What’s Killing U.S. Productivity? America’s Narcissism Era.

By Pam Martens and Russ Martens: August 8, 2017

Newsweek Cover -- Lazy Boy Donald TrumpYesterday, Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, spoke to the Rotary Club of Downtown Sioux Falls, South Dakota and then opened up the mic to questions from the audience. One question concerned today’s lack of true innovation rather than just innovations in social media. Kashkari responded as follows:

Kashkari: “This is a big complicated topic. A big question mark in the economics profession is why is productivity growth in the U.S. economy so low. It’s much lower than it has been in prior decades. And, we think, you pull out your iPhone or Twitter or Facebook – you think, wow, all this stuff is happening. Well, some experts say the things that we’re creating now – that we’re innovating now – just aren’t that impactful. They don’t really move the needle very much. So if you compare Facebook and Twitter, which seem pretty cool, to electricity or the internal combustion engine, or the airplane, it’s just not that important.”

Kashkari is on to something significant but we have to differ with him in this regard: this is not really “a big complicated topic.” It’s a very basic concept: we are living in the most narcissistic era that America has ever experienced and it’s dragging down not only U.S. productivity but the country itself.

Memorializing this era just last week was the unprecedented “Lazy Boy” cover of Newsweek, depicting the leader of the free world as a slouch, replete with the critical necessity of this era: the smartphone on his lap — which affords him instant narcissistic gratification to his Twitter followers.

Walk on any bustling sidewalk today and you will observe a sea of pedestrian faces buried in their iPhone or some other digital device. These people are not likely thinking about creating the next internal combustion engine. They are posting personal photos to their Facebook page, Tweeting, sending selfies, checking out the latest cool restaurant, or simply gossiping with friends. Innovative minds have succumbed, on a mass scale, to digital hedonism.

Putting self above country extends to the Wall Street analysts who have made easy money fueling this craze by putting out buy recommendations on the social media companies that make these products and the billionaire hedge fund owners who have crowded into these stocks, simply because it’s a lazy boy trade.

On June 9 of this year, Robert Boroujerdi of Goldman Sachs released a report on the FAAMG stocks: Facebook, Apple, Amazon, Microsoft and Google-parent Alphabet. The report found that these five stocks have increased their market value by $600 billion this year, accounting for approximately 40 percent of the year-to-date performance of the entire 500 stocks that make up the Standard and Poor’s 500 Index.

And yet, the essential purpose of the stock market is to efficiently allocate capital to the most promising businesses for innovation that will drive productivity, job and wage growth, and a higher standard of living for all Americans.

Misguided product innovation is routine today in America. Take, for example, this assessment in a July 19, 2017 article by Roger Cheng of c/net describing the poorly vetted Google Glass. Cheng writes:

“Google’s $1,500 eyewear grabbed headlines and readers’ imaginations when four skydivers jumped out of a zeppelin while wearing Glass for a 2012 demo that introduced the device to the world. With it, you could video chat with friends, view Google Maps for directions or quickly snap a photo. But that initial enthusiasm turned into hostility over privacy concerns. Bars, restaurants and the Motion Picture Association of America banned Google’s fancy glasses from their venues.”

Underscoring the nebulous connection between free social media services and the real economy is the fact that these services are not counted in measuring Gross Domestic Product in the U.S. They are not considered part of the market economy where goods and services are sold for a defined price.

Writing in the Wall Street Journal in 2015, reporter Greg Ip summed up the problem:

“Google’s decision to separate its profitable businesses from its money-losing ‘moonshot’ ventures has offered a window into why American productivity is struggling despite so much exciting technological innovation.

“The things at which Google and its peers excel, from Internet search to mobile software, are changing how we work, play and communicate, yet have had little discernible macroeconomic impact. Productivity—the goods and services a worker produces in an hour—grew just 0.4% per year over the past five years…”

Add to all of this the fact that a handful of mega Wall Street banks have concentrated market control over capital allocation and are starving the economy by using 99 percent of their earnings to buy back their own stock and pay dividends to their rich shareholders and it’s clear why we have a malfunctioning economy that no longer works for the majority of Americans.

Federal Bank Regulator Drops a Bombshell as Corporate Media Snoozes

Graphic Provided by Thomas Hoenig to the Senate Banking Committee in his Letter of July 31, 2017

Graphic Provided by Thomas Hoenig, Vice Chair of the FDIC, to the Senate Banking Committee in his Letter of July 31, 2017

By Pam Martens and Russ Martens: August 7, 2017

Last Monday, Thomas Hoenig, the Vice Chairman of the Federal Deposit Insurance Corporation (FDIC), sent a stunning letter to the Chair and Ranking Member of the U.S. Senate Banking Committee. The letter contained information that should have become front page news at every business wire service and the leading business newspapers. But with the exception of Reuters, major corporate media like the Wall Street Journal, Bloomberg News, the Business section of the New York Times and Washington Post ignored the bombshell story, according to our search at Google News.

What the fearless Hoenig told the Senate Banking Committee was effectively this: the biggest Wall Street banks have been lying to the American people that overly stringent capital rules by their regulators are constraining their ability to lend to consumers and businesses. What’s really behind their inability to make more loans is the documented fact that the 10 largest banks in the country “will distribute, in aggregate, 99 percent of their net income on an annualized basis,” by paying out dividends to shareholders and buying back excessive amounts of their own stock.

Hoenig writes that the banks are starving the U.S. economy through these practices and if “the 10 largest U.S. Bank Holding Companies were to retain a greater share of their earnings earmarked for dividends and share buybacks in 2017 they would be able to increase loans by more than $1 trillion, which is greater than 5 percent of annual U.S. GDP.”

Backing up his assertions, Hoenig provided a chart showing payouts on a bank-by-bank basis. Highlighted in yellow on Hoenig’s chart is the fact that four of the big Wall Street banks are set to pay out more than 100 percent of earnings: Citigroup 127 percent; Bank of New York Mellon 108 percent; JPMorgan Chase 107 percent and Morgan Stanley 103 percent.

What’s motivating this payout binge at the banks? Hoenig doesn’t offer an opinion in his letter but he does state that share buybacks represent 72 percent of the total payouts for the 10 largest bank holding companies. What share buybacks do for top management at these banks is to make the share price of their bank’s stock look far better than it otherwise would while making themselves rich on their stock options. If just the share buybacks (forgetting about the dividend payouts) were retained by the banks instead of being paid out, the banks could “increase small business loans by three quarters of a trillion dollars or mortgage loans by almost one and a half trillion dollars.”

Hoenig also urged in his letter that there be a “substantive public debate” on what the biggest banks are doing with their capital rather than allowing this “critical” issue to be “discussed in sound bites.” Most corporate media responded to this appeal by ignoring Hoenig’s letter altogether.

How 10 U.S. mega banks developed such a stranglehold on the U.S. financial system that they are in a position to starve the U.S. economy of $1 trillion in loans was explained in detail by Hoenig in a speech he delivered at the Conference on Systemic Risk and Organization of the Financial System at Chapman University in Orange, California on May 12. Hoenig stated:

“Following Gramm-Leach-Bliley [legislation in 1999], commercial and investment banks began a series of significant mergers that affected the combined industries in a profound way.

“Investment banks originally were formed as partnerships, where owners were liable for all of the firm’s debts. When the New York Stock Exchange relaxed its rules to permit joint stock corporate ownership in 1970, over time it became an attractive opportunity for the investment banking industry to grow and expand its business model. Investment banks that converted to public companies altered the incentives of owners and management, increasing appetite for risk and leveraging balance sheets. The further effect of combining insured commercial banks and investment banks under Gramm-Leach-Bliley magnified these outcomes. In the end, there was a profound change in industry culture that further changed the competitive dynamics among firms. As universal banks formed and matured, and with increasing support from the expanding safety net, the largest banks were increasingly drawn away from relationship banking and lending and toward the higher risk-return model of the broker-dealer-investment bank focused on trading and other fee-based income.

“Of course a pivotal force of change was the financial crisis of 2008 itself, out of which came more than new legislation. The effect of the crisis on the U.S. economy, the numerous bank failures, and the government’s response in addressing those failures dramatizes accelerated industry consolidation and altered its structure and direction in ways that will have lasting effects. JPMorgan Chase acquired Bear Stearns with government assistance, and subsequently acquired Washington Mutual after it failed. Wells Fargo acquired Wachovia. The government injected capital into Citibank, thus bailing it out. Bank of America purchased Countrywide and Merrill Lynch, and later also received extraordinary government assistance. After the failure of Lehman Brothers, regulators allowed two remaining investment banking firms, Goldman Sachs and Morgan Stanley, to become bank holding companies, providing them explicit access to the federal safety net. In short, the crisis and government’s reaction to it quickly and dramatically changed the composition and structure of the U.S. financial system.

“The crisis altered the industry’s structure in other ways as well.  Between 2008 and 2014, there were 507 bank failures and 1,576 private mergers, mostly among community banks; and practically no chartering activity. Among regional and community banks, this trend toward consolidation continues nearly a decade after the crisis.”

In summary, while the reckless Wall Street banks brought on the crises, the Federal Reserve rewarded them in the midst of it by allowing the biggest banks to gobble up other banks, thus becoming a greater future threat to the nation in terms of controlling deposits and lending as well as presenting unfathomable levels of risk going forward.

This is a critical issue that deserves a serious national debate before the next financial crisis is upon us.

Related Articles:

Bank Debt Worries Overhang Markets: FDIC’s Hoenig Speaks Out 

Hoenig: Wall Street Banks “Excessively Leveraged” at 22 to 1 Ratios 

Kashkari’s Nuclear Option: Turn Wall Street Mega Banks Into Public Utilities 

Senator Warren Drops a Bombshell in Senate Hearing: Bipartisan Bill to Restore Glass-Steagall Being Introduced

Should the Federal Reserve Be Doing the Nation’s Work with a Skeleton Crew?

Source: Federal Reserve

Source: Federal Reserve

 

By Pam Martens and Russ Martens: August 3, 2017

The Federal Reserve Board of Governors is supposed to have a roster of seven Governors. It currently has four. Equally alarming, it lists just two members serving on each of its eight committees. One Fed Board Governor, Lael Brainard, is listed as one of the two members on six of the eight committees, or 75 percent of all committees. Governor Jerome Powell sits on five of the eight committees, or 63 percent of all committees.

The Fed’s Committee on Supervision and Regulation consists of just Powell and Brainard. And yet, this is what the Fed’s 2015 Annual Report describes as the institutions the Fed supervises:

4,922 Bank Holding Companies

442 Domestic Financial Holding Companies

470 Savings and Loan Holding Companies

839 State Member Banks

154 Foreign Banks Operating in the U.S.

Along with other entities per the graph above.

There has long been the suspicion that the Fed has farmed out much of its work of supervising the largest and serially malfeasant Wall Street banks to the Federal Reserve Bank of New York. There has also long been the suspicion that the New York Fed has grown too cozy with the banks it oversees to do the job properly. (See related articles below.)

The Trump administration appears intent on levitating the stock market by promising Wall Street more deregulation. The public must never forget that the Federal Reserve wore blinders and Congress sat on its hands as Wall Street spun out of control in a frenzy of speculative excess and corruption, leading to the greatest financial collapse from 2008 to 2010 since the Great Depression. Two-member committees at the Fed are a brazen affront to what this nation has been put through at the hands of Wall Street and its misguided regulators.

Related Articles:

As Citigroup Spun Toward Insolvency in ’07- ’08, Its Regulator Was Dining and Schmoozing With Citi Execs

U.S. Senate Tries Public Shaming of New York Fed President Dudley

Forex Guilty Pleas and the New York Fed’s Blinders

Fed Chair Bernanke Held 84 Secret Meetings in the Lead Up to the Wall Street Collapse

The New York Fed Has Contracted JPMorgan to Hold Over $1.7 Trillion of its QE Bonds Despite Two Felony Counts and Serial Charges of Crimes

Carmen Segarra: Secretly Tape Recorded Goldman and New York Fed

New York Fed’s Answer to Cartels Rigging Markets – Form Another Cartel

Is the New York Fed Too Deeply Conflicted to Regulate Wall Street?

Relationship Managers at the New York Fed and Citibank: The Job Function Ripe for Corruption

New Documents Show How Power Moved to Wall Street, Via the New York Fed

Intelligence Gathering Plays Key Role at New York Fed’s Trading Desk

Libor Scandal Grows: Barclays Banged On the Door of the New York Fed 12 Times

Trading Floor of the Federal Reserve Bank of New York; In Photos, Over the Years

Earnings Rise with Boost from Falling U.S. Dollar But Consumers Will Bear the Brunt of Rising Prices

S&P 500 Earnings Growth CY 2017 (Source: FactSet)

S&P 500 Earnings Growth CY 2017 (Source: FactSet)

By Pam Martens and Russ Martens: August 2, 2017

There seems to be an unlimited supply of methods in which the rich in America keep getting richer and the average Joe picks up the tab. (Think about the $16 trillion secret bailout of Wall Street by the Federal Reserve from 2007 to 2010 for the quintessential example.)

Yesterday, Fortune Magazine ran this sobering headline: “The Wealth Gap in the U.S. Is Worse Than In Russia or Iran.” The article quotes Richard Florida, author of The New Urban Crisis, as follows:

“Inequality in New York City is like Swaziland. Miami’s is like Zimbabwe. Los Angeles is equivalent to Sri Lanka. I actually look at the difference between the 95th percentile of income earners in big cities and the lower 20%. In the New York metro area, the 95th percentile makes $282,000 and the 20th percentile makes $23,000. These gaps between the rich and the poor in income and wealth are vast across the country and even worse in our cities.”

Against that backdrop comes news from FactSet last Friday that with 57 percent of the companies in the Standard and Poor’s 500 Index reporting actual earnings results for the second quarter of 2017, “ten sectors are reporting year-over-year earnings growth, led by the Energy, Information Technology, and Financials sectors.” FactSet adds this: “The only sector reporting a year-over-year decline in earnings is the Consumer Discretionary sector.” That would be the sector in which the average Joe lives.

Reuters has even more cheery news for the super rich who own the bulk of the shares of the S&P 500. The wire service reports that “The S&P 500 index is on track to post back-to-back, double-digit quarterly earnings growth for the first time in almost six years, and the trend could continue as a weak U.S. dollar and global growth help boost results.”

Unfortunately for the little guy, a weakening U.S. dollar causes price increases on imported goods from countries whose currencies have risen against the falling U.S. dollar. Add this to stagnating wages for the middle class, spiraling health care costs, the next generation buried under $1.325 trillion of student debt (much of it loaded onto their shoulders by the same Wall Street predators who crashed the U.S. financial system in 2008) and one can see why America might feel like Sri Lanka to many of its citizens instead of the much vaunted meritocracy that Wall Street titans like to portray to the rest of the world.

Income Inequality Graph from Robert Reich's Film, "Inequality for All"

U.S. Income Inequality Graph from Robert Reich’s Film, “Inequality for All”

Scaramucci: First Fired by Goldman Sachs, Now the White House

By Pam Martens and Russ Martens: August 1, 2017

Anthony Scaramucci

Anthony Scaramucci

Were it not for the profanity-laced tirade that Donald Trump’s briefly tenured Director of Communications offered up to a New Yorker reporter, it might be considered a badge of honor to get fired from both the great vampire squid, Goldman Sachs, and by the President whose administration is firmly ensnared in Goldman Sachs’ tentacles.

Wall Street veteran and hedge fund titan, Anthony Scaramucci, who was fired yesterday after a 10-day stint as Director of Communications for Trump’s White House, told reporter Courtney Comstock in 2010 at Business Insider that he had been “fired from Goldman a year and five months” into his tenure there as an investment banker. Scaramucci was rehired by Goldman a few months later, but in a sales position.

Scaramucci’s ties to Wall Street are extensive, including a stint as Managing Director at Lehman Brothers, the iconic investment bank which filed bankruptcy in September 2008 during the height of the financial crisis.

Scaramucci founded SkyBridge Capital in 2005 and in 2010 it purchased a hedge fund of funds from Citigroup, the behemoth Wall Street bank that received the largest bailout in U.S. history during the financial crisis.

In January of this year, SkyBridge Capital announced that it had agreed to sell a majority stake to RON Transatlantic and HNA Group, a Chinese conglomerate. Reuters reported yesterday that the sale is still “under review by the Committee on Foreign Investment in the United States, known as CFIUS.”

Bloomberg News reported on July 25 that Scaramucci was seeking a tax deferral on his huge stake in Skybridge as a result of joining the Trump administration. Federal law allows persons accepting a position in the executive branch to defer capital gains taxes if they are required to sell assets to avoid conflicts of interest while serving in government.

Former Goldman Sachs CEO, Henry (Hank) Paulson, immediately filed to sell a $500 million stake in shares of Goldman Sachs after his 2006 Senate confirmation to become U.S. Treasury Secretary in the George W. Bush administration. According to The Economist magazine, Paulson may have saved up to $200 million from the maneuver.