by Nancy Spannaus
Nov. 1, 2018—It should be no surprise that at its Oct. 31 (Halloween) meeting, the Federal Reserve decided to loosen regulations not only for the banks with a $250 billion net worth, but also for those with assets up to the $700 billion level. This decision reflects a phenomenon called “Bancomania,” a term coined by First Treasury Secretary Alexander Hamilton back during the speculative rampages of 1791-92.
Hamilton took aim at the speculators thus: “These extravagant sallies of speculation do injury to the government and to the whole system of public credit by disgusting all sober citizens and giving a wild air to everything… The superstructure of credit is now too vast for the foundation. It must be gradually brought within more reasonable dimensions or it will tumble.” He added that such “banking activity” reflected “a spirit of gambling,” and promptly took action to defuse it.
Not since Franklin Roosevelt has the United States had a President who shared Hamilton’s (and President George Washington’s) contempt for speculators, and was willing to do something about it. It was FDR who shepherded through banking regulations such as Glass-Steagall (which was specifically aimed at reducing speculative excesses) and the rules of the Securities and Exchange Commission (SEC), thereby setting the stage for the “golden age” of U.S. economic productivity. When the Wall Street banks refused to invest in the infrastructure, industry, and agriculture which the country needed, FDR then added a new source of government-backed credit through the Reconstruction Finance Corporation (RFC).
These historical precedents point to the alternatives available to the deregulation mania being exhibited by the Congress and the Fed. One need only rely on the American System principles exhibited by Hamilton and FDR to find the means to crush the speculators, before they bring on a new, more severe financial and economic collapse.
Buybacks Dwarf Investment
Protagonists of the liberalization just announced by the Fed will argue that the new measures will aid the economy by encouraging expanded investment. That argument defies recent experience.
As JPMorgan Chase CEO Jamie Dimon predicted after the Trump tax cut passed last December, the increased cash flow into the corporate sector during 2018 has flowed not into jobs and capital investment, but into stock buybacks. The total spending on that form of purely financial speculation is expected to amount to anywhere between $800 billion and $1 trillion dollar for 2018. According to Investopedia on Oct. 18, a JPMorgan analyst identified stock buybacks as the key driver of not only the current stock market highs, but of the nine-year bull market.
Stock buybacks do absolutely nothing to build the physical economy of the country; rather they create what can accurately be described as a bubble. Even worse, under current circumstances, many corporations are borrowing money to buy back their own stocks (at higher prices, as a necessary incentive). It’s the banks who are lending them that money, as well as “investing” in stock buybacks themselves. Indeed, former FDIC vice-chairman Thomas Hoenig excoriated the top four banking behemoths (JPMorgan Chase, Bank of New York Mellon, Citigroup, and Morgan Stanley) for spending more than 100% of their earnings on dividends and buybacks back in August of 2017. That trend has certainly not changed.
For this reason, FDR’s SEC outlawed such transactions as stock market manipulation. That prohibition held until 1982, when radical free marketeers succeeded in getting the SEC to allow the practice. (For an interesting analysis by Forbes magazine, click here.
And what about capital investment? According to Goldman Sachs (CNBC, Sept. 17), share buybacks will amount to more than capital expenditures for the year. The last time this happened was in 2007, the year before the entire speculative mess came crashing down.
Estimates of the much-touted increase in capital investment have been varied. The Bureau of Economic Analysis presents its figures as GDP, a flawed measure for analyzing physical processes. The most sober analysis I’ve seen came from the chairman of the Atlanta Federal Reserve, who, in a July 26 Bloomberg article, was reported to have estimated that the increase would be below 5% year-on-year. Kiplinger on Oct. 25 estimated an increase of 7% year-on-year. No one could credibly characterize this as a “surge.” Numerous analysts note that the major increase in investment in plant and equipment has come in the oil and gas industry, as prices rebounded. The reopening of a number of steel and aluminum plants in the wake of Trump’s tariffs has improved the lives of some Americans, especially in small towns, but does nothing to change the overall picture.
Nothing in what the Federal Reserve just did will encourage investment to correct the country’s massive infrastructure deficit, or aging plant and equipment. By reducing the amount of money that a whole set of major banks (excepting only the top nine) have to keep on hand, and the frequency of stress testing, the Fed has simply given more banks free rein. They will use it to increase their gambling, at the nation’s peril.
Tags: Alexander Hamilton, American System, banks, buybacks, Federal Reserve, investment, Nancy Spannaus, speculation