Wasted Vote

             As a supporter of the Libertarian Party I have been accused of wasting my vote. Today the tables are turned with many Republicans regretting their 2016 vote for Donald Trump, particularly since the Libertarian Candidates at the time were two former successful Republican governors, Gary Johnson of New Mexico and William Weld of Massachusetts, of normally Democrat States. I believe Weld can be credited for turning back a Democrat rule run amuck, something that Connecticut never got.

This year our candidate for President is Jo Jorgenson, frankly not a credible candidate nevertheless a useful marker for Constitution loving conservatives who favor small government and market solutions unable to vote for Joe Biden. Post election the Libertarian Party may become the refuge for conservatives to resurrect the values of honor, prudence and good manners from the ashes Trump leaves behind and retrieve the moral authority to oppose Democrat overreach.

Shovel ready; A new tool for the Federal Reserve Bank now that it has exhausted QE

In the 2008 financial crisis The Federal Reserve Bank under Ben Bernanke developed a policy called Quantitative Easing (QE) which greatly expanded its portfolio of government bonds to release cash into an economy locked in fear. It was meant to give banks and other financial institutions time to clear in an orderly manner the bankrupt assets carried on their books.  But without the crisis forcing hard decisions the cash was not consumed. So it became excess cash looking for yield which drove down interest rates to near zero for safe securities and the not so safe ones as well. This global search for yield raised the value of financial assets to levels that in many cases were not warranted by the underlying economic conditions they represented. Unfortunately the Fed was casual about reloading its weapon so that when Chairman Jerome Powell used it again this Spring of 2020 but it was like shooting blanks. It exaggerated the stock market mania while doing nothing for Main Street looking into the jaws of a great depression.

Interest rates are a well understood pricing mechanism in financial markets but as rates approach zero there is less and less history to guide investors and regulators alike.  Zero is the event horizon below which the arcane formulas of bond traders don’t make sense. It can be argued that QE managed a long and gradual bull market on Wall Street which appeared to be good but its near zero interest rates created a funny money loop built mainly on hope. How else can one explain the high valuations private equity gave to their portfolios to satisfy their pension fund clients’ desperate need for high and otherwise impossible to achieve returns? For example Uber reached a $72 billion private valuation not seen since going public even in today’s frothy market. Most egregious was WeWork’s $47 billion private valuation which in the process of going public had the curtain pulled back from its Wizard of Oz and went to a nil value. An unfortunate characteristic of these private investments was how little of it was in durable assets, infrastructure assets in particular.

What the Fed needs is a new tool, one which in times of crisis puts a greater value on durable infrastructure investments and a lower value on those assets cooked up by Wall Street’s financial engineers. Infrastructure investments are recognized as productivity enhancing ones that promote growth and real job creation but because such investments have years-long lag times for a project to get shovel ready they are useless as a tool for the Fed in times of crisis. But what if they quickly refinanced existing bonded projects acting as an investment banker?

An investment banker who would select to buy a bond, for example California’s high speed rail project currently underway and expensively financed, for the entirety of a project. The proposition would be that the Fed would buy at $100 par value and then sell back at $80 ten years later. This refinance operation would free up resources California could use to direct toward its other obligations. As an investment banker the Fed should be free to ask for these bonding proposals from all public and private regulated authorities they deem suitable and of sufficient size to make a difference and only during the limited time it takes to get an economic recovery underway.

The net long term effect would be to reduce the cost of infrastructure projects in general as the market recognizes that the Fed could buy out already financed ones at a profit to investors when the next crisis comes. Today, with States losing tax revenues from the pandemic induced depression the Fed could refinance many municipal infrastructure bonds and give States a reset opportunity to handle today’s crisis while Congress dithers.      

Infrastructure investments aside, the Federal Reserve Bank would then be free to sop up liquidity and raise interest rates in general to balance out its portfolio with a positive average rate.  Higher rates to bring markets back to traditional well understood values.  Rates which give pension funds and insurance companies an opportunity to cover their future obligations with time tested valuations. And finally the Fed should tolerate failure, at least at the beginning of a crisis to re-acquaint financial engineers with risk and give Wall Street the clear message that it is not its Best Friend Forever.