On June 28th 2017, the United States Congress held a hearing titled: “The Federal Reserve’s Impact on Main Street, Retirees and Savings.” If you haven't watched it yet, we highly recommend doing so.
We followed the live feed closely here at PeakProsperity.com (as this topic is a major focus of ours) and were extremely and pleasantly surprised that most of the experts invited to provide testimony expressed views that closely mirror our own. They were critical of much of what the Federal Reserve has done over the past decade, explaining that its policies have badly hurt "regular Americans" while vastly enriching big corporations and the privileged elite.
Joining us for today's podcast is Alex J. Pollock, one of the experts who participated on that Congressional panel. Pollock is a Distinguished Senior Fellow with the R Street Institute, a non-profit, non-partisan public policy think tank based in Washington, D.C.. He also serves as a Director of the CME Group and is the author of Boom & Bust: Financial Cycles and Human Prosperity (AEI Press, 2010).
In this discussion, Pollock details out his assessments of the Fed's major transgressions against the interests of the general public. But perhaps more interestingly, he shares his observations from the hearing and how it struck him that many of the members of Congress that convened it appear to be growing increasingly concerned about the Fed's lack of accountability, as well as its potential fallibility.
I thought the members of the subcommittee were serious and had clearly done some study of the issues. These are just hugely important, as there’s nothing that’s more ubiquitous in any society than money. 100 some years ago, they used to call the nature of money — about which they had great debates in the days of William Jennings Bryan and William McKinley — "The Money Question".
The Money Question continues to be huge, because if you’re changing the nature of money and manipulating interest rates and manipulating financial markets, you are touching virtually everybody in this society. That’s the basic activity that’s going on with the Federal Reserve and it’s a deeply and essentially political question, in addition to being a financial and economic question.
In my opinion, the impact of the Fed's policies have been highly negative. They have engineered negative real interest rates, which have a negative impact on savings and especially on conservative savers.
But I want to touch on the 2008 crisis. All right, we had the period of the crisis, and during a crisis there’s extreme uncertainty. So there was experimentation and bailouts going on. We can always argue about what was the right way to do it, but these things happen in nearly every crisis.
But now the crisis is over. And when did the crisis end in the United States? In the second quarter of 2009. That’s eight years ago. So, the question that I like to think about is: Eight years later, why have we still got this Federal Reserve manipulation going on? And in particular: Why are we still taking money away from savers to give to borrowers?
The saver has hard-earned savings prudently laid up to provide for emergencies and for the future. Let’s say the interest rate has been something like, 0.3%, something trivial, thanks to the Fed. Meanwhile, the Fed is trying to engineer annual inflation of 2% and has publicly announced its plan is to have perpetual inflation, forever. So the value of our savings is going down at 1.7 % per year as long as this continues, and it’s been going on eight years after the crisis ended.
On the other side, this is an advantage to various kinds of borrowers. Some of them are ordinary people, but some of them are highly-leveraged speculators. There’s nobody, with one exception, which I’ll mention in a moment, who gets more advantage on a negative interest rates than people with a lot of debt speculating in financial markets. And that makes it much more profitable to carry on their activities.
The one exception is the government itself. That’s an even bigger beneficiary because if the government wants to run big deficits, how can the Fed help it out? By making the real interest rate it has to pay to run its deficits negative. So, one of the things the Fed is doing by this policy, is trying to and succeeding in letting the government run its deficits and keeping the cost of those deficits down on the back of the savers. So, what we have going on here is a huge transfer of wealth from savers to borrowers. And the biggest borrower is, of course, the government itself.
Click the play button below to listen to Chris' interview with Alex J. Pollock (45m:29s).
Chris Martenson: Welcome everyone to this Peak Prosperity podcast. It is July 18th, 2017. I am your host, Chris Martenson. The Federal Reserve is both harming people today and saddling the future with extraordinary risks. Now as you know, that’s been our view here at Peak Prosperity for many years, starting with Greenspan, through Bernanke and now into Yellen.
Now on June 28th of 2017 the United States Congress held a hearing entitled, “The Federal Reserve’s Impact on Main Street, Retirees and Savings.” As you know, this is something we’ve been following those impacts for years. And I was so excited to see this particular hearing come forward.
So, we followed and we featured this live discussion as it unfolded under our featured discussion section at the site. One of the invited experts that gave testimony was Alex J. Pollock, and he’s today’s guest for this program. What I found fascinating about that hearing was that out of the four experts that had been empaneled, three of them might as well have been regular readers of hours over the years. Or perhaps you would think we’d been learning from them.
Either way, our views are no longer fringe, but held by three out of four financial experts brought into testify and it’s seems like common sense. Actions have consequences. The Fed’s actions have had enormous consequences, and it’s good to see them publicly aired finally. Either way, excuse me. So, we’ll get into this in more detail, but the synthesis is that the Fed’s policies have badly hurt savers, Main Street and retirees while transferring those losses over to the financial system to become its gains.
I was particularly taken by the clear, level-headed fact-based testimony of Alex J. Pollock. Alex is a Distinguished Senior Fellow with the R Street Institute, a non-profit, non-partisan public policy think tank. Alex joined R Street in January of 2016 from the American Enterprise Institute, where he was a Resident Fellow from 2004 to 2015. And he previously was President and CEO of the Federal Home Loan Bank of Chicago from 1991 to 2004.
He also serves as a Director of the CME Group, a Director of the Great Lakes Higher Education Corp, and a Director and past Chairman of the Great Books Foundation, as well as many other board and service roles. He is also the author of “Boom & Bust: Financial Cycles and Human Prosperity,” published in 2011. Alex, thank you so much for speaking with us today.
Alex J. Pollock: Thank you so much for having me.
Chris Martenson: Let’s begin, Alex, if we could with your testimony to the Congressional Committee on the Financial Services Committee. This was on the Fed’s Impact on Main Street, Retirees and Savings. First, set the stage for us. What was the purpose of the hearing? Who convened it? And why did they call you in?
Alex J. Pollock: This is a hearing of a subcommittee, of monetary policy of the Financial Services Committee, which is the Committee of Jurisdiction of the Federal Reserve and other things financial. Long ago, that committee was known as the Committee on Banking and Currency, just to get its link to monetary affairs historically. And they were worried about what the Fed has been doing over the last number of years to distort financial markets, to, I was going to say rob, but I’ll say, take money away-
Chris Martenson: Uh huh.
Alex J. Pollock: From Savers and give it-
Chris Martenson: Uh huh.
Alex J. Pollock: To other people. And in general, how, what should the relationship be between the Federal Reserve and its creator and overseer, the Congress of the United States. Which is a contentious issue as you know, because the Fed believes and is fond of strongly promoting the idea that it should be independent, that is that you just be able to do whatever it wants. And this I think, is a very healthy reaction from the Congress saying, well, we would really like to understand what, Federal Reserve, you are doing.
And make it be clear that the, no matter how exalted an organization may be, or think it is, they are, all parts of the government are responsible to the elected representatives of the people, that is to say the Congress. And as I said, that seems to be a very healthy development.
Chris Martenson: Now, people in the United States believe that, we’re told this all the time, that we operate under a democratic form of government. Several of the hallmarks of democracy include free and fair elections, you’ve got basic protections of rights, majority rule, open citizen participation. But one of those core tenets of democracy is the right to either serve in the public in the interest, or to vote in an elected representative; that his accountability is supposed to be part of that equation.
You’ve just touched on a really important part which is, who is the Fed actually accountable to in this story?
Alex J. Pollock: If you believe the story of people who believe in the independence of the Fed, as they say, they’re not accountable to anybody except themselves, but that’s, as your comment suggests, clearly an undemocratic idea. They have to be and they should be accountable to the legislature. And how to make that accountability real is a very important and interesting problem we need to keep working on.
The opposite of a democracy is of course, rule by self-appointed philosopher kings. Philosopher kings are antithetical to the American tradition, and to the proper American political philosophy, and we shouldn’t have philosopher kings in the Federal Reserve any more than we have them any place else.
Chris Martenson: Well, here’s where this gets a little bit tricky. So, I wanted, I will get back to the testimony. I really want to dive into the impacts that have been recorded on Main Street, Retirees, Savers, all of that. But it was a number of years ago that Bloomberg Markets had to go in through FOIA requests and really pry out of the Federal Reserve some documents to say, hey, what were you doing there during the height of this panic and in the years afterwards?
And they got, I don’t know, 29,000 pages of documents out of them. But it turned out that 7.77 trillion dollars had been loaned out to a variety of organizations, including foreign central banks, U.S. banks, foreign banks, you name it. And at the height of the crisis in December 5th, 2008, 1.2 trillion dollars was out the door at below market rates. Doesn’t that seem like something that the public should have at least some insight into?
And if not, tell me, I don’t understand the argument of the people who say, no, no, that’s private. That should be for the Fed to have the independence it needs. It needs to be able to funnel up to 1.2 trillion dollars out in the dead of night to whoever it wants to. Nobody should be able to see that. How do, can you help me understand the argument that says, there’s no way that there’s going to be any possibility for, let’s just say, malfeasance to occur in that, in such a moment?
Alex J. Pollock: Well, I cannot help you understand the argument that the public should not be aware and the elected representatives of the public, what the Fed has done and what’s going on. That just seems to be, to me, to be fundamental.
Chris Martenson: Uh huh. Well, it’s certainly fundamental from the standpoint of transparency, of understanding, these are public monies we’re talking about. So, let’s like, circle back. I thought at that hearing from what I watched, I thought several of the attending Congressmen and Congresswomen asked really good questions, even more than, I was pleasantly surprised. Did you think so?
Alex J. Pollock: Yes, I did. And I can tell you that at least for me, none of those questions was planted.
Chris Martenson: Really?
Chris Martenson: Where did those questions come from? That’s fantastic, cuz they were really good questions; they really were.
Alex J. Pollock: I thought so. And I thought the members of the subcommittee were serious, and thought about it, and [had] done some study of the issue. And of course, these are just hugely important issues that there’s nothing that’s more ubiquitous in any society than money. 100 some years ago, they used to call the nature of money, about which they had great debates, let’s say in the days of William Jennings Bryan and William McKinley.
The money question, and the money question, it continues to be huge because if you’re changing the nature of money, and manipulating interest rates, and manipulating financial markets, you are touching virtually everybody in this society. And so, that’s the basic activity that’s going on with the Federal Reserve and it’s a deeply and essentially political question, in addition to being a financial and economic question.
Chris Martenson: I might even throw in a sociological question because we saw three years ago, I think it was 2015 that 62 people had as much wealth as half the world. And then in 2016, I think that dropped to eight. And now the number is down to five. So, what’s happening here, is the central banks in total, not just to pick on the Federal Reserve, but collectively, have printed around 33 trillion dollars into the maw of this crisis, kept that printing going up.
And of course, it’s creating large wealth and income gaps, which is really, has a political dimension, it’s also a sociological question. But isn’t it, this to me seems like a very ripe area to have thoughtful, we should be debating the money question, because these are really big impacts, but the Federal Reserve wants to conduct these experiments. I’m not aware that they have the expertise of either the political or the sociological dimension on board.
And yet, they are allowed to fully just run these experiments. Is this really, this hearing, was this starting to nudge towards that idea of saying, hey, maybe we should have more public oversight of something this central? It’s not, money isn’t like-
Alex J. Pollock: Yeah.
Chris Martenson: We’re fiddling with wheat prices. We’re fiddling with the price of everything. That feels pretty central to me. Was that sort of the thrust of this, or am I missing it?
Alex J. Pollock: Money is the price of everything. And of course, interest rates are the price of money in the future. We now have in the CHOICE Act, which has been passed by the House of Representatives, a bill which has the title in it on Federal Reserve reform. Which suggests, and the way I think about this is a serious and grown up conversations between the Federal Reserve and the responsible committees in Congress about what is really going on; what theories are being applied here? What are alternative ways to think about them? What are the risks? What are the uncertainties? Just the way you would, let’s say in the management committee of a company. Debate what you’re trying to do.
And this hearing we’re discussing, was a step in that direction. I hope we can take more steps as time goes on.
Chris Martenson: Now Alex, in that, I’m looking at your testimony here. And I’ll jump to you started, I loved you did this. You started with your conclusion, which is: Congress should require a savers impact analysis from the Federal Reserve at each discussion of the Fed’s policies and plans with the Committees of Jurisdiction. That seems a very measured, and also a very reasonable step that the Fed should consider the impacts of its policies on everyone, not just say, the banking system. So, can you talk to us about that a little bit?
Alex J. Pollock: Yes. Well, we know that for long-term growth of the society, but also for the wellbeing of individuals and families we have to have saving. And that long periods such as we’ve had, and which the Federal Reserve manipulates real interest rates by which we mean of course, interest rates minus the inflation rate, it manipulates real interest rates to be less than zero is punishing savers.
It means if you save 100 dollars, it’s worth 99 at the end of the year. So, how can it be that this key function and idea, economic and a political, sociological idea of savings doesn’t get the full attention about what is happening. So, in general, I think it would be right to say in trying to think about what the Fed calls monetary policy, or what we could call monetary manipulation, or monetary experimentation, to use the term you did.
What is it doing to various important parts of the society and the economy. And what about always remembering savers; that seems to me to be an idea that is actually impossible to argue with, but it isn’t done. So, my proposal is that the Fed, as it comes up to the Congress to have what we would hope for as a grown up, serious, substantive discussion about what’s going on would always in addition to everything else it’s saying, be talking about what is this policy doing for or against savings and to savers?
Chris Martenson: Now the Fed has been conducting this negative real interest rate policy for a number of years. You were at the Committee-
Alex J. Pollock: Eight years.
Chris Martenson: Eight very long years from my perspective. And if you were going to summarize the other testimony you heard, what is the punchline? What has the impact on Main Street, Retirees and Savings been of those eight years?
Alex J. Pollock: Well, it’s been highly negative. They have negative real interest rates, that is a negative impact on savings, and especially on conservative savers. Now I want to come back to something you said before, which is the crisis. Alright, there’s the period of the crisis, and the period of the crisis there’s extreme uncertainty. And there is experimentation and bailouts going on. We can always argue about what was the right way to do it, but that always happens in every crisis.
And there is always government intervention and experimentation. That’s just an empirical law of the behavior of government. Alright so, but now let’s say the crisis is over. When did the crisis end in the United States? And the answer is, in the second quarter of 2009, that’s eight years ago. So, why the question that I like to think about is: so why eight years later have we still got this Federal Reserve manipulation going on?
And in particular, why are we still taking money away from savers to give to borrowers? Now, and of course, there are all kinds of borrowers, but let me mention two of them in particular. So, let’s start with the saver. So, the saver has hard-earned savings prudently laid up to provide for emergencies, and to provide for the future. And let’s say the interest rate has been something like, 0.3 percent, something trivial, thanks to the Fed.
Meanwhile, the Fed is trying to engineer annual inflation of two percent. And has publicly announced its plan is to have perpetual inflation, two percent forever. So, if these, we’re inflating it too, and we’re getting 0.3, the value of our savings is going down at 1.7 percent per year as long as this has been going on, and it’s been going on eight years after the crisis ended. Okay, on the other side, that’s an advantage to various kinds of borrowers.
Some of them are ordinary people, but some of them are highly-leveraged speculators. There’s nobody, with one exception, which I’ll come to, but gets more advantage on a negative interest rates than people with a lot of debt speculating in financial markets. And that makes it a much more profitable to carry on their activities. And the one exception is the government itself. That’s an even bigger beneficiary because if the government wants to run big deficits, how can the Fed help it out?
Well, how about by making the real interest rate you have to pay as the government to run your deficits negative. So, one of the things the Fed is doing by this policy, is trying to and succeeding in letting the government run its deficits and keeping the cost of those deficits down on the back of the savers. So, what we have going on here is a huge transfer of wealth from savers to borrowers. And the big, we know the biggest borrower is, it’s the government itself.
Chris Martenson: Yeah. This gets right to the heart of my critique and criticism of Fed policy over many years, which is: I don’t happen to believe, it is my belief, so I’ll put them on the table. I don’t believe you can print your way to prosperity. Every time this has been attempted in all of history, all we’d see were temporary booms supported by overly abundant and even mispriced money. The resulting gains as you’ve just described are unevenly distributed. One sector loses, another gains, speculators win as you say, the middle class loses mostly.
So, seen in this way, the Federal Reserve is not a prosperity-creating institution like they like to paint themselves, but a redistribution machine that would probably make Karl Marx blush. Is that too harsh?
Alex J. Pollock: Well, I think among its very important effects are precisely redistribution. Now one of the Congressmen present at this hearing was a Democratic Congressman, a friend of mine. He started off his opening comments saying, I think we need to think about the distributive or redistributive effects of Federal Reserve policy. And then he left as they often, as members of Congress often do in hearings, they can go in and out.
And I said, I was so glad to hear Congressman Foster say that, because that’s precisely what I want to talk about. The redistribution by the Federal Reserve from savers to other people.
Chris Martenson: Well, and -
Alex J. Pollock: And as you know, I went ahead and put a number on what I believed that redistribution has been, which is 2.4 trillion dollars since 2008.
Chris Martenson: 2.4 trillion, is that just lost interest, or is there another component to that?
Alex J. Pollock: That is the negative real interest rates. So, we take what we estimate as all of the individual savings there are in different forms; CDs, treasury bills owned by individuals, money market fund shares, savings deposits. And we calculate the interest rate received minus the inflation rate, the depreciation of the currency by the inflation rate. That gets us the negative real interest rate. Then we compare that to what would have happened if you had had positive real interest rates on such savings equal to the 50-year average of the period before, that is to say 1958 to 2007.
And that gap between the 50-year average positive real interest rate, which is 1.66 percent, and the actual negative real interest rate which is received. We multiply that gap times the total amount of savings. We get, they transfer, or the loss to savers, 2.4 trillion dollars.
Chris Martenson: Alex, so let me talk about-
Alex J. Pollock: Laid out and-
Chris Martenson: Keep going.
Alex J. Pollock: I just said, I laid out all this math in my testimony. There’s a year by year calculation so if somebody doesn’t like this or that assumption, they can change it. But it’s not going to change the fundamental conclusion.
Chris Martenson: Right. And so, let’s take the implication of that conclusion. There was some millionaire real estate investor recently that chided millennials because they weren’t buying houses, because he said they eat too much avocado toast, or something like that. But traditionally, savers which might be parents and grandparents, had gotten that interest income. You’ve identified 2.4 missing trillion dollars. And that would ordinarily be; there is the capital stock of a family which might go into new business formation and the enterprises that have been typically the life blood of the growth in jobs and prosperity engine of the United States.
And then you wander over to the Census Bureau data, and they say, wow, look, new business formations really just like, just plummeting and we don’t understand why. And I think, I’m way over here waving my hand, I think I do. I think there’s a couple missing trillion dollars that’s not available to the traditional stock of savers; grandparents, parents, all of that to help to begin to raise up and seed, provide seed capital to the next generation.
So, there are real impacts to this. And-
Alex J. Pollock: I think that’s true. Or helping the, as is traditional helping the children buy houses.
Chris Martenson: Yes.
Alex J. Pollock: Now there’s another problem buying houses, which the prices of houses thanks very importantly to the Fed, are now again off the chart. The nominal price of houses on average in the United States is now higher, now this is in nominal terms, are now higher than they were at the peak of the bubble in 2006. Why is that? It’s because the Fed has artificially suppressed interest rates while hurting savers.
You might say, well, look how wonderful it is for somebody getting a mortgage, they get a lower rate. But they’re also paying a much higher price for the house. So, we’re pushing the price of houses out of the reach of these very young people you were referring to a moment ago by the same Federal Reserve policy. They set out very consciously to create a boom, a renewed boom in house prices.
In economist speak, they call it a wealth effect. We make the price of assets go up. Well, that was arguable maybe in 2012, which was the bottom of U.S. house prices, but this is 2017, five years later they’re still ahead of it. House prices are over their peak in nominal terms and very high in real terms. Why are they still at it? That’s the sort of question that needs to be seriously discussed with them.
Chris Martenson: Well, it certainly does, but if we could speculate for a minute, my view is that they started out in these highly interventionist programs. They created markets that require continuous propping in order to remain elevated. I think we had a couple of beginnings of minor corrections. We had one in 2011, one in ’12, one in ’14, another one in early January of 2016. Each of those was met with a brand-new wall of either queue money directly, or enhanced printing by a foreign central bank, either Bank of Japan, or Bank of, European Central Bank.
So, there’s been this constant effort to keep everything just going and growing. And I think I could sort of understand that policy if you said, well, we’re going to do this until growth comes back. But you wander with me over to the GDP growth numbers that are all anemic if you look at economists who understand the role of debt and also unfunded liabilities as a drag on future growth, all we’ve gotten is a massive pile of new unfunded liabilities, and the record amounts of debt on corporate balance sheets, sovereign balance sheets, public, private, you name it, it’s all over the place.
And we still don’t have the growth to show for it. Do you think, Alex, are the central banks, have they, is there a way out of this for them that allows them to save face and isn’t too painful for everybody?
Alex J. Pollock: They’re in a tough spot I think. Especially, with their bond and mortgage investments, let’s take. This is true of all of the major central banks. I’ll include Switzerland among major central banks-
Chris Martenson: Uh huh.
Alex J. Pollock: Because of their highly interesting country and currency. Swiss Central Bank, as you know, is buying American stocks-
Chris Martenson: Uh huh.
Alex J. Pollock: On the balance sheet of the central bank, among a lot of other things. But in the Fed, they’re buying long-term bonds and long-term fixed rate mortgages that says, let me just say, and print. The Federal Reserve has made itself into the biggest savings and loan in the world.
Chris Martenson: Huh.
Alex J. Pollock: The savings and loans collapsed as we’ll recall from buying long-term fixed rate mortgages and funding them with floating-rate liabilities. Well, that’s exactly what the Federal Reserve does today. Now they did this to drive the market prices of those securities of mortgaged-backed securities, and that is to say mortgages and of long-term treasury they wanted to drive their prices higher. That is to say they wanted to make the interest rates lower. And they wanted all that to make house prices higher.
And they wanted it to make it cheaper to fund the big government deficits. Well so, you bought a big enough position to move the market up. And now you’ve got this huge position, 1.8 trillion mortgages and two and a half trillion of long-term government bonds. And now you say you would like to normalize, as the phrase is, and get out of it. But if the position was big enough to drive the market up when you bought it, it’s very hard to imagine how you can get out of it without driving the market down.
But they don’t want to drive the market down. So, there’s their dilemma.
Chris Martenson: Well, the concern might be that it’s not just drive it down, but it may well go very far down and then they’ll lose all of their wealth effect. But then I think more importantly, they would have to admit a certain amount of defeat saying, wow, we pumped everything up and all we got was this t-shirt.
Alex J. Pollock: Yeah.
Chris Martenson: Right?
Alex J. Pollock: Course. How could I possibly play the role of the infallible oracle if it was obvious that my strategy in the end didn’t work.
Chris Martenson: Right. And so, here we are at this really interesting critical juncture. But it’s astonishing to me that the damage actually to pensions, just astonishing damage to pensions by the nominal, as well as the real rates of interest, astonishing damage to savers, all of that, we’re just starting to have that-
Chris Martenson: Conversation now.
Alex J. Pollock: Pensions are just a pooled form of savings. So, when you’re damaging savers, and in our calculation, we didn’t even count the effect on pensions, which as I say, are savings.
Chris Martenson: Hm. So, this has all been, it’s really clearly a very, very large issue when Janet Yellen most recently gave speeches, I saw her say that, washed her hands and said, no, no, the Fed’s not responsible for wealth gaps, or income inequality, that wasn’t us. Of course, obviously, it totally is a direct feature of their program. And people wrote about that, including myself years ago. But here we are, do you think, tell me about your sense of the political appetite to maybe really begin to do things like audit the Fed. And if you could explain for people what that actually means, because I think there’s been a lot of very poor ink wasted on it, and some very poor descriptions of what that really means.
Mostly, it feels like PR to help preserve the “independence of the Fed.” But and you had a 2005, a Wall Street Journal editorial that was entitled, “It’s High Time to Audit the Federal Reserve.”
Alex J. Pollock: I did.
Alex J. Pollock: Yes. And I tried to explain that by audit, the audit as I said, may not be the happiest term or phrase picked for this-
Chris Martenson: Uh huh.
Alex J. Pollock: That doesn’t mean to go in and tick the boxes and ask whether the assets equal the liabilities. It means seriously review by the Congress what the Fed is doing, why it’s doing it, what the trade-offs are, what the distributional effects are, what the uncertainties are and what would make sense going forward.
Chris Martenson: Uh huh.
Alex J. Pollock: So, you, probably a better term than audit the Fed would be, make the Fed accountable.
Chris Martenson: Hm. And so, talk about that accountability. What would happen, accountability usually means there’s some form of consequence if something goes awry, how would accountability actually apply here, do you think?
Alex J. Pollock: Well, in a basic sense, we are coming back to one of the most fundamental items in the political philosophy, which gave birth to the American Constitution, and that is checks and balances. That nobody is the thought, and the thought is correct, nobody can be trusted with unchecked power.
Chris Martenson: Hmm.
Alex J. Pollock: Everybody, no matter how well-intentioned they might be, should be subject to review and checks and balances by others. That’s as fundamental a principle of governance that you can get in a principle of politics. So, I just apply that to the Federal Reserve. It should also be in a system of checks and balances in a system of review by the Congress. And what punishment could you have? Well, I’m focused less on punishment than on exploration of the ideas, the effects of discovering and admitting mistakes when they’re making, which is a fundamental principle of human life.
And being enmeshed in a system where other people are looking, criticizing, reviewing, evaluating what you’re doing.
Chris Martenson: Now this is something I would highly support because I recently wrote an article called, “A bad model’s worst outcomes.” I think the Fed has running models that don’t make any sense. And I think that if we could critically have a dialogue around that, I think that it would be a wonderful debate. And they should have to defend these crazy models. So, one of them, I think that they’re holding now, I think the Fed’s become highly interventionist.
And by the way, in full disclosure, my Grandfather sat on the New York Federal Reserve. He was a Regional Bank President at the time. He was under Paul Volcker at that moment. So, I had-
Alex J. Pollock: Huh.
Chris Martenson: A little sort of an insight into how this all worked, but my Grandfather would not recognize what the Fed has become. And if I would characterize their bad model, at least on one component, it seems to me that they believe they’re in charge of assuring that we don’t have busts after booms, it’s just booms from now on. Seems rather misguided. It’s not well-grounded in history. In other words, we have to believe that this time is different, that these people in charge of the Fed now are going to do something that no humans have managed before, which is to eliminate the business cycle.
And of course, they failed in 2000, they failed in 2007, and here we are with not just a housing bubble, but I think we’ve got what I call the “mother of all bubbles.” This is everything, this is the everything bubble. It’s got, it’s like, the everything bagel, it’s got everything. It’s-
Alex J. Pollock: Oh, it’s certainly a bubble in bonds and stocks, and houses and not to be forgotten, commercial real estate.
Chris Martenson: Across all that, and across every sector in bonds, junk bonds in Europe trading with it under three percent. Crazy, right? So, here we are, but that seems to be their motto, which is, oh, we figured out how to eliminate the business cycle. Your thoughts on that, is that, have they done it?
Alex J. Pollock: That’s a phrase that has been popular for a long time. The mistakes go far back beyond the years you mentioned. They go back to, I want to say, at least the post-World War I inflation, I guess in 1920 or so, followed by a big bust. And often since then, the Fed, like anybody else, is sometimes right and sometimes wrong, and sometimes disastrously wrong. They, it got to be a very popular saying in the 1960s in the heyday of belief in a Keynesian Economy that the macroeconomists would come to Washington and advise the government. And they would, do you remember this phrase; “fine-tune the economy?”
Chris Martenson: Uh huh.
Alex J. Pollock: And actually, seriously talked about doing away with business cycles and crises. And then we had terrific cycles and financial crises in the 1970s, 1980s, 1990s, 2000s and if you count the European Sovereign Debt Crisis, 2010s. So, the cycles are not going away and the central bankers don’t know how to make them go away. And the problem is that the, because the future is inherently uncertain and unknowable, when you do extreme and experimental things, you very often get results that you not only didn’t intend, but had no way of expecting.
And that can surely happen with central banking and the money question.
Chris Martenson: Now one of the things I think the Federal Reserve has done by driving interest rates, well, starting the early 1980s, from say, 14 percent on the long end on down to where we are at 1.8 percent, or from seven percent on the short, down to wherever we are, zero essentially. I guess we’re hovering around one percent right now. So, look, everybody’s familiar with this number, the national debt of the United States, around 20 trillion.
Unthinkable number just ten years ago, but here we are. But if you look at the total underfunded liabilities plus the debts of the U.S., which includes corporate, household, all of that. Bridgewater Associates, Ray Dalio’s organization, put together this chart and said, compared to GDP, what are the total IOUs with the United States? And the answer is, they’ve just been going up steadily with little dips and wiggles, but pretty much steadily since the time we’ve been dropping rates.
And we’re down here at the zero bond, but the punchline is this, Alex, we’re at 1,100 percent IOUs to GDP. No country has ever been here before. How do we even begin to approach a number like that? What are the options that are available to begin to wrestle with something like that? Which to me, looks so large, I only have one question floating in my head, which is: who’s going to eat those losses? But what are your thoughts there?
Alex J. Pollock: Well, we know that when debt gets very large relative to incomes there are typically losses, as you say. And the first questions that arise after any big correction is precisely who is going to get the losses? So, there is a +zero-sum game that goes on like in a bankruptcy debt reorganization. We know there are big losses. Consider Puerto Rico today, for example, are-
Chris Martenson: Uh huh.
Alex J. Pollock: Big losses. Everybody can't be paid, but who is going to take what kind of losses? Who’s going to get a 40 percent haircut? who’s going to get a 60 percent haircut? Who’s going to get an 80 percent haircut? And so, the great debate becomes about who gets the losses. Now one of the things, as we’ve been talking about that happened after the last bust of 2007 to 2009, is losses and how it’s distributed. And a big bunch of the losses through the Fed has been put on savers in exactly the way we’ve been discussing.
Chris Martenson: Or I guess, whoever’s on the other side of those IOUs will certainly take it. I just, for my, the life of me, I have not been able to figure out how you get around a debt load that big. There’s no historical example that says, here’s how it’s been done before. We had England get out from a 260 percent debt to GDP load, that was from the period of 1815 to 1900. Hey, they dismantled the Napoleonic war machinery.
Hey, they had this thing called the Industrial Revolution, couple of nice tailwinds. They did it, but nobody’s been here before. And I haven’t found anybody who can have a substantive discussion around this. I talked with Bradley Belt, former Executive Director of the Pension Benefit Guaranty Corp, and his only, he just threw his, he shrugs his shoulders and says, rapid growth. We have to have rapid economic growth; that’s the plan.
And what I’m interested in how this hearing-
Alex J. Pollock: By the way, that’s rapid real, when you say that, that means rapid real growth.
Chris Martenson: Correct.
Alex J. Pollock: Not just nominal growth.
Chris Martenson: Rapid real growth-
Alex J. Pollock: Yeah. That means you have to have productivity. And productivity means you have to have innovation, entrepreneurship, investment and savings. There is something else you can do. You can have a currency reform like in Germany in 1922 or ’23, when you got one new mark for ten billion old ones.
Chris Martenson: Well, then-
Alex J. Pollock: Or so.
Chris Martenson: We’re just, then we’re just answering the question-
Chris Martenson: Who is eating the losses?
Alex J. Pollock: Who gets the losses? Absolutely.
Chris Martenson: [Cross talking]
Chris Martenson: Who is eating the losses?
Alex J. Pollock: Who gets the losses? Absolutely.
Chris Martenson: Yeah. Alright. So, if you were suddenly made the self-appointed philosopher king in charge at this moment in history, what would you begin to do to right this ship?
Alex J. Pollock: First of all, I don’t accept the job as philosopher-
Alex J. Pollock: King.
Chris Martenson: Smart man.
Alex J. Pollock: They can't exist in principle, not me or anybody else.
Alex J. Pollock: It’s the, what this is, the result of decades of development, and we will take decades of development to address it. On the other hand, enterprising economies, and enterprising societies have an amazing history of coming through incredible challenges of various kinds in keeping the growth going. That’s the good news. I have just finished writing a book which is called, “Finance and Philosophy” by the way, at least that’s a tentative title.
Chris Martenson: Uh huh.
Alex J. Pollock: And it has a chapter called, “Wonderful Trend and Troublesome Cycle.” And there is an incredible long-term 200-year-old trend of growth and increasing well-being for ordinary people like you and me in enterprising societies. I can keep that trend going, but you’ve got to have enterprise, innovation, science, entrepreneurship, savings and the rule of law. So, I guess that would be the list I would start with and then I would work from there.
Chris Martenson: Well, clearly, a lot of things on that list would need tweaking at best at this point. So, with that, I’m really looking forward to seeing that new book come out, Alex. I want to thank you so much for your time today. We are out of time at this moment, for this interview, but please tell people how they can continue to follow your work?
Alex J. Pollock: Thank you. I am a Fellow of the R Street Institute, and there’s a page on the R Street Institute webpage that’s me. It’s www.rstreet, the letter R, and the word street written together, .org/people/Alex-J-Pollock, P-o-l-l-o-c-k, and that’s my page. And it has everything that I have written since the beginning of 2016. And there’s a lot on the Fed, and related topics on there. And if you would like to take a look, that would be great.
And if any of the listeners feel inspired to write me about anything they see there, my email is there, and I’d love to hear from you.
Chris Martenson: Well, thank you very much. We’ll put that direct link right under this podcast at our site. Thank you so much for the work you’ve been doing. Thank you for bringing your message, and what I think is a message of common sense, and very badly needed to Congress. And please, all the best and have wonderful success in helping to bring some accountability to the Fed, that would be a wonderful, wonderful addition at this part of history.
Alex J. Pollock: Thank you very much. We’re going to keep working on it. And I thank you again for having me on your podcast. It’s really been great to be together with you.
Chris Martenson: Thank you. Likewise.