Okay Mr. President, you want to talk about “inequality”? Let’s talk about it.

By Nick Sorrentino

Wednesday, January 29, 2014

I woke up this morning to Steve Liesman on CNBC explaining the theme of the State of the Union Address. You see, since 1980 middle class wages have only gone up only 50% in inflation adjusted terms whereas for the top 1% of earners income has gone up by 210%. Something clearly must be done. How can such a disparity be? This is unfair. Can’t the government “solve” this?

The new narrative which has likely been crafted by John Podesta super crony capitalist extraordinaire, is that Congress (specifically the Republican controlled House) isn’t letting the president address the issue of income inequality.

“It’s those old guys who don’t care about you who are holding back the manna from heaven aka Washington DC. It’s their fault not mine. I’m not incompetent and way out of my league even after 5 years in the White House. Not my fault. It’s the selfish and rich Republicans. They want you to remain poor.”

Rally the base when times are bad is the old political wisdom, and times are very bad for this president. Shore up the folks who will defend you no matter what and change the conversation from Obamacare. Anything but Obamacare.

Given that the ACA is Obama’s chief “achievement” to date this is a particularly sad state of affairs. The president’s “pivot” (the word is right up there with “optics” in my book) toward income inequality is a cynical political move. The White House is desperate to regain at least some momentum in the face of a 2013 which was one failure after another.

But since Mr. Obama seems keen on bringing it up, let’s talk about inequality.

Despite what the establishment #oldmedia always say, the increased income inequality that we see is not the result of the “rich” taking advantage of unfettered markets and then making a mint at the expense of everyone else. Capitalism, free markets, free thinking, entrepreneurship, innovation, is not the problem. Capitalism is in most respects the cure. No, the problem is that business and government have increasingly partnered with one another to make some very rich and to shut out others. It’s too little capitalism which is the problem.

Let’s take a look at the most obvious example, Wall Street.

Has Wall Street reaped the windfall it has over the past 5 years because of the free market, because of capitalism?

Absolutely not. Had the free market been allowed to work in 2008 Goldman Sachs, AIG, Citi, Bank of America, and Morgan Stanley would probably be history. These banks leveraged themselves out too far and got caught exposed. Their greed did them in. Mr Market made a margin call and many “masters of the universe” turned out to have feet of clay after all. The banks should have been allowed to collapse so that better managed banks could fill in the space.

The banks weren’t too big to fail. They could have failed and life would have gone on. ATMs would have kept working. The sun would have still risen in the east. The economy after a period of adjustment would have righted itself and emerged much healthier for having jettisoned the poorly managed firms. Lloyd Blankfein would have been out of a job, but he’d have survived somehow in the Hamptons.

But that isn’t what happened as we know. The managers of these institutions knew how to manipulate the levers of power. They were able to engineer a massive bailout, which started at $700 billion and just grew from there. In the years after the bailout bonuses were paid out at the big banks with abandon. These bonuses were for the most part paid for by the American taxpayer. No wonder people are angry.

But the bailouts weren’t capitalism. The bonuses which were paid to Jamie Dimon and friends weren’t a result of “free markets.” They weren’t the just rewards of building a better mousetrap, or even building a better derivative algorithm. They were the result of crony capitalism, a soft form of fascism, which is of course a form of socialism. The bankers made millions because the state redistributed the income of everyday Americans and gave it to Wall Street.

Or take for example the sell off of the taxpayer’s (forced) position in GM at a loss last year. In addition to losing $10 billion on the deal for the taxpayers, the deal done by Treasury unleashes the executives which so long as money was still owed to the taxpayer couldn’t go nuts with executive compensation. Now, after the $10 billion taxpayer loss they and the GM board are free to do as they wish in the pay department.

Or what about the huge percentage of so called “green” energy initiative grants and loans which went to politically connected people in 2009. Folks made millions, in wind, solar, algae, and who knows what else, all again courtesy of the US tax payer. Almost none of the ventures were economically viable. But lots of people got paid that is for sure.

There are probably thousands of other examples over the last 10 years or so (and many more going back way before the past decade,) ranging from war profiteering of all sorts, to cronyism in the new healthcare law, to draconian copyright laws which are a subsidy to Hollywood, to, well, there are many other examples which we have chronicled at Against Crony Capitalism.

So we shouldn’t be surprised that there is so much income inequality. Business and government in this country have partnered up. Sometimes the government has the upper hand. Sometimes business does. But both parties engage in the crony capitalism waltz to enrich themselves, to the exclusion of a large part of the American population.

And at the heart of it all, is the Federal Reserve.

Nothing creates illegitimate inequality (there is legitimate income inequality which exists in a free price system) like the Federal Reserve.

0% interest rates are for the most part pretty good for rich people. Money which is super cheap can be used to speculate and invest at almost no cost. In theory such low rates are also good for home buyers. Low rates keep monthly payments lower. More people buying homes (with lower payments) spurs the economy and then the economy roars back to life as we all buy Sub Zero freezers and SUVs. This was the logic behind the housing boom in the mid 2000s and it is the same logic the Fed is using now (with less success.)

But 0% rates also means that savers are hung out to dry. The prudent middle class is hammered. Those who have a nice nest egg built up over a lifetime of hard work and thrift find that unless they take on significant risk there is no return for their money. $500,000 in a CD not so long ago yielded an yearly payout of $25,000. Now because of the Fed keeping money cheap artificially that same $500,000 might yield $5,000 on an annualized basis if one is lucky.

Over time granny finds that $5000 per year isn’t enough to get by on even though her house is paid off. She finds she must dip into her nest egg a little more each year, which also in turn lowers her already modest yield. Soon the nest egg is gone.

Of course she can always seek increased yield in other places like the stock market, (which though they won’t say it is exactly where the Fed wants granny to put her money) but widows and orphans really have no business there. It’s bad enough for granny to lose her pool of wealth over years. Losing much of it in an afternoon is tougher to take. But that is what our current monetary policy encourages.

Not so long ago granny could keep up. She could beat inflation and pay her living expenses. When she died her wealth was passed on to the next generation.

But now, thanks to the Fed and it’s policies which benefit the hedge fund guys instead of the average saver it is unlikely that much of granny’s wealth will be passed on. Wealth has been pulled from the middle class.

“Inequality” has been exacerbated by a government which is too large. The only way to get the economy on track is to lessen the footprint of government. Free prices. Free markets. Let people create. Make it easier to start businesses

But Obama is unlikely to talk about how after years and years of failure government must now get out of the way. (Boy how great would that be?) Or how government sponsored public/private partnerships steal money from the average American. Or how the government enabled the biggest bonus binge Wall Street has ever seen. Or how granny is getting clobbered because of loose monetary policy.

No, he will talk about how the economy has worked for the “rich” while others have fallen behind. But he won’t call for freer markets and an end to price fixing at the Federal Reserve. He will instead insist that government “do something.” What that something is I’m not sure but the term “shovel ready” will likely make an appearance somewhere along the line, with its old buddy “infrastructure improvement.”

The president will continue to wag his finger at the House GOP a bit and threaten to use executive actions to go around them. He’ll try to look like he means business.

Obama also talks about the need to raise the minimum wage, which is basically economic suicide but makes for good sound bites. He will give hope to people who are hurting but who unfortunately may not understand that if the minimum wage is raised they may soon be out of a job.

In short Obama will be long on proposals, long on rhetoric, but woefully short on understanding. Pretty much the to story of his presidency before the the most recent State of the Union address.