Common Cents

The Road to Recession

Ralph Murphy

(12/2016) Annual growth in the American economy was about 1.1% of total earnings compared to last year. It reflected a downturn of over 1% and was predictable amid continued mergers of antagonistic interests in the public as well as private sectors. Part of the concern may involve the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 that sought to "promote accountability and transparency in the financial system", but may have ironically hampered it.

Dodd Frank was a reform measure spearheaded by two Democratic Congressmen amid the liquidity "crisis" for investors after a 2008 mortgage bubble collapsed and sent tied assets spiraling downward. Rather than take a loss in the capital markets, the bankers and others affected were able to achieve bailouts with public funds and maintain artificial parity for earnings as if their investments had been successful. Central bank assets were merged and the private sector was able to change Federal Reserve policy. The enforcement structure became an unlikely alchemy of corporate governance that still has access to the Treasury and Fed funds to cover mistakes or afford what amounts to simple theft. The bill sought to avoid conflicts of interest, but may have created them by dictating corporate policies that were not closely linked to profit maximization and efforts to meet demand.

The Federal Reserve Act of 1913 transferred Congressional power to an independent regulator amid increased economic complexity and need for liquidity and to accommodate growth. Since inception, the Fed has regulated the money supply as well as the banking sectors for propriety and competence in lending from the critical investment organ. Those were the "core values" Senator Christopher Dodd (D. Conn.) sought to return the nation to. The bill also amended the Federal Reserve Act for its first major update since the depression era 1935 legislation stiffened oversight. It effectively institutionalized technology changes that allowed the Fed to harbor most all the nation’s capital as invested. It also provided a direct tie to the business sector that changed policy to major enforcement agencies such as the SEC, FDIC and the Fed itself.

As Dodd-Frank developed, the public and private sector’s access to the Fed money became almost self regulating and the system harbored resources in the tens of trillions of dollars. Most transactions affecting money supply changes take place through the Fed bank of New York which has a rollover of a reported $1.8 trillion each day tied to business needs and another $1.3 trillion linked to securities. The latter is key to changes in the money supply and its value in the market place. It doesn't create that volume of money, but just serves as a clearing house or net provider for the private investors who then use it to generate new earnings. That "bank" should only be involved in the government securities trade and that should be tied to money supply management based on GDP changes and sought value of the currency.

The problem now is the investment patterns themselves as post Dodd-Frank policy have allowed lobbyists to effectively sit on governing boards as well as to dictate the salaries of the top staffers to include the CEOs. Compensation Committees which were once considered minor, in-house offices- since Dodd Frank must be drawn as "independent" players outside the organization’s structure. While still approved by the company’s board members- it has led to lobbyists with vastly divergent interests and loyalties to their own firm as well the ones they effectively manage. The profit motive that drives conventional production based on competence and expected materiel reward is passed to the lobbyists vision of the same based on politics or personal gain. The latter includes former and possibly present Congressional leaders as well as Executive players said to affect most all the top 500 concerns.

The issue doesn't end with the suspect investment patterns tied to leading a company for personal or outsourced rival affiliations. Merger and acquisition (M&A) policies which had been subject to close scrutiny by varied antitrust legislative limits after enforcement became so lax, that the events went almost unchecked. The dealing could be propped to staggering sums relative to corporate earnings as it appeared the concerns were able to access the Fed money to float the deals. Antitrust is very difficult to enforce as monopolies or price rigging is difficult to prove in a market price scrutinized by regulators. That and the companies do incur a loss of market share by setting prices higher than demand. Lowering the prices increases sales volume and earnings. The problem at present is more the external access and manipulation of corporate policy as well as the mergers since the markets aren't producing based on routine consumer interest, but rather the whim of the lobbyists or others. They have almost unchecked access to key controls of the private sector firms and Fed money to bailout mistakes.

The financial markets have become almost self-regulating since 2010, and capital needed for conventional dealing is being misdirected both to domestic and foreign ventures - often for net losses. If the money isn't available as envisioned by Fed policy it can't produce growth. Dodd- Frank has to be reviewed- as does the role of the Fed given technology shifts which now store data and cash at unprecedented levels. These factors have created a completely different investment landscape than that of a slower paced era’s communications and data storage methods.

The situation is manageable as the money can be traced if lost, but again it is being poorly invested as required or permitted by law. A downturn with anemic growth numbers could continue to be seriously debilitating over time. The core Fed role of providing money and regulating banks that Senator Dodd and others sought to promote in passing the legislation of 2010 can best be afforded by keeping the central bank out of the new investment directives. Cash can be retained by proven producers in a regulated, competitive framework. The Dodd-Frank bill and associated Fed policy seems to misdirect talent and earnings- rather than promote them.

Ralph Murphy is a former member of the CIA Headquarters Staff in Langley, VA.