Practical Dad

The Fed and My Family

December 2013 marked the 100th anniversary of the creation of the Federal Reserve System of the United States.  It has become the preeminent central bank in the world and its policies and practices ripple across the globe like a form of financial chaos theory.  The decision to taper the quantitative easing by a simple $10 billion each month leads to a liquidity crisis across the emerging economics as so much funding is withdrawn.  Much has been written about the Fed and it's become a lightning rod with supporters and detractors on either side but with very few in the middle.  But for all of the gigabytes written about it, how does this institution affect family?  It can certainly impact the interest rate on the mortgage and car note, but how does it affect my core role as a parent, to raise the kids to make their way in the world as productive and moral adults?  It's these two simple adjectives - productive and moral - that frame my perspective.

I'm afraid that the true impact isn't good and it's raising productive adults that is the first casualty of the Fed's policies.  This isn't a bug in the system, it's the proverbial feature since our entire American economic model is now predicated upon consumption.  When you google kids materials for the Federal Reserve System, one of the first links is to Great Minds Think, an educational source published by the Federal Reserve Bank of Cleveland.  Glance through the table of contents and you'll find that the section on saving is #8, well past the sections on earning and spending money.  The message to the user - intentional or not - is that we teach the kids to be good consumers before we teach them to be good savers.

While there don't seem to be any overt commentaries by the Fed on the raising of kids, there is one particular speech by then-Chairman Ben Bernanke that provides an important clue about the attitude of both the Fed and the economic system towards the family unit.  Chairman Bernanke gave prepared remarks to a conference of high school economics teachers in August 2012 and while it's boiler plate pap on the face, it's fascinating in another way if you're willing to parse it.  Bernanke praised the educators for their work - commenting that he himself was an educator, having been an economics professor - and noted the importance of children having a proper financial education.  But it bothered me and it took several readings over time to pinpoint the source of the discomfort.  The point of education is to prepare the youngsters to take their place in the adult world and he routinely referred to them as young people and students.  By my count, there were fifteen references to the youth throughout the talk.  What was different however, was in the references to the adults.  When speaking about adults in general, excluding the educators, there were eight references.  One reference used the term American and two others used the word people.  But the remaining five references consistently used the term consumer.  There is no other descriptive noun used.  Citizen?  No.  Adult?  No.  Even when the parent is mentioned, it's in the context of working on exercises with the kids so that they too, can learn.  The upshot of the talk is that our role is to raise our children to take their adult economic place as consumers.

The problem with this philosophy is that the consumer-driven economic model is actively dying.

  • Since the start of the recession in late 2007, family incomes have dropped more than 6%, despite a rebound in the last two years.
  • Fully 75% of the jobs created as of the first half of 2013 were part-time, without benefits because of weak activity and corporate fears of teh effects of the coming Affordable Care ("Obamacare") Act.
  • The chaos of the ACA will significantly impact American family consumer spending as families are forced to spend more on their healthcare, either via higher premiums and deductibles or simply doing without insurance and paying their healthcare costs out -of-pocket.

The necessity then is to save more and to teach the kids to save instead of consume but again, the Federal Reserve has a policy regarding saving as well.  The imposition of artificially low interest rates makes it counterproductive to save and in a practical sense, punishes it by teaching the kids that they're better off to spend their money instead of putting it away for later.  Such has been the lesson for the older kids when they realized that their passbook savings rates of .1% yielded nothing of value through the course of a year.  This was also the lesson that Youngest began to realize when he came home from school last week, announcing that I want to get a CD.  When I inquired what he meant by CD, he responded a Certificate of Deposit, Dad with a note of amused derision in his 6th grade voice.  He subsequently explained to me what it was and commented that the teacher's example utilized a five year CD rate of .87%, which the teacher noted as a really good rate.  So Youngest now knows that his passbook rate is about .1% and can appreciate the relative eight-fold improvement between the savings and CD rates.  Dad, I might as well get something better for it since I'm not going to use it...  But for every kid who says that, how many are taking the opposite lesson that there's no practical value in saving?  Dude, I can take all of that annualized extra interest and download me another Avenged Sevenfold EP - WOOT!!

So the kids can get a five year CD with an annualized return of .87%.  With a morbidly obese national debt requiring tender care, a wrecked fiscal policy via a broken Congress and a zombified real economy dependent upon these artificially low rates, I doubt that the Fed will willingly raise rates within the next five years.  The Fed can - will have to - keep these nominal rates low but the fact is that the rest of the world is not willing to continue purchasing our debt at such rates of return and the Fed itself has become the world's largest buyer of US Treasury debt.  But the Fed cannot continue to purchase the notes indefinitely and the rates will have to rise in order for the rest of the world to accept the risk that comes with such an outsized debt.  This is why I look at the President's new MyRA retirement savings program with such incredulity; it's touted as a risk-free return in a low-return world but the entire program simply smacks of a means to gain access to the public savings that will be used to purchase the government bonds that the Fed is no longer capable of purchasing itself because of a bloated balance sheet.  And when we burn through that cache of cash because there's no fiscal discipline, then the government bonds will indeed be risky as default lurks.  Greece, Spain and the peripheral nations on the southern edge of Europe are instructive examples.

These influences are part and parcel of raising a child to be a moral adult.  We as parents can do everything that we can to teach morality, but society's influence is pervasive and short of going Amish, what occurs in the larger realm does filter down to the family level.  The policies of the Fed dovetail with the hands-off financial deregulation of the government to protect the financial sector, even when it engages in practices that are illegal, unethical and immoral, far beyond the purview of their original businesses of taking deposits and lending.  The young people learn that there is indeed a judicial double standard as financial malfeasance is unpunished while student debt collections become more overbearing and garden variety crimes receive increasingly severe punishments.  If you don't believe that there's a different standard for the financial wizards, consider this.  If a Wall Street establishment is fined an amount that is still far less than the offense and the institution gets to negotiate the amount of the fine, then there's a different standard and the fine is, to the firm, just another cost of doing business with a budgetary line-item somewhere between labor costs and paper clips.

Along with the judicial impact is the fact that more than a handful of institutions are now considered  Too Big To Fail, a term which means that their bankruptcy would imperil the entire financial system.  To accommodate these firms. the Fed established a significant number of back room arrangements starting in 2007; so the firms were nursed through the crisis.  But then supports were continued with no effort at restraining the behavior so that the risks, particularly through the growth of derivatives, have grown even larger than they were in 2007.  This is the monetary equivalent of nursing your kid through self-inflicted auto accident injuries and then buying him a brand new car with no repercussions or discipline.  The need and ability to assess risk, to be judicious and prudent with the capital, is rendered irrelevant as the institutions understand that there is no real loss because they are hooked up to their sweet Sugar Feddy.  The are losing - some have arguably lost - the ability to make decisions that reflect an awareness that they have to stand on their own feet and could truly fail.  As I write about this aspect, it's striking to consider the parallels of the present relationship between the Fed's actions regarding their constituent banks and the actions of parents who hover over their children, not allowing them to take their place in the real world.  The continuation of this trend will lead to the training of a generation of financial decision-makers who are incapable of standing on their own two feet.  This analogy does however, not account for the reality that the Fed's kids are borderline sociopathic kleptocrats.

This article isn't an idle philosophic musing.  Raising a kid to take his or her place as an adult means that there are countless conversations that must occur; it isn't enough to talk about the birds and the bees and discourage drug use, the conversations must also go to current events, politics, money and yes, morality.  The kids must learn that when the real capital becomes tight - not the dollars presently coursing through - the safety nets will fail or, at the least, fray.  There will not be a Sugar Feddy around to pick up after them as they have with the banks that have indeed captured them and usurped their function.  They are going to have to be able to make judgments and to produce.  And they're going to have to understand the difference between right and wrong because that capital will be tight enough that the regulatory oversight will have returned with a resounding vengeance to protect it.  Parents can no longer be unaware of the policies of the Fed; they must begin to understand what's occurring and amend their parenting to both account for it and counter it until acceptable policies have returned.

It was both unsurprising and disconcerting about two years ago when my middle child - then in middle school - asked why I should worry about being honest.  God knows many others were getting away with robbery.  There was little that I could say apart from the seemingly inane remark that somebody had to maintain some integrity and that there was value to being able to look at yourself in the mirror in the morning.

And that conversation, in a front seat en route home from yet another practice, has stayed with me since then.  Because he is a kid who listens and pays attention and you'd be surprised at how many of the kids, purportedly tuned out, are actually keeping an ear cocked to what's going on. 

A central bank in and of itself isn't necessarily a bad thing.  There is a systemic function to the fulfilled, one that was handled with some ability prior to the onset of the roaring 90s with its deregulation and concurrent unwilllingness by the Fed to allow failure.  Banks are aided by the ability to draw prudently upon a central source for funding in the event of true necessity but the term prudent dictates that this would be in the event of circumstances beyond their own control.  To permit them the unfettered access in the face of their own unbridled greed and foolishness simply teaches them that there are no consequences to poor decisions.  The resultant monstrous misallocation of capital means that we've spent our money on radioactive granite countertops instead of lathes and machine tools that help us compete in the adult world, the one that our kids will be entering. 

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