PANC 2014: Has the Fed Jumped the Shark?

In a time when corporate merger activity is benefiting CEOs and shareholders, but creating few jobs, Bloomberg TV host Trish Regan asks how to make growth benefit more Americans.

Regan, also a USA Today columnist and author, addressed a variety of macroeconomic trends during the keynote address at the 2014 PLANADVISER National Conference, held last week in Orlando, including the Federal Reserve Bank’s leadership in the wake of the global financial crisis. She recalled her astonishment when Lehman Brothers, one of the largest investment banks in the United States that had been around since 1850, declared bankruptcy in 2008. Making a comparison to the situation we are in today, Regan said that we have a tendency to run into bubbles and the Fed plays a large role in that. Regan asked, “Are we running into another asset bubble of a different kind?”

As Regan observed, the U.S. has recently seen some of the weakest annualized growth measured in a post-recession period. Retail sales are down, and we will be lucky to get 3% growth in the second half of this year, she pointed out. These realities are gloomy, but Regan suggests the real danger could be the ongoing attempt to fight the last financial crisis.

“It is the law of unintentional consequences,” Regan said of the Fed’s lasting stimulus-related efforts. “While the Fed is trying to fight the last crisis, they’re inadvertently creating another one.”

Regan specified several key problems in the U.S. economy. First, corporate mergers result in increased stock prices and are good for productivity; however they do not produce positive benefits from a job-creation standpoint. There are currently 7.51 million Americans working part time that want to work full time, but cannot find jobs, she said. To further complicate things, wages are not keeping up with inflation.

Second, Regan stated that many growing companies are receiving high valuations, sometimes before they are making money. She pointed specifically to high valuations for Uber, Snapchat, and even the Los Angeles Clippers basketball team. Regan said the Fed could be driving up asset prices by making credit relatively easy to obtain. This issue of “cheap money” also affects retirement, she said, because retirees are constantly searching for yield and are getting involved in riskier investments.

The third problem Regan addressed was explicitly related to the housing industry. Although purchases might be up, much of that purchasing is being done by investors, not new home buyers; a lack of confidence persists in the market.

Regan was quick to add that the Fed is not solely to blame for current macroeconomic challenges impacting the largest corporations and individual retirement savers alike. Many problems stem from “regulatory overhang” from Washington. Regan said there is fear in the industry that Washington could eventually engage in tax reform that looks to secure new revenue at the expense of retirement-related tax credits.

However, at this point, neither side of the aisle will agree to a meaningful tax reform, meaning the industry still has breathing room to try to positively impact tax reform decisions, Regan said. “Our current tax inversion laws inadvertently encourage companies to invert now because they may not be able to do so later,” she added. The result is a disproportionate number of companies thinking of relocating overseas now. Regan specifically pointed to Burger King’s acquisition of Canada-based Tim Horton’s.

“This is what happens when we have the highest taxes,” Regan said. “Companies have a responsibility to their shareholders and need to make the best decision for them.”

What’s the solution to all these problems? Regan proposed a need for improved growth, employment, wages, and quality of jobs. “We need to build demand in a slow economy,” she said. Her solution also involves an optimistic view from the Fed in the form of raised interest rates. She explained that people would be incentivized to go out and buy now, before rates move even higher.

“If Americans believed that they could borrow at this rate for only a short period of time, they would be incentivized to borrow now,” she said.

With regard to Washington, Regan discussed a need for fiscal and monetary policy to work together, as the U.S. government impacts the economy with its decision and policy-making. Regan reassured attendees that she does not believe the country’s current situation is as troublesome as it was when Lehman Brothers went under. However, to see improvement, the Fed, in conjunction with other parts of the U.S. government, must work to set standards and make reforms that will benefit the economy as a whole, she concluded.