Saturday, September 16, 2023

"What the Founding Fathers Believed: Stock Ownership for All " (and some other stuff)

A repost from 2013 when the wealth effects of post-Great-Financial-Crisis QE were apparent to all. Here's the asset side of the Fed's balance sheet, the 2008 - 2009 QE looks positively quaint compared with what was to come:

There are three thing that jump out of this display: 1) the 2020 asset buying was of an almost unfathomable magnitude and speed. 2) the fact that after the GFC the Fed continued to either buy more treasuries and mortgage backed securities or at minimum maintain their holdings, all the while running a zero-interest-rat-policy. 3) Except for the half-assed attempt at QT in 2018 - 2019, which was halted and reversed, dramatically, in September 2019. We've looked at that period a few times and I am starting to wonder if someone with very deep pockets wasn't making some huge waves in the Fed pool, based on material non-public information regarding the coming coronavirus pandemic.

But I digress.

Back to the founders. First posted, last visited, November 15, 2013:

Anyone who doesn't acknowledge that the benefits of QE flow to asset holders hasn't been paying attention.

The U.S. administration and the Federal Reserve, cheered on by economists-for that bit of academic gilding, and by journalists-who supply 'Progressive' cred and political cover, have been directly increasing the wealth gap to the great detriment of the non-asset holders and the economy as a whole.
I say keep it up.

For a contrary opinion...

From PBS NewsHour's Business Desk blog:

Citizen ownership, often demonized as "socialist," has a pedigree dating to the American Revolution. "Scene at the Signing of the Constitution of the United States," oil on canvas by Howard Chandler Christy, 1940, via Wikipedia Commons.
Paul Solman: "Using tech playbook, oil drillers shower employees with stock." So read a recent article in Reuters.

But as Joseph Blasi of Rutgers and Richard Freeman of Harvard emphasize in Friday's post, worker ownership is as new as fracking, but as old as America itself. George Washington, a slave owner, remember, believed that broad-based worker ownership would ensure "the happiness of the lowest class of people because of the equal distribution of property."

John D. Rockefeller encouraged worker ownership. George Eastman (of Eastman Kodak) helped invent stock options.

These and other rather surprising facts are in Blasi, Freeman and co-author Doug Kruse's new book, "The Citizens Share," which Freeman told me about recently when I interviewed him for the NewsHour.
"The Alternative American Dream: Inclusive Capitalism." That was the headline of an extremely popular post on our Making Sen$e Business Desk by long-time worker ownership activist Chris Mackin this summer. Now, Freeman and Blasi, in a sense, follow up.

Richard B. Freeman and Joseph R. Blasi: The fact is indisputable: productivity -- output per worker -- nearly doubled over the past 30 years. Yet the real pay of most workers increased much more slowly, and the hourly pay of many groups of non-supervisory workers barely budged at all. So what happened to the gains of higher productivity?

They showed up in an increased share of income accruing to owners of capital and in the pay of top earners, whose compensation consists disproportionately of -- guess what? -- stock options and stock grants that give them a share of the increased growth and income that comes from capital. The net result of this shift has been the well-documented increase in the wealth and income of a small number of Americans and American families, while the income and wealth of most Americans has grown little, if at all.

Here's the latest census data: the top 10 percent of earners received 46.5 percent of all income in 2011, the largest slice of the pie since 1917. But the persons who benefited most from recent economic growth constitute an even small minority of the top 10 percent. Yes, the upper 1 percent whom the Wall Street Occupiers made famous gained more than their fellow travelers in the top 10 percent. But among the upper 1 percent, the real winners were those in the upper 0.1 percent, whose share of national income increased from 3.1 percent (1972) to 11.3 percent (2012). Had the share of the upper 0.1 percent remained as 30 years ago, the income for all other Americans, including the rest of the upper 1 percent, would have increased by about 8 percent in the past three decades.

But even this is not the full story of the increased inequality of income. Within the upper 0.1 percent, the biggest gainers were those in the upper 0.01 percent -- one American in 10,000 -- whose share of income increased from 1.2 percent (1972) to 5.5 percent (2012).

As for capital income -- capital gains on stocks and bonds, dividends and interest -- the latest Internal Revenue Service report on the country's top 400 taxpayers is an egalitarian's nightmare. In 2009 these persons, who make up .00028 percent of all persons filing individual tax returns, earned 16 percent of all net capital gains, 6.5 percent of all dividends and 3.2 percent of all interest income. And that's 400 people. 
As a result, a larger social problem looms: high-rising inequality is transforming the U.S. from an economy and polity based on a broad middle class to a feudal society dominated by a small number of super-wealthy "lords of the manor."

Reading through the original arguments for a United States of America suggests that this level of inequality threatens not only our economy -- who will buy what the wealthy produce? -- but the health of our democracy as well. One does not have to be a modern radical to worry. Back in the 1770s, the Founding Fathers worried deeply about the dangers to the new democracy of concentration of wealth.

James Madison warned that inequality in property ownership would subvert liberty, either through opposition to wealth (a war of labor against capital) or "by an oligarchy founded on corruption" through which the wealthy dominate political decision-making (a war of capital against labor). John Adams favored distribution of public lands to the landless to create broad-based ownership of property, then the critical component of business capital in the largely agricultural U.S. Current levels and trends in inequality would almost certainly have terrified the founders, who believed that broad-based property ownership was essential to the sustenance of a republic....MUCH MORE

And a couple of the official explanations of what was going on in 2019:

with some commentary:

"Economist Michael Hudson Says the Fed 'Broke the Law' with its Repo Loans to Wall Street Trading Houses"
At the time I remember thinking "Oh look, the Fed has a new lending facility" and moving on to something shiny, not realizing it was a very big deal. As the old-timers used to say: "Pay attention or pay the offer."....
A Nomura Document May Shed Light on the Repo Blowup and Fed Bailout of the Gang of Six in 2019
"A Closer Look at the U.S. Bacon Situation"
"The Day When Repo Rates Blew Out: Fed Recounts a Fiasco that Occurred as the FOMC Was Meeting, and How it Reacted"

And one (of a half-dozen) not-so-official narrative via The Philosophical Salon: 

 Money, Money, Money: "A Self-Fulfilling Prophecy: Systemic Collapse and Pandemic Simulation"

....Follow the money
In pre-Covid times, the world economy was on the verge of another colossal meltdown. Here is a brief chronicle of how the pressure was building up:

June 2019: In its Annual Economic Report, the Swiss-based Bank of International Settlements (BIS), the ‘Central Bank of all central banks’, sets the international alarm bells ringing. The document highlights “overheating […] in the leveraged loan market”, where “credit standards have been deteriorating” and “collateralized loan obligations (CLOs) have surged – reminiscent of the steep rise in collateralized debt obligations [CDOs] that amplified the subprime crisis [in 2008].” Simply stated, the belly of the financial industry is once again full of junk.

9 August 2019: The BIS issues a working paper calling for “unconventional monetary policy measures” to “insulate the real economy from further deterioration in financial conditions”. The paper indicates that, by offering “direct credit to the economy” during a crisis, central bank lending “can replace commercial banks in providing loans to firms.”

15 August 2019: Blackrock Inc., the world’s most powerful investment fund (managing around $7 trillion in stock and bond funds), issues a white paper titled Dealing with the next downturn. Essentially, the paper instructs the US Federal Reserve to inject liquidity directly into the financial system to prevent “a dramatic downturn.” Again, the message is unequivocal: “An unprecedented response is needed when monetary policy is exhausted and fiscal policy alone is not enough. That response will likely involve ‘going direct’”: “finding ways to get central bank money directly in the hands of public and private sector spenders” while avoiding “hyperinflation. Examples include the Weimar Republic in the 1920s as well as Argentina and Zimbabwe more recently.”

22-24 August 2019: G7 central bankers meet in Jackson Hole, Wyoming, to discuss BlackRock’s paper along with urgent measures to prevent the looming meltdown. In the prescient words of James Bullard, President of the St Louis Federal Reserve: “We just have to stop thinking that next year things are going to be normal.”

15-16 September 2019: The downturn is officially inaugurated by a sudden spike in the repo rates (from 2% to 10.5%). ‘Repo’ is shorthand for ‘repurchase agreement’, a contract where investment funds lend money against collateral assets (normally Treasury securities). At the time of the exchange, financial operators (banks) undertake to buy back the assets at a higher price, typically overnight. In brief, repos are short-term collateralized loans. They are the main source of funding for traders in most markets, especially the derivatives galaxy. A lack of liquidity in the repo market can have a devastating domino effect on all major financial sectors.

17 September 2019:
The Fed begins the emergency monetary programme, pumping hundreds of billions of dollars per week into Wall Street, effectively executing BlackRock’s “going direct” plan. (Unsurprisingly, in March 2020 the Fed will hire BlackRock to manage the bailout package in response to the ‘COVID-19 crisis’).

19 September 2019: Donald Trump signs Executive Order 13887, establishing a National Influenza Vaccine Task Force whose aim is to develop a “5-year national plan (Plan) to promote the use of more agile and scalable vaccine manufacturing technologies and to accelerate development of vaccines that protect against many or all influenza viruses.” This is to counteract “an influenza pandemic”, which, “unlike seasonal influenza […] has the potential to spread rapidly around the globe, infect higher numbers of people, and cause high rates of illness and death in populations that lack prior immunity”. As someone guessed, the pandemic was imminent, while in Europe too preparations were underway (see here and here).

"Stock market valuations don’t ‘reflect the damage ahead,’ BlackRock warns"
In the carefree days of yore I probably wouldn't have taken much notice of this beyond thinking "ah, big money manager has thoughts."
But since "Flashback: That Time Just Weeks Before Covid That BlackRock Told The Fed Exactly What It Wanted The Fed To Do (BLK)" which links to ourselves and the 2019 BLK whitepaper where Mr. Fink's peeps gave the Fed its marching orders for the 2020 disaster; well, I'm paying a bit more attention. If interested the Philosophical Salon has more after the jump.....
....A look at Chairman Powell's calendar for the period February through June 2020, when the market went from total collapse, including an intraday 3000 DJIA-point loss one day in March, actually in the middle of one of the covid press conferences, to one of the most amazing recoveries in the last 90 years:

TradingView Chart

TradingView, DJIA daily, December 2019 - June 2020

Some highlights from the Fed Chair's calendar:

 February 19, Wednesday

3:00 PM – 4:00 PM Meeting with Jamie Dimon, CEO and Jenn Peipszack, CFO, JPMorgan Chase
Location: Anteroom 

March 19, Thursday

4:30 PM – 5:00 PM Phone call with Larry Fink, CEO BlackRock  

 April 3, Friday

3:30 PM – 3:45 PM Phone call with Larry Fink, CEO, BlackRock

April 9, Thursday

5:15 PM – 5:30 PM Phone call with Larry Fink, CEO, BlackRock

May 13, Wednesday

1:30 PM – 2:00 PM Phone call with Larry Fink, CEO, BlackRock

Of course there is much much more but discerning reader gets the point: Powell forgot to call me!

 It appears I may have become a bit obsessed with the events of September 2019 - March 2020.