Just three European banks had taken on so much debt before 2008 that their balance sheets

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How is First Republic Bank different from Silicon Valley Bank?

Readers: Please help me keep these bank failures straight. “First Republic Stock Plunges After Bank Rescue Plan, Dividend Suspension” (WSJ, today):

First Republic Bank shares fell more than 30% Friday after a multibillion-dollar rescue deal orchestrated by the biggest U.S. banks failed to convince investors that the troubled lender is on solid footing.

The move erased the gains that came Thursday, when a group of banks including JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. deposited $30 billion in First Republic in an effort to restore confidence in a banking system badly battered by a pair of bank failures.

“It’s not clear whether it’s viable as a stand-alone entity,” said Julian Wellesley, global banks analyst at Boston-based Loomis Sayles & Co. “So it’s likely, in my view, to be taken over.”

The sudden collapse recently of Silicon Valley Bank and Signature Bank—the second- and third-largest bank failures in U.S. history, respectively—have sparked concerns that anxious customers could drain deposits from other small and midsize banks.

What do SVB and First Republic have in common other than both being supervised/regulated by the San Francisco Fed? Was First Republic as devoted to diversity and inclusion as SVB?

As Congress and the D.C. Fed flooded the U.S. with money in 2020, what was First Republic thinking about? “First Republic Expands Commitment To Diversity, Equity and Inclusion” (August 31, 2020):

First Republic has engaged Management Leadership for Tomorrow (“MLT”), a national nonprofit that equips and emboldens high-achieving Black, Latinx and Native American individuals to secure high-trajectory jobs, while partnering with employers to provide access to a new generation of diverse leaders. The organization’s advisory services help institutions to better foster an environment of success for the underrepresented colleague experience.

“A diversity of backgrounds, opinions and perspectives has always been fundamental to our success,” said Jim Herbert, Founder, Chairman, and CEO of First Republic. “Management Leadership for Tomorrow has a proven track record of success in helping companies find and develop leaders from underrepresented communities.”

Individuals who self-identify as members of ethnic minority groups currently total 48% of First Republic’s workforce, with over 55 languages spoken at the company. Building upon First Republic’s long-standing culture of inclusion and diversity, MLT will provide strategic and tactical support to help further diversify the company’s workforce. In addition, the organization will collaborate with First Republic to enhance colleague and culture development programs that drive a sense of belonging and engagement.

If we count employees identifying as “women” as being in a victimhood class and we consider these 48% who were victims via “ethnic minority group” identification, the majority of the bank’s employees were victims and yet the goal was apparently to go bigger in the victimhood department. Here’s the person who was CEO for 37 years, through 2022:

James Herbert was replaced, in the CEO/COO roles, by a diverse duo:

But what exactly did these diverse executives do to cause the meltdown? And why didn’t the San Francisco Fed notice anything amiss? Let’s check a 2018 New York Times article:

The Federal Reserve Bank of San Francisco has installed Mary C. Daly, a labor economist who currently serves as the head of research, as the institution’s new president beginning Oct. 1. … Ms. Daly, who is openly gay, will become the third woman among the 12 presidents of the Fed’s regional banks. As a senior executive at the San Francisco Fed, she has been a leading voice for addressing what she has described as a “diversity crisis” in the economics profession and at the Federal Reserve. At the San Francisco Fed, she pushed successfully to balance the hiring of male and female research assistants.

Dr. Daly attacked the diversity crisis at the San Francisco Fed, but ignored the insolvency crises brewing at SVB and First Republic? If diverse teams are smarter and more capable and the San Francisco Fed had more diversity than other regional Federal Reserve Banks, why are two of the biggest failures in the SF Fed’s territory?


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How about decimation for the Memphis police department and city government?

The Killing of Tyre Nichols seems to be fading from the news. The New York Times thinks that pizza is more important:

There has been no coherent explanation thus far of why the police killed this particular guy, as opposed to all of the other people with whom they interact daily, but presumably no explanation could justify their actions.

We are informed that the problem is the culture/institution, not the individuals. See “The Myth Propelling America’s Violent Police Culture” (Atlantic, Jan 31, 2023):

This past weekend, as I watched the videos of Tyre Nichols being beaten to death, I asked myself, Why does this keep happening? But I know the answer: It’s police culture—rooted in a tribal mentality, built on a false myth of a war between good and evil, fed by political indifference to the real drivers of violence in our communities. We continue to use police to maintain order as a substitute for equality and adequate social services. It will take a generation of courageous leaders to change this culture, to reject this myth, and to truly promote a mission of service—a mission that won’t drive officers to lose their humanity.

The organization is at fault, in other words, and the problems extend to the city government as a whole because crime wouldn’t happen if there were “equality and adequate social services”. The author’s point that police officers’ behavior are primarily driven by peer expectations rings true and, therefore, merely imprisoning or executing a few rogue officers won’t stop the next murder by police.

What would happen in Roman times if there were serious problems with a military unit (and the police in the U.S. definitely qualify as “military”)? Decimation:

Decimation (Latin: decimatio; decem = “ten”) was a form of Roman military discipline in which every tenth man in a group was executed by members of his cohort. The discipline was used by senior commanders in the Roman army to punish units or large groups guilty of capital offences, such as cowardice, mutiny, desertion, and insubordination, and for pacification of rebellious legions.

The word decimation is derived from Latin meaning “removal of a tenth”. The procedure was an attempt to balance the need to punish serious offences with the realities of managing a large group of offenders.

A cohort (roughly 480 soldiers) selected for punishment by decimation was divided into groups of ten. Each group drew lots (sortition), and the soldier on whom the lot of the shortest straw fell was executed by his nine comrades, often by stoning, clubbing, or stabbing. The remaining soldiers were often given rations of barley instead of wheat (the latter being the standard soldier’s diet) for a few days, and required to bivouac outside the fortified security of the camp for some time.

As the punishment fell by lot, all soldiers in a group sentenced to decimation were potentially liable for execution, regardless of individual degrees of fault, rank, or distinction.

An authentic Roman-style decimation would presumably offend modern sensibilities, but maybe the proven management technique could be adapted for our kinder, gentler world (albeit not kinder or gentler for Tyre Nichols). In addition to individual punishments for the perpetrators (they’re charged with second-degree murder so they cannot be executed), why not cut the salary of every employee in the Memphis police department by 10 percent and take away a year of pension entitlement? The chief of police (“Memphis Police Department’s first Black female chief”) and mayor (“A Democrat, he previously served as a member of the Memphis City Council”) would be fired. These kinds of punishments would give institutions the incentive to reform themselves. Absent collective punishment, which of course will seem unfair to many, why should institutions bother to change?


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The Zoom-based federal government

I spent Martin Luther King Jr. Day in Washington, D.C. My white friend who earns $200,000 in total compensation as a government worker was enjoying a holiday while the Black service/retail industry workers who get $15/hr had to come in for their regular shifts. Over a leisurely holiday lunch, she explained the current structure of a typical federal agency. “Nobody has to come in,” she said, “and most of the people who work for me haven’t come into the office for months. I go in two or three days a week just to get out of the house, but it is not required.” Why wouldn’t the young people she manages want to come in and get out of their crummy apartments? “A junior programmer wouldn’t get paid more than $90,000 per year, so he couldn’t afford to live in the city anyway. One guy lives out in Gaithersburg with his brother and it is too much effort to come in. The rest of the Millennials aren’t interested even if they do live, with parental support, reasonably close to our office.”

A reader recently sent me “D.C. Mayor to Biden: Your Teleworking Employees Are Killing My City” (Politico, January 20, 2023):

At the swearing-in this month for her third term as the District of Columbia’s mayor, Muriel Bowser delivered a surprising inaugural-address ultimatum of sorts to the federal government: Get your employees back to in-person work — or else vacate your lifeless downtown office buildings so we can fill the city with people again.

This is an odd position for Mayor Bowser. She was an enthusiastic proponent of Science, i.e., lockdowns, school closure, forced masking, and vaccine papers checks. Given that SARS-CoV-2 is live and kicking, she’s the last person one would expect to advocate mass gatherings in office buildings, on the Metro, etc. The virus didn’t change; why did she?

Federal telework policies vary, but in general they’re generous — a major change from the situation that prevailed before 2020. Pre-pandemic, only 3 percent of feds teleworked daily, even as the private-sector workforce across the country had made at least some strides. After Covid, parts of the government caught up in a hurry, embracing telework in the name of public health.

For federal employees, and the public they serve, the new flexibility has some upsides. Beyond the fact that some people just don’t much like commuting to an office every day, the prospect of being able to work from home even if home means Tennessee or Texas is good for retention, since a federal paycheck goes a lot farther once you leave one of the nation’s priciest metro areas. (It also might accomplish, inadvertently, the longtime GOP goal of moving chunks of the bureaucracy away from the capital.)

According to John Falcicchio, the city’s economic-development boss and Bowser’s chief of staff, the federal government’s 200,000 D.C. jobs represent roughly a quarter of the total employment base; the government also occupies a third of Washington office space — not just the cabinet departments whose ornate headquarters dot Federal Triangle, but plenty of the faceless privately held buildings in the canyons around Farragut Square, too.

“Or another way to look at it is Metro,” the regional transit system, he says. “It’s about a third of what it used to be.”

The D.C. city government is setting an example by making its own workers come into the office five days per week? No!

He also made clear that Bowser wasn’t calling for the same back-to-normal as Comer’s legislation: Her own government currently expects non-frontline workers to be in offices at least three days a week, not five, something he said would be a good model for feds, too.

The D.C. government laptop class, in other words, can leave for the Delaware beaches on Thursday evening and not return until Tuesday morning.

When I was up in Boston, I was somewhat surprised to find a friend who is a senior federal official living there. She manages a $2 billion budget and a correspondingly epic number of people. She hasn’t been required to report to her D.C. office since March 2020.

Now it’s photo time!

A young Covidian and her dad, both masked, board our jammed BOS-DCA flight (somehow I doubt this was a required business trip!):

Want to pay $8 for a cup of drip coffee, but don’t want to take the Covid risk of a jammed flight to San Francisco? Blue Bottle is all over D.C. (this one in Georgetown):

The C&O Canal has looked better:

(George Washington was a huge investor in the Potomac Company, which sought to build a canal like the above, and thus had a massive financial incentive to bring the nation’s capital down from NY or Philadelphia to the swamps of the lower Potomac.)

The DCA VOR, out the window of an American Airlines 737 (JetBlue is no longer cheaper!):

Yachts from which the laptop class can now work (maybe the lobbyists rather than the civil servants):

The Washington Monument and Lincoln Memorial, increasingly surrounded by monuments to our various wars:

The Watergate, where a president whose crimes were negligible compared to Donald Trump and the rest of the January 6 Insurrectionists got into trouble:

(It’s the boring rectangular office building in the back, not the curvy buildings near the river.)

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On welfare in Boston at $210,300 per year

In a comment on an earlier post, Alex expressed surprise that Joe Biden was popular with a majority of American voters:

This is the guy Republicans are finding tough to beat? It says a lot about how bad everything has become.

My response:

Alex: I don’t think it is surprising that Biden, or anyone else who is a Democrat, is tough to beat. If we model American voters as trying to recapture some of the 50% of the economy that is government, the majority’s best hope is typically a Democrat because the majority of Americans benefit from a larger government (government employee, receiving means-tested benefits, on traditional welfare, married to government employee, government contractor, income too low to pay significant income tax, etc.).

I decided to check the Bidenflation-adjusted numbers for means-tested program (“welfare”) eligibility up in Maskachusetts. In Boston itself, it seems that, as of 2022, a family of 4 could qualify to live in “city-funded” (i.e., taxpayer-funded) housing at below-market rates while earning up to $210,300 per year. The main web page links to a spreadsheet:

The adults in that household would have a strong incentive to vote Democrat!


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Shopping for health insurance on healthcare.gov

Our government has decided that it is okay for a doctor or hospital to charge an uninsured customer 10X what an insurance company would pay for a service. Thus, an American who doesn’t want to pay 10X the fair price and risk bankruptcy has no choice but to sign up for health insurance. He/she/ze/they cannot pay the $25,000 that an insurance company would pay for a serious issue and defer the purchase of a new car. Instead, he/she/ze/they must deal with a bill for $200,000 and aggressive bill collectors and lawyers from the hospital.

I recently decided to see if it would make sense to get a policy from healthcare.gov for our family. There are three big providers in eastern Florida: Mayo Clinic, Cleveland Clinic, and University of Miami. The site has a way to enter these providers and see if they’re in the network for the plan. Here are some of the quotes:

The consumer is supposed to evaluate 174 alternatives, build a spreadsheet and run a Monte Carlo experiment to figure out which is likely to result in minimum spending? You’d be a fool to have insurance that didn’t cover these three networks, as we discovered to our chagrin last year with Humana. Healthcare.gov offers to help you register to vote, but it doesn’t offer to limit results to insurance policies that will pay these essential providers.

I thought that Blue Cross had deals with everyone and yet this $66,000+/year policy ($72,000 including the out-of-pocket maximum) is presented as not covering any of the places that you’d want to go if you needed a specialized specialist:

Perhaps we could work it from the other side? Here’s what Mayo Jacksonville says they’ll take:

The consumer is supposed to recognize, therefore, that Mayo takes “Aetna” and “Blue Cross Blue Shield” but not the versions of “Aetna” and “Blue Cross” that are sold on healthcare.gov? How many people are this sophisticated? Mayo Jacksonville takes “Cigna EPO”, but, according to healthcare.gov, not “Cigna Connect 900 EPO”:

As Obama said, if you like your doctor you can keep your doctor so long as your doctor doesn’t work at any of the good clinics or hospitals in the nation’s third largest state. I scrolled through all of the 174 plans and never found one that covered more than University of Miami (and that was rare).

Maybe this is peculiar to Florida? Friends in Maskachusetts who had been paying $30,000 per year to Blue Cross (in pre-Biden dollars) switched to MassHealth (Medicaid; there was an income test, but no asset test on the MA signup web site) and found that their choice of doctors was much wider. That seems to be the case in Florida as well. Mayo Clinic is happy to accept Medicaid. Cleveland Clinic says they take Medicaid. University of Miami takes Medicaid. In other words, Americans have voted to set up a system in which a person who works and pays $72,000 per year for health insurance has inferior access to health care compared to what someone who has never worked enjoys.

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If student loan forgiveness is illegal, can it still be accomplished via an infinite payment pause?

Continuing with our Thanksgiving theme, we can give thanks to the most generous members of our society. The most praiseworthy generosity is, of course, giving away money that other people earned. If we accept that stealing a neighbor’s car and donating it to charity makes me a more charitable person, Washington, D.C., is home to the world’s most generous humans. As we try to chew our dried leftover turkey, let’s look at a notable example of generosity from the central planners… “Biden extends student loan payment pause as debt relief plan remains on hold” (NBC):

The Biden administration announced Tuesday that it would extend the payment pause on federal student loans, as President Joe Biden’s debt cancellation plan remains blocked in court.

The payment pause, which was previously set to expire in January, will be extended until June 30 or until the litigation is resolved — whichever comes first. If the litigation has not been resolved by June 30, payments will resume 60 days after that.

“I’m completely confident that my plan is legal,” Biden said in a video announcement. “But it isn’t fair to ask tens of millions of borrowers eligible for relief to resume their student debt payments while the courts consider the lawsuit.”

Federal student loan holders have not been required to make payments since March 2020, when President Donald Trump signed the CARES Act, which paused payments through September 2020 and stopped interest from accruing to alleviate the economic impact of the coronavirus pandemic.

In theory it is Congress that sets the budget. So it might be illegal for a president to forgive loans, such that the borrowers don’t have to pay for their gender studies degrees and the cost can instead be shifted onto the working class. And, since Congress can spend money and transfer costs from the working class to the laptop class, the original payment/interest pause in 2020 was definitely legal. But maybe it is also legal for a charitable president with a big heart to keep extending the pauses via executive order. The loan isn’t “forgiven” (illegal unless Congress does it and more accurately described as “transferred to the working class”), but it never has to be paid so long as a great humanitarian/philanthropist is in the White House. The original value of the loan eventually becomes insignificant due to inflation.


  • “Student Loan Pause Could Cost $275 Billion” (CRB): The pause costs over $5 billion per month and extending it through the end of 2024 would cost at least $120 billion. This would bring the total cost since Spring of 2020 to $275 billion. This represents about 70 percent of the cost of the President’s announced debt cancellation plan and is higher than the ten-year cost of President Biden’s proposal to double the maximum Pell Grant by 2029.
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The Lost Bank lesson: Make sure you have a lot of friends in Washington, D.C.

I hope that each of you did his/her/zir/their reading assignment from a month ago, i.e., The Lost Bank: The Story of Washington Mutual – The Biggest Bank Failure in American History.

Now that I have finished the book myself and have given folks a chance to avoid spoilers, a brief post about the end of the book.

It turns out that it wasn’t clear that WaMu had actually failed. Even when it was seized by the FDIC, wiping out shareholders and bondholders, and then sold for almost nothing to politically connected and savvy JPMorgan Chase, the bank may well have had sufficient liquidity under Federal rules. A quiet bank run, in which billions of dollars left WaMu daily, was precipitated by the following factors: (1) leaks from Washington, D.C., (2) the FDIC insurance limit of $100,000 per depositor (almost enough to buy a car today!), (3) consumer ignorance regarding the practicalities of FDIC insurance, (4) consumer reluctance to become embroiled in a process of getting money from the FDIC. If not for the leaks about the regulators’ concerns, the bank run probably wouldn’t have happened and the regulators wouldn’t have been able to seize WaMu’s assets.

We may never know the answer to whether the bank actually met the relevant criteria for being shut down. Kirsten Grind, the Wall Street Journal reporter who wrote the book, gives various estimates for the bank’s liquidity on the day of shutdown but is unable to say which one is correct.

Why is it that 5 banks enjoy roughly half of U.S. commercial bank assets?

Partly this is due to the reasons discussed in the previous post regarding this book. But it is also due to the fact that the government treated some of the biggest New York banks differently than WaMu, only slightly smaller. The NY banks, donors to Senator Charles Schumer, had similar liquidity issues to what WaMu suffered. But they were deemed “systemic risks” a.k.a. “too big to fail” and, therefore, were showered with government money (taxed, borrowed, or printed) that was denied to WaMu. A handful of political appointees and government workers at the Fed, the US Treasury, the FDIC, and the OTS had a tremendous amount of discretion regarding which banks would get bigger and which would be seized.

So in addition to the topics mentioned in my previous post, the book serves as a good example of the importance of lobbying and political donations!


  • “A Champion of Wall Street Reaps Benefits” (NYT, 12/13/2008): Senator Schumer plays an unrivaled role in Washington as beneficiary, advocate and overseer of an industry that is his hometown’s most important business. Mr. Schumer led the Democratic Senatorial Campaign Committee for the last four years, raising a record $240 million while increasing donations from Wall Street by 50 percent. That money helped the Democrats gain power in Congress, elevated Mr. Schumer’s standing in his party and increased the industry’s clout in the capital. Calling himself “an almost obsessive defender of New York jobs,” Mr. Schumer has often talked of the need to avoid excessive regulation of an industry that is increasingly threatened by global competition.
  • Is LGBTQIA the most popular social justice cause because it does not require giving money? (includes photos of Seattle from August 2019, including one in which the truth of the Rainbow Flag religion is proven mathematically)
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Tax Day for procrastinators: big increases due to inflation

Happy Tax Day if you filed for an extension.

What’s different this year? Inflation means that ordinary schlubs can pay tax rates that were sold as applying only to the elite. The Obamacare “Net Investment Income Tax” of 3.8 percent on top of ordinary income and capital gains taxes, for example, wasn’t supposed to hit Joe Average. But what if Joe Average tried to escape the lockdowns and school closures in California by selling a house and moving to Texas? Adjusted for inflation in the real estate market, his house might not have gone up in value at all. In other words, his purchasing power from selling the house to buy a different house wouldn’t have changed (probably reduced, actually, in terms of how big a house in Austin can be purchased with the proceeds from selling a house in California). But almost surely he will have more than $250,000 in nominal gains. This is all an illusory inflation-driven “gain” and the tax code recognizes that to a small extent by excluding the first $250,000 of house price inflation. But on the rest of it, Joe will have to pay California capital gains tax, Federal capital gains tax, and an additional 3.8 percent for Obamacare. From the IRS:

The Net Investment Income Tax does not apply to any amount of gain that is excluded from gross income for regular income tax purposes. The pre-existing statutory exclusion in section 121 exempts the first $250,000 ($500,000 in the case of a married couple) of gain recognized on the sale of a principal residence from gross income for regular income tax purposes and, thus, from the NIIT.

How about a wage slave? If he/she/ze/they was earning $170,000 in 2019 and got bumped to $210,000 in 2021, his/her/zir/their spending power is actually lower due to raging inflation. Yet now he/she/ze/they is subject to the 0.9 percent Obamacare “Additional Medicare Tax” due to having income over a fixed threshold of $200,000 (soon to be the price of a Diet Coke?).

From Delray Beach, Levy and Associates:

What kind of people are paying the bill for all of the great work done by Congress and Joe Biden? From the haters at Heritage Foundation:

In 2018, due to the cruel policies of the dictator Donald Trump, the rich Americans who earned 21 percent of all income paid only 40 percent of income taxes. Separately, keep in mind that the above chart relates to cash income. A person could be in the “Bottom 50%” with $0 in W-2 income and still have a spending power and lifestyle better than someone earning $50,000 per year (in the “25%-50%” column) due to means-tested public housing, health care, SNAP/EBT, smartphone, and broadband. See “The Work versus Welfare Trade‐​Off: 2013” (CATO) for the states where being on welfare leads to a larger spending power than working at the median wage. Maskachusetts is #3 in Table 4, with welfare being worth 118% of median salary.

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Can our government generate its own inflation spiral?

Earlier here I wondered Could our epic deficits drive inflation no matter how high the Fed raises rates? (the answer is “yes” according to one of the smartest economists in the world: Economist answers my question about high interest rates and high deficits). Regarding the latest rounds of interest rate hikes, a Democrat-voting university professor friend posted on Facebook:

If you tried to put out a fire with water, and the fire got no smaller even after 3 attempts, you’d hopefully realize this is no normal water and/or this is no normal fire. And if you were able to come to this conclusion, you would not be the Fed.

My response was “I think the government may itself be the inflation spiral. Government is nearly half the economy and everything the government pays money for is indexed to inflation. Medicare, military and similar contracts, Social Security, pensions, employee salaries, etc.”

(This was a few days before “Social Security cost-of-living adjustment will be 8.7% in 2023, highest increase in 40 years” (CNBC, today))

If everything that is part of the local/state/federal government sector is indexed to inflation, doesn’t that mean that inflation goes down only if horrific pain is being inflicted on those dumb enough to be in the private sector? If government workers are getting cost-of-living adjustments (COLA), their spending power by definition cannot change (assuming that the BLS is calculating the CPI correctly). If the CPI says prices went up by 10 percent, the government workers will have 10 percent more in salary to go chasing after a mostly fixed supply of goods. This is the classic wage-price spiral.

Government is not 100 percent of the U.S. economy, so maybe the wage-price spiral can be broken if significant spending power reductions are imposed on non-union non-government workers. But at some level of government control of the economy, the spiral should be unbreakable regardless of interest rates and regardless of how poor the private sector chumps become.

(Why “non-union”? Union workers typically would have an automatic COLA increase and we could also consider union workers part of the government sector because they depend on the government to sustain their union power.)

Loosely related… prices and government worker wages go around in the Bois de Boulogne:


  • “Inflation Is Unrelenting, Bad News for the Fed and White House” (New York Times, today): “This is a self-inflicted wound that will impact the most vulnerable members of our society the most,[” said Mohamed El-Erian] (I think that El-Erian is saying what I say above, but more succinctly; everyone involved with the government will be 100 percent protected from inflation, which means that the peasants are going to be destroyed to keep those affiliated with the government from feeling any pain)
  • “Retirees Catch a Break With the Social Security COLA” (WSJ): On Thursday, the Social Security Administration said recipients will get an 8.7% increase in their payments next year and, for the second year in a row, that actually exceeds estimates of how much their costs increased. That is according to a 35-year-old initiative to measure the true rate of inflation facing those over 62, via an experimental consumer-price index produced by the Labor Department’s Bureau of Labor Statistics, known as the CPI-E; the E stands for “elderly.” … This year, the COLA was 8.7%, more than the 8% rise in the CPI-E.
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