Category Archives: banks

Can the Federal Reserve Bank of Atlanta play development bank in West End Atlanta?

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Mohamed El-Erian in his book, The Only Game in Town, shared this observation about the average person’s awareness of the importance of their country’s central bank.
“Most people spend little of any time thinking about how central banks impact them — not only in their daily lives but also in influencing (and even defining) the opportunities that their kids will have. Indeed, despite the substantial reach of these powerful institutions and the critical role they have played, there is still little societal recognition as to how much citizens have riding on their judgment, wisdom, and success — from protecting and enhancing their financial savings to securing credit and finding well-paying jobs.”

Staff at The Economist published an article describing the history of the world’s central banks, institutions that were first started to help raise funds for wars waged by monarchs and then taking on the additional tasks of helping to grow economies by stabilizing the prices of goods and currencies.

“Governments have asked central banks to pursue several goals at once: stabilizing currencies; fighting inflation; safeguarding the financial system; coordinating policy with other countries; and reviving economies.” — The Economist

But development bank, specifically development bank for poor communities within cities, is not listed as one of those goals. The Federal Reserve Bank of Atlanta has taken on a role of “information clearing house” for initiatives that emphasize development of low income communities. The Federal Reserve is not a development bank like the World Bank or the Inter-Development Bank, where these organizations provide direct investment into national projects aimed at economic or social development. Given the Federal Reserve’s stodgy and wonky characteristics, the central bank’s interest in issues that border on the social as well as economic is interesting. The Federal Reserve Bank of Atlanta’s president, Raphael Bostic, has acknowledged that economists are considering the more behavioral aspects of consumers in assessing the health of the economy.

That approach could play well in understanding areas like the West End section of Atlanta, an area that given current gentrification still has a significant low-income population. The area’s household median income is half of that of Atlanta’s with home prices ranging between $45,000 and $580,000. Although the population experienced a 13% drop since 2000, people have been moving back into the neighborhood as evidenced by a 5% increase in population since 2010. But the Federal Reserve’s acknowledgment of an income and employment problem may be offset by its recent policy of rate hikes.

Rate increases approved by the Board of Governors of the Federal Reserve are good for bankers (Jamie Dimon, CEO of JP Morgan Chase believes interest rates should be at 5%.), but higher rates if not timed properly could dampen economic growth as borrowing becomes more expensive. Even if employment training initiatives championed by the Federal Reserve have any positive effects, could those effects be diluted by a higher cost of living?

Also, poorly timed rate increases could take a little air out of asset bubbles. Seeing a house priced at $580,000 literally two doors down from an apartment building where rents average $645 a month gives me the impression that little asset bubbles are forming given the gap in wealth on this street. Worse yet, as property taxes rise with home values, landlords may be forced to raise rents placing an additional burden on low-income residents of West End.

Instead of contributing to an initiative that empowers low-income residents, the Federal Reserve may be adding to the wealth gap by widening the physical gap between well-off and not so well-off. No need for electronics in order to build a virtual gated community.

A Black political strategy for debt markets. Stay out of them.

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You cannot resolve poverty within the black population by attempting to put more blacks into credit markets. Poverty is a function of capital: the less capital you have, the greater the likelihood that you that you will be poor.  Specifically, the more income-generating capital you own, the less likely that you will be poor.  The black political elite believe that if more middle income and poor blacks can borrow money, they would be able to purchase homes, cars, appliances, and the other trappings of consumer life; thus, living the American dream while claiming a stake in assets.  This approach is wrong because it fails to properly address the first act that was necessary for capital acquisition in America and also fails to reconcile the original acts of acquisition with the current barriers to capital acquisition and the alternatives available especially to non-affluent blacks.

Original capital acquisition in America was the result of theft.  This may sound cynical unless you have looked at the history of capital acquisition in America from the beginning of its colonization by European countries.  Take for example the language used by U.S. Supreme Court chief justice Marshall in Johnson v. McIntosh when discussing the principle of acquisition of discovery:

“While the different nations of Europe respected the right of the natives, as occupants, they asserted the ultimate dominion to be in themselves; and claimed and exercised, as a consequence of this ultimate dominion, a power to grant the soil, while yet in the possession of the natives.  These grants have been understood by all, to convey a title to the grantees, subject only to the Indian right of occupancy. The history of America, from its discovery to the present day, proves, we think, the universal recognition of these principles.”

Chief Justice Marshall then goes on to describe how England went about implementing this universal law:

“So early as the year 1496, her monarch granted a commission to the Cabots, to discover countries then unknown to Christian people, and to take possession of them in the name of the king of England. In this first effort made by the English government to acquire territory on this continent, we perceive a complete recognition of the principle which has been mentioned. The right of discovery given by this commission, is confined to countries ‘then unknown to all Christian people’; and of these countries Cabot was empowered to take possession in the name of the king of England.  Thus, asserting a right to take possession, notwithstanding the occupancy of the natives, who were heathens, and at the same time, admitting the prior title of any Christian people who may have made a previous discovery.”

In short, we came and discovered the place. The natural capital lying above and below the land is ours and you leave when we say so.  Chief Justice Marshall said as much when he continued:

“Discovery gave an exclusive right to extinguish the Indian title of occupancy, either by purchase or by conquest … The title by conquest is acquired and maintained by force.  The conqueror prescribes its limits.”

This acquisition by discovery drove, in my opinion, the philosophy of manifest destiny; that white America was destined to spread western civilization and republican democracy to unoccupied territories from whence Native Americans had either been eliminated or removed. The Homestead Act of 1862 and resulting grants of land, this time from the American government, put into the hands of people of European descent more natural resources including land and access to minerals and fuel sources for little or nothing.

Americans of European descent had a considerable head start. But other than establishing that original land acquisition in America is mostly the result of theft, what does this have to do with capital and credit markets? Because land and other natural resources are the anchors for debt markets. They serve as the collateral that backs up loans that are invested into the debt markets. In other words, they create the funding used to underwrite consumer and other debt.  Make the wrong bet and you could lose the family farm. Make the right bet and you have expanded your commercial enterprise from farming into other lines of business.  Occupying the credit generator/underwriter portion of the debt market is where the wealth creation takes place. Asking blacks to occupy the consumer portion of this market, especially when blacks do not have substantial land or mineral resources ownership is the same as putting blacks back on the plantation.

The black political elite cannot take the black population back in time where blacks can set up their own system of original theft in North America.  The black political elite could discourage blacks from entering a credit system that charges them an interest rate on loans that exceeds those as whites, that treats a black couple looking for a mortgage as a credit risk even when that couple has more than sufficient income to qualify for a loan.

One policy recommendation is that while blacks pursue as many income opportunities as possible that they avoid credit markets.  Blacks do not have the political power nor does the rest of America have the political will to offer up another “Oklahoma land rush” specifically tailored for black Americans.  Blacks do have more control over their spending. Paying off debt (much easier said than done) and not purchasing any more money not only leaves more money in the pocketbooks of black people, but sends a message to the bond markets and eventually the U.S. government that if either the markets or the government want blacks to get back into the consumption game, then there will have to be major changes in capital allocation policy.

Government defined by distraction

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The past 85 years have created an illusion as to what American government is. In the 1930s, government became a fuel injector for the American economy where the Executive branch pumped money into public works programs designed to employ idle labor. New regulatory regimes were created to regulate away the excesses of speculation and manage the extraction and use of natural resources.

By the 1960s, government took on the additional role of social justice guarantor, crafting and delivering legislation designed in part to further incorporate black Americans into national society and to provide other social services including healthcare to children and the elderly.

Through its military and science branches, government continued its research, development, and investment into computer networks and outer space. It was out of these activities that the internet was spawned allowing my five faithful followers to read this blog.

It is no wonder that Barack Obama said in 2012 with some authority the following:

“If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business — you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet.”

The reality is that government as a noble entity is a myth; that the past eight plus decades have been a distraction from what we should only expect from government; that it is an entity that expands its control over jurisdictions anywhere in the world for the benefit of its financiers. What we should expect from government should be more in line with Donald Trump’s views on Iraqi oil:

“If we kept the oil, you probably wouldn’t have ISIS because that’s where they made their money in the first place, so we should have kept the oil, but, OK, maybe we’ll have another chance.”

While many were taken aback at the bluntness of Mr Trump’s statement, the President honed in on the primary expectation we should have of government, an entity that acquires and manages resources.

Americans have an issue with ugliness being exposed. They are weary of the guilt-fest they have endured over the past sixty years in particular, from scenes of police dogs attacking black Americans in Birmingham, Alabama to American military personnel being accused of murdering civilians in Iraq. But in the words of Mr Trump, “There are a lot of killers. We have a lot of killers. Well, you think our country is so innocent?”

Unbeknownst to him, Mr Trump summed up the core expectation of government; that of acquirer of resources. Any “noble” distribution is a response to the distractions caused by the powerless who are able to sneak into democracy’s nooks and crannies to agitate just long enough for social benefits that pale in size to the benefits flowing to the holders of government bonds. An irony, that there is distraction on both sides ….