There are some nascent signs that the world’s central bankers are finally beginning to understand – or at least publicly acknowledge – that their policies are, for the third time already in this new century, creating asset bubbles that have extremely malignant effects on investment decisions and wealth distribution.
Speaking before the International Monetary Fund (IMF), the Financial Times reports that Mario Draghi, head of the European Central Bank, warned central banks about the “blind risks” arising from their unconventional stimulus programs, saying “(b)ecause the use of these new instruments can have different consequences than conventional monetary policy, in particular with respect to the distribution of wealth and the allocation of resources, it has become more important that those consequences are identified, weighed and where necessary mitigated.” Assiduous readers of this blog will remember that I raised these issues way back in September 2013.
And there are the recent musings of Janet Yellen, the head of the Federal Reserve, at the same IMF forum that “equity market valuations at this point generally are quite high,” although she apparently failed to add: “…because I can’t take my big fat thumb off the ‘print’ button.” It is especially disappointing that Yellen hasn’t taken more aggressive action against asset bubbles because her lone valid claim to the seat she currently occupies is that she was one of the few Federal Reserve governors who warned about the housing bubble back in 2005, when Ben Bernanke was still firmly resident on the Isle of Denial.
All of this follows a recent opinion piece in The Wall Street Journal entitled “The U.S. Federal Reserve Asset Bubble Machine.” The opinion was written by Ruchir Sharma, who is the head of emerging markets and global macro strategies at Morgan Stanley Investment Management. Sharma has apparently been well schooled by Stephen Roach, the former chief economist at Morgan Stanley who was one of the most vocal opponents of Federal Reserve policy prior to the financial crisis and who currently thinks that the Fed “hasn’t learned the lessons of what it put the world through a decade ago.” Here is a great short video of Roach speaking on CNBC, along with some quotes from his very prescient warnings back in 2005.
Back to Sharma’s opinion piece. One of the things he points out is that, although stocks, bonds and real estate have individually been more overvalued at times in the past, today we have the “kind of synchronized boom” that “has never happened, not even before the past two major meltdowns.” Sharma points out, very rightly, that “(e)very major economic shock in recent decades has been preceded by an asset bubble” and that “central banks are unleashing easy money to fight an imaginary villain, consumer-price deflation, at the risk of feeding a real monster, asset-price inflation.” The very simultaneity of these bubbles should be more than a little hint to the central bankers as to their common cause.
We have seen the damaged caused by an equity bubble in 2000 and a real estate bubble in 2007-2008, as well as arguably a bond and currency bubble in 1997-1998, but thanks to the likes of Yellen, Draghi and Kuroda (the head of the Bank of Japan, and perhaps the Maddest Hatter of them all) there is a very good chance that we will shortly be treated to a perfect storm.
Sub-Prime Student Loans
After the sub-prime mortgage crisis, it was necessary to find a villain. For the left, it was greedy bankers foisting inappropriate loans on unsophisticated and inexperienced borrowers. For the right, it was government policies — notably the Fair Housing Act, the Equal Credit Opportunity Act and the Community Reinvestment Act – and the policies of the FHA, Fannie Mae and Freddie Mac, along with the search for yield caused by overly loose monetary policy, that goaded the banks into imprudent lending. The good news is that, when the post mortems are written about the coming student loan crisis, there will be no doubt about the guilty party. The government’s fingerprints are all over this one and not even a Paul Krugman will be able to blame the private sector for this mess.
The Manhattan Institute for Policy Research, a conservative think tank set up by hedge fund billionaire Paul Singer, does some excellent work, especially on education. They have recently published on an article on student loans that gives some of the very scary statistics on this $1 trillion disaster-in-waiting. I won’t cover the stats, for which I recommend a quick read of the linked article or my earlier blog on the subject, but I just want to make one point.
The Economist has recently run a piece entitled “It depends what you study, not where”. The article describes research done by PayScale, a firm that calculates the returns from college education. The firm compares the earnings of college graduates with the cost of the degree, net of financial aid. The results are summarized in the title of the article: study engineering or computer science, almost anywhere, and over a 20-year period you generated a hefty 12% return per annum; study business, and you clocked in at a very respectable 8.7% per annum; study arts or the humanities, and you are lucky if you avoided losing money, unlike the hapless graduates of the Maryland Institute College of Art whose college degree was a $92,000 loser. In other words, many of the college degrees manufactured in America – and, as my earlier blog points out, only roughly 1/3 of students study engineering, computer science and math, and many of these students march right back to Asia when they are done with their studies – are nothing but expensive consumption items. They are assuredly not the investments necessary to pay back the interest and principal on the amounts borrowed.
Can you imagine the howls of protest from the left if private sector lenders were foisting massive amounts of debt ($27,000 on average for the 70% of students who take loans, with the overall levels of debt up 325% since 2004) on young, unsophisticated and inexperienced borrowers under the false pretense, in many cases, that the borrower is financing an investment in his future? Particularly to finance tuition fees that have increased by 1,180% since records started being kept in 1978, 3.25 times faster than the consumer price index, in large part because of the availability of government loans? And in an environment when 44% of recent college graduates are underemployed, according to the New York Federal Reserve, including over 115,000 janitors and a quarter of retail salespeople?
Come on, Krugman, et alia, where’s the outrage?
And the Winner Is: Silicon Valley
The votes are in. It’s official. Silicon Valley is the silliest place on the planet – although I have to admit that I don’t know Hollywood.
The Economist has recently run an article entitled “The first man of Silicon Valley.” The article is about the recent death of David Goldberg, the husband of Facebook’s Chief Operating Officer, Sheryl Sandberg. David has apparently become a feminist icon in the Valley following the publication of Sheryl’s book, Leaning In, which applauded his selfless support of her senior level career at Google and Facebook.
Listen to this: When she became responsible for Global Online Sales and Operations at Google, a very senior and well-paid role, he moved to the Valley from Los Angeles! He “selflessly” coached her in negotiating for higher compensation when she was offered the job of COO at Facebook! When their first child was born and she had a bum leg, he took charge of the baby for a whole week! Apparently, they both have made an effort to be home in time for dinner!
Sheryl Sandberg’s career at Google and Facebook has, according to Forbes magazine, given her a net worth of $1.06 billion. If anybody out there is listening, let me be perfectly clear: I am happy to make the same sacrifices under these conditions. Call me “icon.”
Roger Barris, London
What I Am Reading
(Author’s Note: This is a new feature of your ever-innovating Economic Man blog, in which I will briefly discuss the contents of my nightstand and make recommendations, for and against.)
Double Down, by Mark Halperin and John Heilemann (2013). This book claims to be “The Explosive Inside Account of the 2012 Presidential Election.” It is a follow up to their earlier book, Game Change, that covered the same material for the 2008 elections. I have read, and recommend, both of them.
I took away several messages from this one. The first is how reluctantly the GOP chose Romney in 2012, after exhausting all alternatives, even the manifestly unelectable Newt Gingrich. The second is what a terrible campaign Romney ran, with the authors’ judgement that he was the most “gaffe-prone” candidate in memory, all the way up to his insistence in putting a surreal, totally unprepared and probably borderline senile Clint Eastwood in front of a national TV audience at the Republican National Convention. The third was all the “baggage” that Romney carried as a candidate: his “Romeycare” health plan in Massachusetts (which undercut the strongest attack against Obama’s record), the notorious “Let Detroit Go Bankrupt” editorial in the New York Times (where the headline was clearly an act of sabotage by the editors), his personal taxes, his privileged childhood and wealthy and out-of-touch adulthood, and his private equity background. And the fourth was the good luck that Obama enjoyed, right up to the appearance of Hurricane Sandy immediately prior to the election, which gave him the opportunity to look all presidential and bipartisan just before the vote, including his very public bromance with Governor Chris Christie in the wake of the natural disaster. (Apparently, after the Romney gaffes and the deus ex machina of Sandy, Bill Clinton took to repeating that Obama was “luckier than a dog with two dicks.” And Bill would know.)
Although Romney took a pretty bad beating in 2012, when you consider the weakness of his candidacy, there is also an undertone of hope. This is same message from the 2008 election, when the fact that the hopeless pairing of McCain and Palin, following the disastrous presidency of Dubya and in the midst of the financial crisis, could even stay in the same electoral zipcode as the Democrats was a testament to the fundamental appeal of the GOP. This means that, if the Republicans can stop shooting themselves in their collective feet, the path to victory is clear.
The first step is that the Republicans must develop policies that blunt the appeal of Democrats to the “ascendant coalition” (sic) of women, the young, blacks and hispanics. As I have argued before, the necessary changes are libertarian policies of pro-choice, immigration reform, and a non-interventionist foreign policy, probably combined with a strong push on educational choice (as the single best policy to help the black community and one to which the Democrats cannot respond without alienating their union base – more on this in a separate blog), a realistic approach to the environment and climate change, and a dropping of the remainder of the religious right’s social policy agenda.
The second step is that the Republicans must find a way to close the yawning “charisma gap” with the Democrats: when the Democrats can roll out Obamas (Barack and Michelle) and a Bill Clinton, along with a George Clooney and a Bruce Springsteen, it is simply not adequate that the Republicans respond with a “stale, male and pale” candidate like Romney backed up by Clint Eastwood and Meatloaf. From a marketing perspective, this simply is not a saleable “product.” The really good news is that if the Republicans cease being toxic on the issues, particularly the social ones, then the “charisma gap” will close automatically.
As the title of my earlier blog – “In a hole, with a shovel” – makes clear, the GOP cannot afford to double down on policies and candidates that appeal to a small and shrinking minority of voters, with our electoral chances always riding on the hope that the “ascendant coalition” will sleep through voting day. For the moment, this strategy can still produce Republican victories in low-turnout, mid-term elections, but the presidency will remain a distant and receding target.