Will anyone ever defend banks?

Bank-bashing didn’t work in Britain, and it may not work here in 2016 from the files of Larry Kudlow at Kudlow and Company

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Bank Bashing Picking Up Steam

One of the interesting nuggets coming out of the conservative sweep in the British elections was the failure of bank-bashing by the Labour party.

Labour leader Miliband, who has since resigned, was anti-bank, anti-rich, and anti-business.

It failed. And while conservative leader David Cameron didn’t necessarily defend banks, he didn’t attack them either.

Now, the case for Tory economic management wasn’t bad. The London Stock Exchange has been hot as a pistol. And the British economy is growing about 2.5 to 3 percent. Not great, not awful. It was enough for a handsome Tory victory. And it may be a message to British pundits that tax-the-rich, redistributionist, bank-bashing talk is old hat. Been there. Won’t work.

But the question is, how will bank-bashing do in the U.S. election next year? It’s already coming from both sides of the aisle.

Of course, the Obama administration has led the way on bank persecution. It has levied over $100 billion in fines for past sins, mostly related to mortgage bonds.

And nowadays, the thinking goes, it would be politically suicidal for anybody to actually defend the banks. That’s the interesting part of this story: Nobody will defend the banks.

Well, outside of the banks that is.

A recent news piece in the Wall Street Journal proclaims, “Banks Prep Defense for Anti-Wall Street Campaigns.” It seems the Financial Services Forum, representing all the big banks, held a clandestine meeting on the 51st floor of Bank of America to figure out a defense. Very conspiratorial, and not very exciting. The thrust of the Journal article is that the banks have done everything, and paid everything, the government has asked of them.

“We atoned for our sins. We will never do it again. Please forgive us for it. And by the way, would you clarify what ‘it’ is?”

Few will admit it, but unaffordable, undocumented mortgage quotas came out of Washington, not Wall Street. And Fanny and Freddie enforced them. And while the Fed’s ultra-easy money destroyed the dollar, it also caused a bubble in home prices.

Yes, banks made risk-management mistakes. But when will the firing squads stop? You know, you can’t have a decent economy without banks.

But when will you ever hear a politician say that?

Senator Elizabeth Warren never misses a chance to slam banks. Nor does socialist Bernie Sanders, or far-left former Maryland governor Martin O’Malley.

Hillary has caught the bank-whacking virus, which is hilarious given all the money raised on Wall Street by the Clinton Foundation.

But Republicans are whacking away too. Of all people, former Florida governor Jeb Bush bashed banks while in New Hampshire.

But wait, didn’t Jeb’s brother preside over the big bank bailout? Oops.

Former Texas governor Rick Perry is slamming the banks. So is former HP CEO Carly Fiorina. She actually said, “I agree fully with Elizabeth Warren.” Huh?

Yes, there is an issue with “too big to fail.” And it’s bipartisan, since both Democrats and Republicans voted for the bailout in 2008. Might we go there again? Economic writer Amity Shlaes has a good suggestion: The candidates should make no-bailout pledges along with their no-tax-hike pledges.

And Federal Deposit Insurance Corporation (FDIC) chairman Martin Gruenberg has said that if a major bank runs into trouble today, “they would be allowed to fail and suffer the consequences of that failure.” Do we believe him?

Either way, it’s doubtful the political assault on banks will end. But I wonder, at some point, will someone in the U.S. -- a big-shot politician, a small-business person, a struggling middle-class mom or dad -- actually say something good about a bank?

Maybe!

Banks do make business loans, which have picked up quite a bit. They do provide mortgages, though the terms are more difficult. They do offer credit cards, decent ATM machines, car loans, farm loans, and student loans. Even though the Fed has decimated interest rates, they do allow large savings accounts. And they do, after all, connect savings with investment. (I think that was their original purpose.)

Sure, I’d get rid of a few banks: Like the Ex-Im Bank, which makes loans to our enemies and destroys jobs at home. Or Fannie and Freddie, which helped cause the problem in the first place, and are now actually being expanded by Team Obama. They have no capital. Disaster waits all over again.

But I have a caution for the candidates: Sometimes British politics leads our politics. And if bank-bashing didn’t work in the U.K., maybe politicians here should let it go, and instead focus on pro-growth measures like flat-tax reform, free trade, deregulation, and sound money. Just for a moment, why not leave banks alone?

Wait a minute. I did not even remotely mean to suggest that I’m defending banks. That would be wrong.

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Curb your economic pessimism

From the file of Lawrence (Larry) Kudlow at Kudlow and Company

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We can do a lot better, but America is still a very resilient place.

The economy has been in a tepid, soft, slow recovery for the past five-and-a-half years. It’s the weakest rebound in generations.

The Commerce Department’s revision of fourth-quarter GDP shows that nothing much has changed.

Over the past year, real economic growth registered 2.4 percent, slightly higher than the recovery average. It ain’t much.

Meanwhile, winter economic reports for retail sales, manufacturing, and capital investment point to a weaker first quarter, perhaps around 1 percent. And Wall Street is talking about a possible profits recession, with expectations of a 2 or 3 percent drop in corporate earnings for the first half of 2015. So the market bears are out in full force.

Now, let’s acknowledge that coming off a deep recession, the rebound should have been 4 or 5 percent, not 2 percent. By some calculations, GDP is 10 percent -- or nearly $2 trillion -- below its long-term trend, and jobs may be lagging by 8 to 10 million.

Government entitlement transfers pay people not to work. Family breakdown has created a poverty trap for the lowest economic groups. Upward mobility is lagging. And the government has attacked the high-end movers and shakers with tax hikes and over regulation.

And unfortunately, a damaging business psychology prevails. It says that success must be punished, and that redistribution is the way to solve inadequate growth, inequality, and unhappiness.

But . . . all this said . . . it’s possible to be too pessimistic.

Let’s start with profits, the mother’s milk of stocks and lifeblood of the economy. The recent GDP report shows a slight profits decline in 2014, the first in years. But this is misleading.

More important, the core measure of earnings, domestic nonfinancial profits, increased 1.4 percent in the fourth quarter and 7.8 percent for 2014. On an annual basis these profits increased $262 billion and were widespread across industries.

The big problem is not the U.S., but the rest of the world, which is mostly in recession and saw profits drop $36 billion in the fourth quarter. At roughly 18 percent, profits from the rest of the world account for the smallest share of corporate earnings since 2006.

By the way, GDP profits from the National Income Accounts are far larger, and therefore more telling, than S&P 500 profits. Initial quarterly estimates from GDP cover about 9,000 companies. Over time, annual revisions will cover roughly 4 million companies. And GDP profits are benchmarked to IRS tax filings, with no accounting shenanigans.

Another economic positive is the rise of the consumer. Rex Nutting of MarketWatch reminds us that consumers got a big windfall from plunging energy prices. So far they’ve saved it, but that may change. Real incomes adjusted for taxes and inflation jumped at a 7.7 percent annual rate over the past three months. This could set the stage for a big boost in consumer spending.

The terrible winter has taken its toll in Q1. But family spending may jump come spring and summer. Along with this, the basic core of the private economy (consumption plus investment), which rose over 4 percent in the fourth quarter and 3.3 percent for 2014, will continue to advance.

Did somebody say King Dollar? It’s holding down consumer prices and business costs (including energy). Even with a lousy world economy, U.S. exports increased 4.5 percent annually in the fourth quarter while imports jumped 10.4 percent. So U.S. businesses are very competitive regarding export sales, and the rise in American imports from overseas will bolster the international economy.

One last encouraging point: C&I business loans have increased over 15 percent annually in the last three months and about 12.5 percent in the past year. That’s a good sign, especially for Main Street business activity, which has been lagging for years.

The Fed will probably raise its target rate later rather than sooner, smaller rather than larger. I’m betting on October and December for some quarter-point rate hikes. That’s consistent with a high dollar and low commodity prices. I doubt long-term rates will change much at all.

So moderate growth, rising core profits, and a still accommodative Fed set the stage for a better stock market as the year goes on. I’m still in the “buy the dip” camp.

We’re not going to get the kind of growth that America is capable of producing until we get tax and regulatory relief and a better attitude about free-market capitalism. But I wouldn’t get too pessimistic.

There’s no recession or inflation in sight, and America is a very resilient place.

Don’t bet against it.

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Ruling the Fed

Republicans attacking Janet Yellen should be careful what they wish for by Larry Kudlow at Kudlow and Company

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Fed chair Janet Yellen testified this week on the state of the economy. The only interesting thing to come of it was some sharp-edged criticism by Republican members of the House Financial Services Committee.

That includes committee chair Jeb Hensarling, who said, “Fed reforms are needed . . . Fed reforms are coming.”

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Senator Rand Paul, for one, is pushing a bill to audit the Fed, by which he means auditing the Fed’s policies and discussions. But Yellen and other Fed big shots fiercely oppose any rules that might be imposed on the central bank by Congress.

Now, down through the years, the Fed has always resisted rules in the name of independence from political pressure. But there’s an interesting backstory here.

In the early 1970s, President Nixon allegedly (it’s never been proven) ordered then-Fed chair Arthur Burns to goose the money supply to spur the economy and help the Nixon reelection effort.

This story becomes even creepier, since Nixon and his entourage destroyed the dollar and launched double-digit inflation by breaking the gold-dollar link established in 1944 at Bretton Woods.

So the Fed has a point about politics.

Later in the 1970s, however, a Democratic Congress voted for the Humphrey-Hawkins bill, which mandated the Fed to keep both unemployment and inflation down. That became law. And of course, for most of the ’70s and early ’80s, the dollar sank lower while unemployment and inflation ratcheted higher.

That prompted Republicans to jawbone the Fed to establish money-supply targets, which followed the dictum of Nobelist Milton Friedman (who wanted to replace the Fed with a computer).

For a while, Fed head Paul Volcker published money-supply targets. But Ronald Reagan told Volcker to do whatever was needed to conquer inflation while he and Congress reduced marginal tax rates and reignited economic growth. The Fed had no new rules. But for 20 years, the economy worked beautifully.

Then the rule story shifts to the financial meltdown of 2008, when the Fed went wild. It pushed the target rate to zero and flooded the banking system with over $4 trillion in new reserves. That really didn’t work. Most of the Fed’s money creation went unused; it was turned around by banks and placed on deposit at the Fed.

Former Dallas Fed president Bob McTeer points out that the money supply never ballooned out of control and the Fed didn’t pump up anything, because the velocity (or turnover) of money collapsed.

Economist John Ryding calculates that over the past six years, while the Fed’s balance sheet grew near 17 percent a year, the M2 money supply increased only 6 percent annually, in line with the long-term trend, while money velocity fell 2 percent yearly and nominal GDP grew by roughly 4 percent. There was no Big Bang, and also no inflation.

Today, Janet Yellen may rightly or wrongly be associated with liberal Democrats, but a key point is that she talks dovish and acts hawkish. She shut down so-called QE reserve creation, a surprise to many.

And lately, the U.S. dollar has gone up while oil and commodity prices have gone down. As a result, an improving economy is trying to reach 3 percent growth.

So Republicans attacking Yellen and calling for higher interest rates should be careful what they wish for. A strong dollar and low energy costs have put the economy in a good place.

Now, if President Obama would agree with the GOP to slash the corporate tax, the economy might grow at 4 or 5 percent with a stronger dollar and even lower commodity prices. Wouldn’t that be ironic? Too bad Obama won’t agree to a serious corporate tax cut.

As for rules and the Fed, there are a bunch of proposals out there: There’s the inflation-fighting Taylor rule, which seemed to work in the 1980s and ’90s. There’s a gold-commodity-King Dollar price rule (which I favor) that also worked in the ’80s and ’90s.

There’s the new-monetarist nominal-GDP-growth rule, although the trouble here is that velocity keeps falling and money GDP has gone nowhere. Alan Greenspan (!) is actually telling people that gold is the only true currency. And Professor Taylor himself is suggesting that the Fed could create its own rule, any rule, but would have to answer to Congress if it ever went off it.

At the end of the day, the economic incentives from lower tax rates and regulatory burdens are the right levers to promote faster growth. And central banks should focus on sound currencies and price stability.

Looking at a renewed King Dollar and low U.S. inflation, the Fed seems to have done its job.

So either:

1) it’s a miracle or
2) the Fed actually knows what it’s doing

You choose.

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