WASHINGTON, DC – APRIL 11: Stephen A. Schwarzman, Chairman, CEO and Co-Founder of Blackstone speaks … More
The Federal Reserve is irrelevant. Market signals continue to confirm the previous truth while economists and pundits continue to follow what’s irrelevant in breathy fashion. In future decades and centuries, economic archaeologists will marvel that what was so unimportant was taken so seriously.
To recognize the Fed’s insignificance, all readers need to do is contemplate all the attention given the central bank by economists and pundits. They are literally following the rate fiddling of an outsourced-by-Congress, would-be price controller within the federal government. Think about that, and in thinking about it ask when price controls have ever correlated with accurate prices in concert with an abundance of the market good controlled.
To think about what the Federal Reserve aims to do whereby it would price control the most important price in the world other than the dollar is to know that the Fed controls nothing. Evidence that it controls nothing can be found in the happy truth that the U.S. economy is the world’s biggest and most dynamic. Such an economy would never achieve the descriptors from the previous sentence all the while having the cost of credit within it controlled by central planners.
After stating the obvious about the U.S. economy being too large to be centrally planned, we can just look around us. The financial services industry in the U.S. isn’t gargantuan because the Fed is powerful, but once again, precisely because it’s not.
Take the recently reported news that private equity behemoth Blackstone Group recently closed on an $8 billion commercial real-estate debt fund. Better yet, consider the Wall Street Journal’s description of the fund’s impetus: after 2008, “bank appetite for real-estate risk greatly declined.” Well, of course it did, and the reduced appetite for risk could be seen in banks and the Fed going to zero.
Banks aren’t and can’t be in the business of losing money, so the surest sign credit conditions were extremely tight from 2008 and beyond could once again be seen in banks and the Fed going to “zero.” Contra conventional wisdom, low rates signal extraordinary risk aversion exactly because compound returns are the most powerful force in savings and investment.
To presume that “zero” ever correlated with zero was not just to dismiss compounding, but it was also to presume that the Fed was and is the only governmental entity capable of decreeing abundance via artificially decreed lower prices. No, not possible.
Blackstone’s fund shows how it wasn’t possible. Blackstone didn’t raise this kind of money for commercial real estate lending because banks are aggressively lending, but precisely because they weren’t and aren’t.
While odd convention tells us to watch what government does, actual markets continue to operate like actual markets. As governments pretend against logic and reality that they can decree cheap abundance, real markets tell the truth. They did, and they still do.
Much more important, the more that the Fed stabs at price controls that are an effect of banks rushing away from risk, the more that true markets will form around the fake ones. In other words, Blackstone’s credit fund isn’t its last and it likely won’t be its largest. To track interest rates, watch Blackstone, not the Fed.
