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Willful Misconduct?

June 29, 2014

Recently a former employer presented me to my state as having conducted myself with “willful misconduct” and I am thankful that thanks to my states’ law, they were able to see through this nonsense and rule in my favor.

Now, having said that, let me share with you that this former employer is the Vanguard Group via Randstad, a temporary staffing agency. The Vanguard Group referring to me as engaging in willful misconduct is the classic case of the pot calling the kettle black. A few months ago the Vanguard Group put out a flyer making the statement that there is no manipulation of the markets and their clients can go back to sleep and being good consumers while leaving their hard earned investments in the care of Vanguard. The Vanguard Group is either an investment firm with a poor understanding of economics or they are engaging in willful misconduct.

I venture to say they are the ones engaging in willful misconduct because they must know that the Federal Reserve has been keeping artificially low interest rates for quite some time now and that has had a negative impact on savers and small-time retail investors. Could it be that Vanguard focuses on exclusively recruiting and licensing recent college grads who are just too young and don’t have enough experience to properly guide their clients in investment decisions that are in their best interest? Why doesn’t Vanguard inform their retail investors that the Federal Reserve’s zero-interest-rate policy causes a $400 billion-per-year wealth transfer from everyday North Americans to large banks. Why doesn’t the Vanguard Group educate its retail investors that part of the Fed’s design is to penalize savers and discourage them from leaving money in the bank, and to encourage them to invest in risky assets, such as stocks and real estate, to prop up collateral values in those markets.

Luckily, many savers are inherently conservative and with good reason. This part I do have to give credit to the Vanguard Group in spite of their petty way of dealing with a situation that I handled correctly and in accordance with the advice I was given my the individual in charge of the department I was working in. Using the language of Cesar Millan, sometimes companies feel threatened when you make a good decision on your own because it shows them they are not in control of you and that’s not acceptable to them. A lot of U.S. companies have temperamental and insecure people in leadership positions that have no business being there. In spite of this, Vanguard understands an eighty-two-year-old retiree does not want to invest in stocks because she could easily lose 30 percent of her retirement savings when the next bubble bursts. A twenty-two-year-old professional saving for a down payment on his first condo may avoid stocks for the same reason. Both savers hope to get a reasonable return on their bank accounts, but the Fed uses rate policy to ensure that they receive nothing. This is where Vanguard fails to guide their clients. As a result, many citizens are saving even more from retirement checks and paychecks to make up for the lack of a market interest rate. So a Fed manipulation designed to discourage savings actually increases savings, on a precautionary basis, to make up for lost interest. This is a behavioral response not taught in textbooks or included in models used by the Fed. So hiring recent grads and licensing them right away to work at an investment company may be engaging in willful misconduct to clients.

Federal Reserve policy has also damaged lending to small and medium-size enterprises (SMEs). This does not trouble the Fed or Vanguard, because it favors the interests of large banks.

The resulting credit crunch for SMEs is one reason unemployment remains stubbornly high. Big businesses such as Apple and IBM do not need banks to fund growth; they have no problem funding activities from internal cash resources or the bond markets. But big business does not create new jobs; the job creation comes largely from small businesses.

Before the 99 percenters go after free market capitalism as the culprit here, let me make clear that the Federal Reserve is not the function of a free market capitalist system, but rather the function of a centralized planning system also known as communism. Karl Marx promoted centralized planning, that’s what the Federal Reserve is, a centralized planning banking system. Adam Smith and Friedrich Hayek warned of the impossibility of the Fed’s task and the dangers of attempting it when they criticized centrally planned banking. You cannot centrally plan an economy without paying attention to market signals. Its true here and it was true in the Soviet Union. The free market is that force I call reality and you cant change the nature of reality. Instead, reality will teach you how wrong you are. The Fed does rely on whats going on in the market through price signals, but they try to attempt to manipulate those price signals via the market. So what happens when you manipulate markets using price signals that are the output of manipulated markets? What happens is called Goodhart’s Law.

Goodhart’s Law says that the central planner must suspend belief in one’s own intervention to gather information about the intervention’s effects. But that information is a false signal because it is not the result of free-market activity. In plain English, the central planner has no choice except to drink his own Kool-Aid. This is the great dilemma for the Federal Reserve and all central banks that seek to direct their economies out of the new depression. The more these institutions intervene in the markets, the less they know about real economic conditions, and the greater need to intervene. Meanwhile, people like you and me look on in amazement wondering why they cant figure out while we struggle to make ends meet.


From → Economics

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