Forget The Banks, Focus on Consumers and Deflation

Finance at First Light
Good morning! Here’s what you need to know:


  1. Larry Summers is leaving, pop the champagne!
  2. Another round of Fed stimulus is a bad idea.
  3. Every president is a banker.
  4. It’s the consumers, Stupid.
  5. That’s why deflation, not inflation, remains the challenge.
  6. Unless consumers deleverage more quickly than expected.
  7. Velma Hart is the new voice of the middle class.



1. Larry Summers is leaving, pop the champagne!

The nation is celebrating the departure of Larry Summers, hailed by seemingly everybody except President Obama as the worst economic influence in recent history.

Barry Ritholtz wrote that Summers “stayed committed to the same bad ideas that led to crisis and collapse. . . . By putting into senior positions the people who helped create the mess, we ended up with a defense of the decision making that proceeded, instead of a fresh approach. Summers was a defender of the status quo. This was not change we could believe in — it was simply more of the same. . . . The hope that a new White House would change the course was quickly dashed by the new old economic team. Obama lacked the will or the understanding or the nerve to break with [bad] Bush policies.”

Robert Scheer, who has joined me over the past year in calling for the resignations of both Summers and Treasury Secretary Timothy Geithner, notes that the financial meltdown wasn’t Obama’s fault but that he “wasted two precious years being misled by Summers and Geithner as to how to respond to it.” Obama should have forced “the bailed-out Wall Street titans to give back something significant to the public in the way of mortgage relief.” Instead, he followed the advice of Summers who pandered to the same banks that he pandered to back when he helped create the financial crisis in 1999. About Summers’s legacy, Scheer writes: “Thanks to the banking debacle he did so much to initiate back in the Clinton years, the nation now has more people living in poverty, 43.6 million of them, than ever in our history. Americans have witnessed the disappearance of $11 trillion of their net worth, $1.5 trillion in the second quarter; the debt has risen alarmingly; unemployment is stuck at 9.6 percent; and trillions of dollars in toxic pools of housing stock are still held by the banks to be thrown into the housing market fire sale anytime home prices promise to edge upward. Behold what brilliance has wrought.”

Michael Thomas thinks “Summers, with a deftness that would be admirable were it not so repellent in its long-term effects, in what it has cost this nation, saw that change was talked about, but not initiated. The talk was talked, but the walk was never walked. That’s what Summers came to do, in my opinion, and that’s what he did.”


2. Another round of Fed stimulus is a bad idea

It became clear on Tuesday that the Federal Reserve is preparing another round of easy money policies. Easy, that is, if you’re a bank but not so easy if you’re a citizen looking to borrow capital. Dollar-destructive activity by the Fed is partly responsible for gold’s recent levitating tendency. It closed yesterday at a record high of $1292 per ounce, up 80% in the last two years.

Representative Cathy McMorris Rodgers (R-WA) wrote in Forbes that the Fed’s easy money program “enables the [Obama] administration’s spend-and-borrow addiction.” She points out that the low-interest-rate policy intended to stimulate lending has actually backfired, as anybody who’s sought bank financing in the past couple of years has discovered firsthand.

Why? Because “banks take in low-cost funds from the Fed and then lend it back to the government at a higher rate. This produces a small profit that — when done on a large enough scale — can become quite lucrative, indeed. Because of this distortion, the Fed’s low interest rates make it harder — not easier — for the private sector to get credit. Meanwhile, savers and investors — ordinary citizens who are building their nest egg for retirement — are getting little return on their money.”

So, the money intended for citizen borrower pockets is actually going to the voracious spending appetite of Washington. Rodgers writes, “Since President Obama took office in January 2009, he has borrowed $2.6 trillion and he expects the government to borrow another $10 trillion over the next ten years. Keeping the costs of that borrowing down isn’t just a luxury; it’s a necessity. That’s where the Fed comes in. By keeping interest rates low, it encourages banks to lend to the government, even at the expense of the private sector.”

She believes that, “To grow our economy, we need a fiscal and monetary policy that encourages saving and investment; not spending and borrowing. The Fed can do its part by bringing interest rates closer to their historical average and stopping its plan — approved on Aug. 10 — to purchase long-term Treasury securities.” She wants to “extend the tax cuts of 2001 and 2003 which are set to expire in about 100 days.”

For a counterpoint on extending the tax cuts, see Daniel Gross’s thoughts in yesterday’s briefing.


3. Every president is a banker

Judging by current news, it’s obvious that not enough people have read Financially Stupid People Are Everywhere: Don’t Be One of Them by Yours Truly.

The section “Every President Is a Banker” beginning on page 80 shows that financially smart people knew early on that Obama was never about “change,” and how this was confirmed by the appointments of Summers and Geithner and the president’s almost instantaneous exception to his lobbyist-banning policy to enable a former Goldman Sachs lobbyist to join the Treasury. After exploring the heist then (and now) in progress, I asked, “Where’s government? Where’s that team of irreproachable guardians you elected to represent you? They never did represent you. That’s what we’re seeing here. From the day you first knew their names, you knew all you needed to know: the names of the new people who’d be controlled by the real gang in charge.”

Jessica Bosari just finished a nice review of the book at, from which: “Americans continue to trust the government that fails them. The debt we bear as a nation was encouraged by the government that told us to leverage the equity in our homes. Debt and consumerism have driven us to this low state, like cattle to the slaughter. Unless Americans take back control of their finances by getting out of debt and limiting spending, big business will always be at the reins.”

That’s regardless of whether we elect Deemsel or Ruprit. (Don’t know who they are? You gotta keep up around here! See my Aug. 25 article, “Both Democrats and Republicans Are Bad For America’s Finances” and be sure to look over the many excellent comments.)

Our current Deemsel, President Obama, chose to surround himself with the same gang of incompetents chosen by his predecessors, as we’ve adequately covered. One that’s been left out of the criticism mix, however, is Federal Reserve Chairman Ben Bernanke, whom Obama reconfirmed. Cullen Roche described him thusly: “He receives endless praise for helping to avoid a supposed second Great Depression. This is like the man who sees a fire in his front yard, ignores it, then when it’s finally becoming a widespread danger decides to save his own house from burning (the banks), lets all of the surroundings houses burn to the ground (Main Street) and then receives endless praise for his courage under fire.”


4. It’s the consumers, Stupid

Part of the problem is that the economy is 70% consumer driven, and consumers are tapped out. That’s the natural result of decades of gradual tightening by special interests that directed more money to them at the top, leaving less fuel for the real engine of the economy below.

‘Twas a time when one wage earner was enough. Then it took two. Then it took debt. The last bastion of consumer debt, the home, fell a few years ago. (You may have noticed.) In the last 30 years or so, all economic growth has benefited just the top 2% of capital owners. Eventually, though, that lopsided arrangement killed itself because every business needs somebody to sell to. The special interests took their eye off that ball, and here we are.

On this subject, Robert Reich, a secretary of labor in the Clinton administration and author most recently of Aftershock: The Next Economy and America’s Future, wrote that the moribund consumer will trump all fiscal and monetary efforts:

Without consumers, businesses have no reason to borrow more. Except to speculate by buying back their own stock and doing mergers and acquisitions, which is exactly what they’re doing.

Ultimately, even if fiscal and monetary policy weren’t deadlocked, we’d still face the same conundrum. Say the White House and Ben Bernanke got everything they wanted to boost the economy. At some point these boosts would have to end. The economy would have to be able to run on its own.

But it can’t run on its own because consumers have reached the end of their ropes.

After three decades of flat wages during which almost all the gains of growth have gone to the very top, the middle class no longer has the buying power to keep the economy going. It can’t send more spouses into paid work, can’t work more hours, can’t borrow any more. All the coping mechanisms are exhausted.

Full article

Reich thinks the answer is “Reorganizing the economy to make sure the vast middle class has a larger share of its benefits.” Fine, but the chance of that happening is zilch.


5. Deflation, not inflation, remains the challenge

DoubleLine founder Jeffrey Gundlach told Liana Madura at Morningstar that “the markets and the economy to date have offered scant evidence to support the inflation case. Stocks are down over the past 10 years. Real estate is down hard over the last five years. Commodities are down sharply over the last two years. Instead of spiking to double digits, bond yields are hugging the ground. M3, which is now calculated only by private economists, is down nicely over the past year. And of course money velocity is moribund: Society has looked into the debt abyss and decided enough is enough with the debt-based consumer economy. So, deflationary forces still prevail.”

There’s a nice explanation of the M3 money supply measurement here.

This not a new concern, by the way. Amborse Evans-Pritchard wrote about it in a May 26 article at the Telegraph under the headline, “US money supply plunges at 1930s pace as Obama eyes fresh stimulus” and the subhead, “The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history.”


6. Consumers might deleverage more quickly than expected

Morgan Stanley’s Richard Berner believes that surging interest in record-low mortgage rates for refinancing bodes well for consumers. In a Global Economic Forum report, he wrote that applications for refis are up some 70% from last spring to 18-month highs.

That will put an extra $10-15 billion annually in consumer pockets and “should accelerate the decline in household debt service in relation to income to a sustainable 11-12% range by late this year, with ongoing benefits to discretionary income and creditworthiness. We think that American consumers are deleveraging their balance sheets and rebuilding saving faster than expected. Consequently, the headwind to consumer spending from deleveraging will be a smaller risk to the outlook, as consumers now can spend more of their income.”


7. Velma Hart is the new voice of the middle class

The downside of creating unprecedented levels of hope, the president is discovering, is that the fallout is immense when it amounts to nothing. Perhaps the president would have benefited from advice I once received from my grandfather: “It’s better to underpromise and overdeliver, than it is to overpromise and underdeliver.”

Below is an interview with Velma Hart, the person who most recently gave voice to the disappointment emanating from Obama’s supporters.

Have a great day!

This entry was posted in Finance at First Light and tagged , , , . Bookmark the permalink. Both comments and trackbacks are currently closed.


  1. Nancy
    Posted October 20, 2010 at 3:24 am | Permalink

    Jason, You are great! Keep up the good work.
    I have read your Stock Market Investing 2010 Edition and received good information. I have already invested in the stocks but reading all the news I am afraid to invest more but keeping my money in the bank gives me practically nothing .
    Thanks again for your book; it was very informative for a rookie in the field.

    • Posted October 22, 2010 at 3:13 pm | Permalink

      Thank you, Nancy. You’re right about money in the bank yielding nothing, but that stocks are frightening in an era of artificial liquidity props. Focusing on dividend yields is a smart middle ground as the steady payments provide some income and a buffer against price drops, plus a bit of an inflation hedge since dividends can rise as the dollar weakens. You’re not the only one scratching their head at the mess around us. Hang in there!

  2. Col
    Posted October 9, 2010 at 9:34 am | Permalink

    You seem to be one of very few who actually understand the problems! Great read, thank you.

  3. Sally Mason
    Posted September 24, 2010 at 12:25 am | Permalink

    Everybody except that top 2% is yelling, “We want the economy fixed, and we want it NOW!” The media is advising the President and mid-term candidates to focus exclusively on the ‘bad economic situation’ if they want to keep their seats. Trouble is, all the real fixes will hurt before they heal and hurting constituents, even in the short run, is political suicide.

    William Irwin Thompson nailed the hard truth of it when he wrote, “No one knows the future, but I would guess that we will have to be turned upside down and emptied before we can be stood upright and filled.” He’s right, but what President or politician would be willing to quote him today? By insisting on instant gratification the citizenry has managed to paralyze everyone in Washington.

    • Posted September 24, 2010 at 6:07 pm | Permalink

      True, and paralysis in the face of financial catastrophe tends to end in bizarre and extreme events such as World War II. When a nation senses that its political system is frozen on the wrong track, it’s more willing to move to the fringes in a desperate attempt to find leadership. In that moment, craziness can slither onto the national stage.

      Look around and tell me we’re not living in that moment.

  4. Jim T
    Posted September 23, 2010 at 10:31 pm | Permalink

    “Velma Hart is the new voice of the middle class”

    Michael Moore still holds this title.

    I hope Obama takes Moore up on his offer to work at the White House, sleep on a cot, and light a fire under the President to get working for the middle class.

    Damn the bankers. Ruining our country.

  • The Kelly Letter logo

    Included with Your Subscription:

Bestselling Financial Author