Bernanke’s Neofeudal Rentier Economy…


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From CHARLES HUGH SMITH
oftwominds

The Fed has directly created a neofeudal rentier economy and society.

Federal Reserve Chairman Bernanke is a Reverse Robin Hood, robbing from the lower 95% and giving to the financier class. The Real Reverse Robin Hood: Ben Bernanke and his Merry Band of Thieves (August 31, 2012).

It’s worth understanding the mechanisms of this wealth transfer: in essence, the Fed extends low-cost credit (i.e. “free money”) to the financier class which then uses this free money to buy rentier assets, that is, assets that generate economic rents for the owners, who add no value and create no wealth.

This is of course the neofeudal model: the financial aristocracy in the manor house own the rentier assets and the debt-serfs toil away to pay the rents and taxes. The financier class (i.e. those that benefit from the financialization of the economy) are as unproductive as feudal lords; they skim the profits generated by the debt-serfs while adding no productive value to the economy.

Financialization and Crony Capitalism Have Gutted the Middle Class (July 13, 2012)

The E.U., Neofeudalism and the Neocolonial-Financialization Model (May 24, 2012)

Why Krugman and the Keynesians Are Lackeys for the Neofeudal Debtocracy (April 24, 2013)

(I separate the bottom 95% from the top 4.5% and the .5% financier class for several reasons: 1) most of the stocks and bonds are owned by the top 5%; 2) the top 4.5% is shedding debt while the bottom 95% are adding debt; 3) the income of the top 4.5% is rising while household income of the bottom 95% is declining, and 4)the top 4.5% have access to lower-cost credit than the bottom 95%, but they do not have access to billions of dollars in nearly-free credit from the Fed or the shadow banking system like the financier class.)

 

Let’s take rental housing as an example of this Fed-driven rentier economy. The financiers borrow $1 billion in nearly-free money and use these funds to buy thousands of houses for cash. Since they can offer cash, they beat out households with approved mortgage applications.

This is the story one hears anecdotally: potential home buyers have a mortgage application approved, all they need is to have their offer for a house accepted. But the house is sold to an investor with cash.

So while the Federal housing agencies are offering low-interest, low-down payment mortgages to marginally qualified (or flat-out unqualified) buyers, the Fed is enabling the financier class to outbid conventional homebuyers.

Here’s the key dynamic: cash earns no return, thanks to the Fed’s zero-interest rate policy (ZIRP). This means the interest rate paid by the financier class is also near-zero. So the trick is to take all those billions of nearly-free dollars and use them to buy assets returning 3+% annually.

These include rental housing, stocks that pay hefty dividends (for example utility companies), municipal bonds, long-term Treasuries, dividends based on patents and royalties, and everyone’s favorite low-risk investment, state-sanctioned monopolies and cartels. (no wonder Big Pharma stocks have skyrocketed.)

Zero interest rates rob from the bottom 95% who do not have equal access to low-cost credit and transfer that wealth to the rentier-financier class. The bottom 95% provide the capital (pension funds, 401K accounts, checking and savings accounts, etc.) for zero return, but their access to near-zero cost credit is restricted.

The financier class then borrows money from the Fed (or the “shadow banking” non-bank credit system that is ultimately backstopped by the Fed) at near-zero rates, which it then uses to buy rentier assets that yield 3+%. The financier class then skims the rents from the debt-serfs, who have been effectively robbed of trillions of dollars in lost interest by the Federal Reserve.

The Fed has directly created a neofeudal rentier economy and society. Giving the financier class unlimited access to free credit with which to buy rentier assets serves two purposes: 1) it drives the valuations of rentier assets ever higher, creating the useful (in terms of propaganda and perception management) illusion of economic vitality, and 2) it greatly enriches the financier class at the expense of the bottom 95%.

Goebbels would approve of the Fed’s masterful propaganda campaign: rob the bottom 95% to benefit the financier class, all the while piously proclaiming that its policies were aimed at increasing employment for the bottom 95%.

In terms of propagandistic chutzpah, it doesn’t get any better than this. Congratulations, Bernanke, Yellen, et al.

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One Comment

It seems that most commentators on the economy are confused. They think therefore they are confused. Take this article for example. It supposes, like they all do, that our financial system has just gone amok, that no one is to blame really, it’s just the Capitalism you see.

This argument holds less and less water all the time. I find myself substituting the phrase “organized criminal activity” for Capitalism so the text makes some sense. The top most earners are simply stealing, conspiring to rob the rest of us with all the tools of the criminal persuasion. Not that I am a fan of the capitalist system (mostly because it nearly inevitably leads to the sort of orgy of organized criminal activity that afflicts us now). It is just that when I look around I just see a panorama of crime posing as legitimate financial activity, as Capitalism.

We would be better off if we focused on the organized crime aspect and left the economics for later, that is if the Propaganda State would allow this. This is not the fantasy organized crime of the movies. It has countless numbers of well trained and talented servants to mystify us, to employ the smoke and mirrors of mass media, to distract us with manufactured events. Organized criminal activity has evolved in the post WWII era to become an all embracing phenomena. The “economy” always had shades of grey, but now it is increasingly black. Nothing is allowed to appear as it is. Welcome to the Pirate Paradise, soon to become a smoking crater. Crime is the State.

There is some interesting work done on the topic, McMafia: A Journey Through the Global Criminal Underworld by Misha Glenny is an example, but no where will you find a true account of the vastness of the criminal space. Journalist know to stay away. What happened to the Pulitzer Prize winning journalist Gary Webb over his in depth investigation of US government involvement in the crack trade, is enough of an object example to warn off any sufficiently talented and intelligent researcher from ever looking that way again.

I have been having some success getting a sense of what is going on by selectively watching Russia Today English. Funny really. In the wake of the collapse of the Soviet Union organized crime moved into Russia in a big way. Russian oligarchs are about as bad as it gets, but still they tolerate some truth, as long as it is in English I guess.

Here we go down the garden path.

yerba

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