Current Economy puts the Fed in a Lose-Lose Situation

Earlier in the week we heard from our good friends at the Federal Reserve, regarding the economy and potential action by the Fed. To the disgust of many, the Fed decided to sit back and do… nothing? That’s right, Fed. Chairman Ben Bernanke and friends are staying on the sidelines for the meantime, monitoring the US economy, and keeping an eye on the saga in Europe (while probably placing a few wagers on how much worse Greece can make its’ situation). Regardless of the decision though, the Fed will remain under severe scrutiny, and many blame them for much of our current problem (some deserving, others not). Allow me to explain….

Many people ask how they could just sit back and do nothing? It is quite simple really; the Fed is basically out of bullets. We have seen a couple rounds of Quantitative Easing (QE), and newly started project of “Operation Twist”. These programs are designed to supply a struggling economy with cheap money, with the intent of encouraging firms to use in funding their business and stimulate growth. A great idea in theory, a little more difficult in practice. What many don’t see is the manipulation in yield curves, bond prices and fixed income prices. What has happened, firms have taken this money, and done…nothing. We see financing institutions and some other companies sitting on record amounts of cash, rather than spending. Why? Well, with Europe a mess, the US economy stagnant, why would you spend? If chaos occurs in Europe, we could see borrowing rates jump, and without growth, that will slow things down even more. It makes sense to borrow and hold now then to borrow later at higher costs. If things go bust domestically like 2008 again, firms know they will need as much liquid capital on hand as possible. New regulations enacted by Congress also played a hand in this as well. Congress requires certain industries and businesses to have a predetermined amount of cash or capital on hand at all times. By restricting cash flow, funds available for business operations now have to sit in the bank, or in some executive’s office.

In addition to QE and other programs, the Fed has lowered interest rates to historic levels. However, low interest rates destroy those who save or rely on interest to make profits. So why cut interest rates then? This idea is the same as the last one, cheap money in the market.

Consumers are also fired up at the Fed with respect to currency rates and the value of the dollar. Currently, we see our dollar at lows we are not accustomed to. This however, is a trade off of low interest rates, cheap money in the market, and excessive spending. The next logical question is to ask is, if firms aren’t going to spend, why lend them money? Well, how bad would things be without any lending? Firms would be undercapitalized, demand would be even lower, and you can run the risk of the market for a certain good freezing as a whole.

So where does this leave us? Should we bump up interest rates to be back at normal functioning levels? Well, that may increase the value of the dollar, but doing that with economic recovery only prevents us from growing. Do we keep it low, leave the dollar depreciated and try to encourage lending and business? How do foreign markets influence this? Or do we sit back and see how things sort themselves out in the short-term, then act accordingly? That is exactly what the Fed is doing, and this time, they got it right. Regardless of the action taken, criticism will fly in from all sides, whether it is in their control or not. It is safe to say that I wouldn’t trade jobs right now; I’m not sure about you. While the Fed is in charge of our monetary policy, monetary policy isn’t direct driver for job creation. As long as politicians use the Fed as their scapegoat and punching bag for poor fiscal policy and their manipulation, much of what we see is what we’re going to get.

Bank Fees? Depends on your side of the Coin

The current economic state has yielded us many interesting headlines from record corporate profits, debt debates, protesting and some old fashion mud slinging between political figures and presidential hopefuls. One topic that I have found as most interesting is debit card and banking fees. As if the financial sector didn’t have enough bad press, the news of banks charging fees for debit cards and checking accounts took the media by storm. Protesters on Wall St. were outraged, as the simple $5 a month fee would deprive them of one morning of Starbucks coffee a month. Those who lost their wealth in the financial downturn were shocked; how could the same companies that destroyed their wealth now take more from them?

Normally, it is pretty common for a business to charge to use their service. We all pay financial advisers to manage our assets; they receive a commission based off of performance. Maintenance companies charge to cut your grass, they don’t do it to get a tan. Fitness centers charge you to use their weights, machines and trainers, not because they enjoy people walking around in sweaty t-shirts. Wouldn’t it make sense to pay a bank $5 a month to ensure the safety of your hard earned cash? Or would you rather keep it under your bed and not have it guaranteed at all? Maybe banks these days are down right greedy….

Just like a coin, there are 2 sides to every story. Most people fail to recognize the recent Dodd-Frank laws that went into effect, one of which was written and orchestrated by Illinois Senator Dick Durbin (don’t worry everyone, nobody knows all of the laws in Dodd-Frank, as there are approximately 225, and they are still being rewritten and worked on 2 years later). Many people just considered the banking industry to be selfish in a stagnant economy. The so-called “Durbin Rule” restricts the fee that banks charge retailers for credit card usage at their locations. To give some background on the fees, they were normally set between the retailer and the bank, at some agreed upon price (free-market principles in action here). With Senator Durbin instituting a limit on these transactions, these banks were forced to find ways make up for the lost revenue stream. Essentially, our politicians engaged in price fixing (illegal for businesses), in hope that the business would pass cost savings to the consumer. Since then, I have yet to see any prices drop, but I do see costs passed on the consumer in the banking world…. Oops?

Recent news of these banks deciding against these fees has brought much relief to the public. Bank of America and Wells Fargo have both come out and said they will not enact this monthly fee. In a recent article on Yahoo! Finance, Senator Durbin told reporters “I hope the banking industry learns from this”. Something tells me they will learn as much from this as being slapped on the wrist for nearly collapsing the economy and walking away with hundreds of billions of dollars of taxpayer money. One Wall Street protester said, “This is what the movement would consider a very, very small first step on rectifying an oppressive dynamic between the financial services industry and the 99 percent”. Of course we need to thank the protesters, as a few people standing outside a business’ building has much more say than thousands of people holding millions in deposits, threatening to give them to your competitor if continue your current state of business.

What should we take away from this? Just like everyone else, I will not forgive the banking world for 2008-2009, and the damage done because of it. But before we kick the child that is down and throw salt in the wounds, lets take a step back. As much as we despise “ Too Big to Fail “ and the other flaws of our banks (which is another topic in itself), lets remember who funds our housing, cars, education, property, business (you see where I’m going). As much as we may hate it, when banks are strong, and credit is good, business generally do very well, and last I checked, that is what this country needs.

Here is the link for the Yahoo Article:

http://finance.yahoo.com/news/Bank-of-America-drops-5-debit-rb-2224200831.html?x=0

Herman Cain's Campaign Finds New Obstacle

In the past few days Politico published a story on past sexual harassment allegations against Presidential candidate Herman Cain.  Mr. Cain's campaign website released the following message in response the the Politico article.

---Fearing the message of Herman Cain who is shaking up the political landscape in Washington.  Inside the Beltway media have begun to launch unsubstantiated personal attach on Cain.  Dredging up thinly sourced allegations stemming from Mr. Cain's tenure as the Chief Executive Officer at the National Restaurant Association in the 1990's, political trade press are now casting aspersion on his character and spreading rumors that never stood up to the facts.  Since Washington establishment critics haven't had much luck in attaching Mr. Cain's ideas to fix a bad economy and create jobs, they are trying to attack him in any way they can.  Sadly, we've seen this movie played out before - a prominent Conservative targeted by liberals simply because they disagree with his politics.  Mr. Cain -- and all Americans, deserve better.---

Last night, Mr. Cain appeared on  'On the Record with Greta Van Susteren' to discuss the previous allegations against Mr. Cain.  The link for the video of this interview is available here.  Cain recounts these previous allegations with Greta and gives "his side" of the story.  At this point, he is the only party to come forward since Politico broke this story a few days ago.  It is unclear at this time whether or not his accusers will come forward and talk to the media.

I want to discuss a few of the issues underlying both the "thinly sourced allegations" against Mr. Cain while he was CEO at the National Restaurant Association, and the personal attack by the "Inside the Beltway media".  First of all, the charge of sexual harassment is a serious one, and I think it has been largely taken out of context in last 20 years or so.  I want to be clear, this is not to say that there are not credible allegations of sexual harassment in our society today.  However, I do think that what we think of today as sexual harassment and what legally defines sexual harassment are somewhat different.  By in large, our desire as a society to constantly be politically correct in our speech is to blame for this.  Political correctness has driven individuals apart such that we cannot communicate with each on some 'normal' level without constant fear of saying the 'wrong thing'.

But why settle the dispute?  This has been a common question circling these allegations.  If Mr. Cain denied the allegations against him, why did the company choose to settle with the supposed victims?  Simply put - it's what corporations do.  For those who may not know, court cases are not only expensive and time consuming, but they also put the organization behind the accused directly into the media spotlight.  Contrary to popular belief, not all media is good media.

While the media would like you think this is not an issue about race and political party, I argue it is.  This is not the first time we've seen this happen to African American conservatives.  As the Associated Press pointed out in a recent article, quoting Atlanta Tea Party leader Debbie Dooley who stated:

---I think the left is totally and completely terrified of a conservative black man coming to power and prominence...they are trying to do the same thing to him that they did with Clarence Thomas---


For those who may be unfamiliar with Supreme Court Justice Clarence Thomas, he faced similar accusations during his confirmation hearings roughly two decades ago.  Rush Limbaugh also weighed in on his radio program stating:

---This is about blacks and Hispanics getting uppity...(liberals) cannot have a black Republican running for office, can't have a Hispanic, the Left owns those minorities, those two groups can't be seen rising on their own.---


Limbaugh makes a valid argument for the motivation of the left.  Historically, the conservative movement has always advocated for rights of the individual, and has always been on the side of equality - not social equality and redistribution the progressive left believes in - but the equality of opportunity to succeed, the very same equality Jefferson spoke of in the Declaration of Independence.

---We hold these truths to be self-evident that all men are created equal...---


If you actually read history, and not just believe what you learned in high school, the left did not fight to end slavery or segregation, that was the conservative movement.  More on this to come in later posts...

My take home message for you is this.  Ask yourself, what motivated this kind of story against Mr. Cain?  IF the allegations were deemed unsubstantiated in the 1990's, why bring them up now?  What possible purpose could they serve in the vetting process of this man as a candidate for President of the United States?  Could it be they seek to damage his image and what he stands for, because they cannot attack his ideas?  What does history have to tell us about this incident?  Is it an isolated event, or have we seen this before?  I always find it helpful to analyze what potential gains an organization like Politico has to gain from digging up this nugget from Mr. Cain's past.  Maybe they have no direct gain, however, taking a step back, I believe there is a case that the political left has much to gain.