No, the banks are not the bad guys …

Alton Drew

The Board of Governors of the Federal Reserve System begin their two-day meeting next Wednesday, one day after the general election. No changes in inter-bank rates are expected, but what will be of interest is a likely repeat of the plea that Congress and the Executive implement a fiscal policy that keeps the economy on life support during the pandemic. Depending on who wins the Electoral College, Chairman Jerome Powell’s post-meeting comments will be either soothing or raise more hairs on the back of the public’s necks.

Mr Powell will reiterate the need for fiscal policy because monetary policy can only do so much. Monetary policy has as one of its goals the backstopping of its member banks, providing needed liquidity when the credit pipes become clogged by opening the flow of credit to businesses via the banks whose inability to lend could stem from not having enough capital to support additional lending.

Fiscal policy, the Fed chairman will likely remind us next Thursday, does a better job of getting cash into the hands of consumers resulting in increased personal expenditures. Consumer spending has historically driven around seventy percent of national income, and that the kind of spending that is needed now.

But this relief is going to be temporary. The more sustaining stimulus will come from an economy that opens back up. If the polls continue to hold and Joe Biden takes office in January 2021, he could take actions to keep needed capital in the United States that probably props up the economy. Would Mr Biden want to tax this capital as part of his promise to bring about an equitable tax environment where the affluent pay their fair share of taxes or will he back pedal on taxing captured capital in order to quell any attempts at tax avoidance while ensuring the availability of stimulative spending?

Mr Biden may also be reminded that in an economy that is credit driven, where banks are the information search agents that help capital seek out higher returns by identifying worthwhile investments, he could also leave banks, their investors, and their depositors off of his tax hit list thus helping the Federal Reserve further unclog the credit pipes.

Public policy should encourage banking to go back to its roots: financing commerce while supporting high yield…

The unbanked are unbanked because they have nothing to bank.  In a nation driven by capital formation and returns on capital, focusing on the unbanked seems like putting the horse before the carrot.  The American Treasury Department and the central bank should be focusing public policy on encouraging capital formation and generating high yield.  Nothing in the U.S. Constitution says that consumers should be encouraged to borrow or that banks should be obliged to lend to the consumer class.

Political responses such as the Community Reinvestment Act, the Dodd-Frank Act, or the creation of the Consumer Financial Protection Board cater to voters but overlook the need for encouraging the accumulation of capital goods necessary for driving the American economy.

More importantly, political responses mentioned above serve to incentivize consumers to enslave themselves to credit even while the last four decades have seen real wages go stagnant.  The political class on the left is quick to leave out consumers’ complicity in the financial downturn of 2007-2009 where consumers were encouraged to borrow against their shrinking means to repay.  Consumers do not need protection from banks.  We need our mindsets redirected in our approach to banking.

Each household needs to rebuild their capital buffer.  It is easier said than done especially in a transition period where the timeline for capital’s replacement of labor with automation and artificial intelligence is being sped up.  Not only is more work being done from home but businesses are determining whether the benefits of keeping employees at home outweigh the costs of bringing them back in-house.  A number of employers have been transparent with updating employees on their engagement with companies offering AI-driven resources that increase efficiency.  Larger companies are partnering with technology companies whose mission is to reduce the time employees spend on certain tasks.  These are threats to labor and income and in this environment not only is the consumer tasked with increasing household capital formation but with seeking additional or alternative opportunities that provide for increases in income, savings, and investment.

One way, in my opinion, to increase capital while deriving additional income is for public policy to encourage high yield on capital.  The consumer who flips her mindset from shopper to investor needs an environment where her savings can accumulate at a faster rate; where higher residuals can be reinvested into her principal holdings and create appreciation.  Public policy should support full employment of capital and maximum prices for capital. How does the US get there?

One way to get there is for banks to abandon their risk-based interest rate pricing model, where higher interest rates is the price that riskier customers must pay for borrowed funds.  Rather, banks should abandon consumer lending altogether.  Lending money to a consumer in a stagnant income, labor replaced by automation environment so that the consumer can build a deck, finish a basement, or send a kid to school is what I call low value enterprise lending where the loan is being applied to a consumer’s wage income versus residuals the asset provides.

Instead, interest rates should reflect the competition between borrowers seeking to demonstrate their enterprise ideas will provide the greatest returns to capital and equity.  High interest rates should not be charged because of a high risk of failure.  Rather, high rates should be charged because where the lender sees high returns to equity in the enterprise, the lender seeks to capture some of that value.

Banks, then, should abandon consumer lending and put energy and resources into commercial or merchant banking.  Consumer involvement in banking should be limited to establishing savings or investment accounts with banks or owning stocks in banks.

Again, the upside from this model for banks, a focus on lending to merchants that leverage real assets to make income.  The upside for the consumer is less borrowing and more investing thus greater capital formation.  Also, the consumer may learn how to plan purchases over a long term versus seeking the psychic value of getting something now and paying for it later.  For example, a consumer may put away cash over some determined period of time to purchase that new deck without having to burden themselves with debt.

Or, a consumer may seek out a group of private consumer lenders who are not connected to the banking system thus reducing the chances of shock to the system should a borrower renege on a loan.  They will be forced to rely on the courts, lawyers, and mediators for resolving any conflicts with private lenders.

 

 

In the coronavirus era, the information engineers will win …

Editorial

Most of us believe life is about accumulating cash, making enough coin to pay the bills, put the kids through school, take a vacation, and buy ourselves a couple toys.  You know.  Living our best life.  Seven hundred thousand Americans found out last month that a virus could cause havoc not only to one’s physical health but also to one’s financial health.  There will be less coin available to pay for that best life.

Americans are not coming to terms with the reality of nature; that nature is the ultimate arbiter of life on this planet.  It is why the call from political leaders in the United States and worldwide to wage war against a disease seems silly to me.  Nature always wins and I believe its victory will be manifested in how it helps change the nature of commerce and work.

How work changes will go beyond whether a bunch of lawyers, accountants, and call center operators can conduct business from home with their kids running around. (Fortunately, social distancing at home is easy for me. I have a teenager. They like staying away from their parents.)  Not only will we have to become overnight IT managers, we will have to adjust to two additional tasks: one, becoming database managers; and two, teaching our bosses’ algorithms how to read and navigate the databases we have been assigned to classify and build.

More and more professionals, from lawyers to accountants to doctors are becoming database managers.  They are being asked to go through thousands of documents, classify them, and tag them according to how relevant they are to resolving an issue of law, finance, or medical treatment.

By tagging the contents of these databases, these professionals are providing their bosses’ algorithms a template to follow; a path to build and travel on when they eventually take over more and more responsibility for mining these databases and their content.

Capital, always in fear of a vacuum, is always in search for yield.  It is  always in search of the information that increases returns on the coin.  The more efficient the search and the more robust and plentiful the information, the greater the yield.  For coin is the physical valuation of information.  The more information capital has for use, the greater the value of the coin.

But for the rest of us, for the non-capital or what I call the credit class, we will have to rethink our view of information.  Information is no longer just something told or facts learned.  It is not just news or knowledge.  It is an asset, something owned that has value.  Each household’s value going further into the 21st century will be judged on the quality, uniqueness, and value of the information that it sits on.  Households will have to spend more of their most valued currency, time, at least in the short to immediate run, accumulating that most important asset, information.

The virus has dis-aggregated Americans.  Americans sitting at home on their desk tops remotely connected to the central brain at their office will soon be called on to generate more energy in the form of information, relying on their own leased data resources and the databases they create.  Capital, demanding the reductions in the costs for information searches, will reward those households that can mine, package, and deliver information that provides capital with a list of opportunities for highest yield.

The information engineers will win for they will lead in buying that best life…