‘Even if you don’t believe anything is going to come of this — that there won’t be any changes at the Fed — in the near term what it implies is, the risk premium for holding long-term Treasuries needs to go even higher.’
–Kathy Jones, strategist at Charles Schwab & Co.
The deal made at Bretton Woods in 1944 was that the US dollar would be as good as gold, because foreign nations could always turn in their dollars for gold at $35/ounce.
Richard Nixon defaulted on that deal. And since 1971 the tacit deal was that the Fed, independent of politics, would protect the dollar. It would lose value, but at a manageable 2% per year.
The Trump Team seems to be defaulting on that deal too. CNN:
Trump says he has fired Fed governor Lisa Cook. She says he has no ‘authority’ to fire her
The charge against Lisa Cook is that she filed false mortgage applications. Fraud? Error? Nothing at all?
According to press reports, she claimed two places as ‘principal’ residences. That is not exactly the same as ‘primary’ residences. Maybe a person could have more than one ‘principal’ residence. But maybe only one ‘primary’ residence?
In any case, it’s for the courts to decide…as they did in the case against Donald J. Trump. In 2024, the New York State court found the man now accusing a Fed governor of mortgage fraud guilty of, well, mortgage fraud. The trial judge thought he lied about the value of his real estate holdings in order to obtain financing. The fraud finding was upheld by an appeals court last week. But the financial penalty of $450 million was deemed excessive and thrown out. The case is likely to remain on appeal.
Whether the courts would ever bother to look at Ms. Cook’s case, we don’t know. But the real reason for wanting to get rid of her is to gain control of the Fed. This is what Turkey’s big man president, Erdogan, did.
In March of 2021, Erdogan fired a central bank governor who warned of rising inflation. A ‘low interest guy,’ he insisted that the bank stick with extremely low rates (Erdogan has also insisted inflation is actually caused by high interest rates, which force sellers to raise prices because of higher borrowing costs).
The result was, of course, to make inflation worse. Today, in Turkey, the economy is said to be ‘collapsing.’ Its financial reserves are running out. And the inflation rate is 58%. The central bank, not quite giving up on Erdoganomics, has its lending rate at 43%.
Back in the USA, Ms. Cook should be fired. But not because of a mortgage application. The whole Fed clan should be dismissed. Together, they set up the context — the opportunity — of which both Ms. Cook and Mr. Trump took advantage.
That is, they forced down interest rates to such levels that every transaction had a whiff of fraud about it. The effective, after-inflation interest rate on the combined mortgages of Ms. Cook’s house in Ann Arbor and her condo in Atlanta was an impossible 50 basis points below zero. Principal residence or not, all of the mortgages written that year flaunted rates far beneath any honest level.
As for Donald Trump, in 1990, he told Marla Maples that he was worth MINUS $900 million. Back then, his many loans were costing him a lot of money in interest. The 10-year Treasury carried an 8% yield. Mr. Trump was not as good a credit risk as the US government; he would have paid a higher interest rate.
But then, the Greenspan Fed, followed by the Bernanke Fed…followed by the Powell Fed…lowered interest rates down to less than 1% for the 10-year Treasury in 2020. Like black magic, Trump could refinance his debt at lower and lower interest rates.
And as the cost of speculative finance went down, the price for commercial property in the New York area rose. From about $560 per square foot in the ‘90s, average prices rose to over $1,400 by 2020. Loans that appeared unpayable in 1990 were fully collateralized by the mid-‘90s…and in high clover thereafter.
This is why Mr. Trump proudly proclaims that he too is a ‘low interest guy.’ Artificially low interest rates saved his fortune, eventually landing him in the White House. That is far more than they did for Ms. Cook, who just got a couple preposterously low-rate mortgages.
The low rates made Trump rich, but they distorted the entire economy and left most of the country with a pile of debt…now over $100 trillion.
Loose mortgage finance also made housing more unaffordable than ever before in US history. An average house was just $150,000 in 1990. But thanks to the Fed’s low rates, it is now more than $420,000. Median household income, meanwhile, grew only from about $34,000 to around $80,000 — nowhere near keeping up with house prices.
Lisa Cook deserves none of the blame for this. She’s only been at the Fed since 2022. But in getting rid of her — if the courts allow it — Trump clears the way for another yes-monkey at the Fed…a ‘low interest guy’ who will keep the grift going for a few years more.
Hazine tahvilleri sat, altın al. That’s Turkish for ‘sell Treasuries, buy gold.’
Regards,
Bill Bonner,
For Fat Tail Daily
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