Good Riddance And Look Out Below

by David Stockman, Lew Rockwell:

There is about to be a changing of the guard in the Eccles Building. That comes straight from the tweeter-in-chief, who actually verbalized his thoughts on the matter during interviews yesterday:

I tell you what, she was in my office three days ago. She was very impressive. I like her a lot. I mean, it’s somebody that I am thinking about……(but) I have to say you’d like to make your own mark….

We’ll take the bolded phrase as gold watch time for Janet Yellen upon expiration of her term in February. And with a full measure of Trumpian gusto, we’d also say: GOOD RIDDANCE!

When the story is finally written about how capitalism was strangled and America impoverished during the first quarter of the 21st century, Janet Yellen will rank high on the list of villains – right along with Ben Bernanke and Alan Greenspan.

Their unforgivable sin was to systematically falsify the most important prices in all of capitalism – the prices of money, debt and other financial assets.

They did so in the arrogant and erroneous belief that 12 mortals on the FOMC can improve upon the work of millions of consumers, producers, workers, entrepreneurs, savers, investors and speculators on the free market; and that it’s possible to centrally plan and manage a $19 trillion economy by fiddling with interest rates, manipulating the yield curve and massively and fraudulently monetizing the public debt.Trumped! A Nation on t…David A. StockmanBest Price: $9.95Buy New $45.00(as of 02:24 EDT - Details)

For want of a better term, we refer to this entire, misbegotten Greenspan-Bernanke-Yellen doctrine as Bubble Finance. That’s because in an open world economy flooded with cheap labor and capital, current Fed policy ultimately generates destructive financial bubbles on Wall Street, not sustainable prosperity on main street.

In fact, the evidence is now overwhelming that Bubble Finance unequivocally weakens domestic investment and growth and erodes real wages and living standards. In part that’s because it induces corporate C-suites to strip mine cash flows and balance sheets in order to fund financial engineering schemes (stock buybacks and M&A deals), thereby pumping trillions of cash back into Wall Street; and in part because it blocks domestic cost-price-wage deflation, thereby accelerating the off-shoring of production, jobs and earned incomes to lower cost venues abroad.

At the same time, Bubble Finance fuels the massive inflation of financial asset prices because, under current conditions of Peak Debt, the Fed’s flood of liquidity and credit never leaves the canyons of Wall Street; it simply funds trading leverage and the bidding up of the prices of existing securities. So doing, these central bank intrusions capriciously redistribute wealth to speculators and the top tier of households which own most of the financial assets.

The evidence for the damage to main street is clear as a bell if you disregard the Wall Street/Washington lie that a once-in-500-year financial disaster struck the US and world economy in September 2008, and that it was only “extraordinary” monetary measures and central bankers’ “courage” to print that precluded Armageddon.

Not at all. There never was a real financial meltdown or run-on-the-banks outside of the canyons of Wall Street.

Had the free market been allowed to have its way with the speculators, gamblers and leverage artists, the AIG holding company would have been liquidated; state insurance commissioners would have taken over its subsidiaries to protect policy holders; the mortgage securitization meth labs of Wall Street would have been shutdown; the duration and credit mismatched trading books of dealers would have been crushed; and Goldman Sachs and Morgan Stanley would have been forced into Chapter 11 and reorganized into numerous smaller and more prudent financial services firms.

It would have all been over in a few months, and the crony capitalists and gamblers who had been enabled by the post-1987 era of Bubble Finance would have been carried out on their shields. So, too, the Greenspan Put would have been interred and honest price discovery would have been restored to the nation’s financial markets, thereby giving capitalism a new lease on life.

As it happened, the post-Lehman shock to the C-suites of corporate America ended on its own accord after about nine months of severe liquidation of excess inventories, bloated payrolls, failed M&A deals and underperforming assets – all of which had been enabled and accumulated by 20-years of Bubble Finance.

As we have demonstrated elsewhere, however, the natural regenerative forces of capitalism were already at work by the summer of 2009. A self-fueling business recovery was underway long before Obama’s shovel-unready fiscal stimulus got going or any of the Fed’s zero cost money made its way to main street.

Indeed, the Fed’s $3.5 trillion bond buying campaign and various phases of QE had no impact whatsoever on triggering, sustaining or enhancing the natural business recovery that is now nearing its 100th month.

To be sure, this recovery has been the weakest in history by a long shot. But that’s not owing to the after-shock of a financial plague that arrived on a comet from outer-space, as the Fed and its acolytes risibly insist.

To the contrary, the Wall Street meltdown was caused by Bubble Finance, while a weakening GDP growth rate is the inherent consequence of excessive financialization, burgeoning debt and the diversion of business cash flows and capital into secondary market speculation. And by doubling down on Greenspan’s giant errors, Bernanke and Yellen only compounded the harm.

That is, it caused main street growth to become even weaker and Wall Street bubbles to become even larger and more dangerous.

As to the former, you can’t argue with the chart below. Real final sales strip out inventory fluctuations and thereby provide a reasonable approximation of the over-the-cycle trend in output growth.

Self-evidently, the final phase of Bubble Finance has nearly ground economic growth to a halt. And unlike the central bankers’ statistical shenanigans which leave out the recession quarters, we measure on a peak-to-peak basis because modern recessions do not come from outer space or inner greed; they are caused by central bankers.

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