The great wisdom traditions of the world maintain that while the individual has a great capacity for personal transformation, in the aggregate, humans function within a certain range, or standard deviation, of behavior. The same is true for human societies.[1] Thus the words of French novelist, Jean-Baptiste Alphonse Kar, “The more things change, the more things stay the same.”

Far older is Solomon, “There is nothing new under the sun…is there a thing of which it is said, ‘See, this is new’? It has been already in the ages before us.”

It is for this reason we say that history rhymes. At present its rhythms are resounding. In that spirit we republish an essay originally composed in 2011, The Forgotten Man.

For many of us under the age of 70, the Great Depression is a series of grainy, black-and-white photographs of listless faces atop gaunt frames; of bread lines, of Hoovervilles, and of Dust Bowl farms. To be sure, the younger we are the hazier the image.  However vague or vivid our impressions of the past, today’s ranks of the unemployed and the foreclosed engender renewed fear that a similar fate may yet befall another generation.  Fear (as Franklin Delano Roosevelt famously expressed) is a powerful emotion that, when mixed with empathy for today’s downtrodden, frequently drives public opinion and therefore public policy.

Unprecedented trillions of dollars are thus being expended by the public sector to steer the economy back onto a growth trajectory and ease the circumstances in which the jobless or overleveraged find themselves.  Nobody can predict with certainty how the excess of our national debt will be purged by generations to come, but a huge part of the tab is currently being paid up front, a fact that not many observers talk about publicly.  You may be surprised to learn who is writing those checks.

For simplicity’s sake, let’s examine the crisis being addressed using basic mathematical logic. Expressing the parties affected as an equation, I’ll identify the highly visible first variable, the jobless and people who have lost their homes (or who are at risk of losing them), by giving it the letter “A,” perhaps for “anguished.” The plight of A causes quite a stir among those who constitute the second variable, “B,” the “bureaucracy,” an expansive and disparate group that I identify as the whole of the federal government, including our nation’s central bank, the Federal Reserve.  Those who comprise B have put their collective heads together to legislate or dictate a series of ad hoc measures attempting to redress the headline-grabbing problems.  But this is not yet a balanced equation.  There is an important missing variable, which I shall call “C,” the “compromised.” Since “B” controls both legislation and policy, it determines what “C” shall do for “A.”  Indeed, without “C,” no program could be implemented at all.  That is a fact conveniently overlooked.

I have chosen to speak up on behalf of C precisely because C has no united voice—no union, no lobby, no ardent advocates in high places, and no vote (at least concerning Federal Reserve monetary policy) on the question of what B decides C shall do for A.  To be sure, C’s multitudes surely outnumber A and B combined, but the interests and welfare of C, along with its integral role as the embodiment of the nation’s most fundamental values, are generally ignored in the face of the more gut-wrenching and attention-getting Page 1 saga about A.  As the story unfolds, C becomes an unwitting participant in its own dismemberment.  Stated as part of our simple math equation, in the transfer of a dollar to A, the state is doing great harm in taking the same amount from C.  It is a dollar that, unlike either A or B, C—the Forgotten Man—has actually earned and saved.

The harsh reality is that B, the policymakers, are doomed by “fatal conceit.”  In profoundly complex systems like economics, the few who deem themselves capable of manipulating markets usurp a power that no small group should be permitted to wield in a free state.  In their arrogance or naïveté, these tinkerers risk upending a social order of trade that transcends human design, having evolved from the free interplay of billions of individuals over the millennia. Fixing the price of money in favor of the borrower becomes the subtle mechanism for engineering a transfer of wealth from C to A, creating huge distortions in behaviors and the allocation of resources.

The Forgotten Man is a phrase resurrected in recent years by author Amity Shlaes in her book recasting the Great Depression.  It was perhaps coined much earlier by political economist and sociologist William Graham Sumner late in the 19th century in a somewhat different context.  Because of its cultural and historical origins, the term Forgotten Man ignores modern standards of political correctness, but is here taken to include both men and women, who are indeed a vital component of the 21st-century workforce.

So who exactly is this person?  Today’s Forgotten Man is a saver, perhaps first among his socially responsible virtues.  It is not the amount he saves, which is often not much, but rather that it is in his character to save. In economic terms, he has learned self-discipline, to defer gratification in the present with the expectation that (1) he will have more to consume in the future if he wishes, and (2) he will have a cushion if a distant tomorrow falls short of what he had expected.  He is among the minority of Americans who have at least some familiarity with what Albert Einstein purportedly called the “greatest force in the universe”—compound interest.  Self-reliance, industriousness, and personal accountability are among other characteristics attributable to the Forgotten Man.  He (or she) shows up for work every day and rarely utters a complaint.  Unwavering fiscal conservatism means that he will never have all he desires, which is one of the sacrifices he must make for never having to worry about losing his home to foreclosure.  We all know many forgotten men.  They are, in short … us.  Or at least what each one of us might aspire to be.

Unlike A (the “anguished”), the Forgotten Man asks little of B (the “bureaucracy” or the “interventionists”), beyond the assurance that his earnings and savings are protected against abuse of power by the state.  Though cut from a different cloth than the Fortune 500 CEO, he nevertheless functions at his best in a rigorous and dispassionate market economy.  All he humbly asks is a level playing field.

The chairman of the Federal Reserve board, Ben Bernanke, in a June 7, 2011, speech before the International Monetary Conference, summarized the Fed’s role in directly or indirectly reducing the burdens of A.  He said there had been “no net cost to the federal budget or the U.S. taxpayer” in the trillions of dollars of monetary relief provided thus far.  Through the mysteries of financial alchemy, apparently, Dr. Bernanke would have us believe that Americans were served a free lunch.  Sadly ignored in the chairman’s “no net cost” assertion, however, was the silent man’s simple request.  Once again, he had been forgotten.  The chairman thus presented an equation with a missing variable:  C.  In truth, by tilting the playing field, the Fed’s cheap monetary policy may well have come at the cost of an incalculable transfer of wealth from the Forgotten Man.

Because Keynesian fiscal stimulus has run headlong into the political and practical wall of mounting debt and deficits, the comparatively opaque central bank is the last man standing, ostensibly on behalf of A.  Largely unencumbered by political constraints, the Federal Reserve System has used its “power of the press” (the kind that prints money) to drive the cost of credit to near zero for 2½ years, with no end in sight.  The Fed’s task has been made much easier by the dearth of borrowers, a phenomenon economists call a “liquidity trap,” which visually resembles pushing on a string.  Despite the expenditure of great effort and resources on one end, not much happens on the other end.  By intervening in the otherwise free markets for money, the Fed has sought to lower the cost for borrowers whose needs it has determined take precedence over the rights of those who extend credit at the household level:  the saving class … our Forgotten Man.

The complexity of reality is the nemesis of central planners.  After “dropping dollars from helicopters” from the moment the financial meltdown first knocked policymakers off their pins, Fed Chairman Bernanke appeared battle-weary at a more recent press conference on June 22.  In stunning contrast to his upbeat defense of Fed policy two weeks earlier, he downgraded projections for U.S. economic growth and unemployment in an equivocating statement:

We don’t have a precise read on why this slower pace of growth is persisting. Maybe some of the headwinds that had been concerning us—like weakness in the financial sector, problems in the housing sector, balance sheet and deleveraging issues—some of these headwinds may be strong or more persistent than we had thought.

It’s looking increasingly likely that B’s decision to expropriate the wealth of C on behalf of A—through the medium of stimulating economic growth through lower interest rates—is not having the intended effect.

As sure as 2 plus 2 equals 4, the Forgotten Man’s loss of interest income must be someone else’s gain.  First among them, the still ailing banking industry has been given a reprieve from the consequences of its own recklessness.  With depositors earning meager interest on their savings, banks get a boost to their income statements.  On the other side of the ledger, below-market interest rates to borrowers—combined with the willingness of desperate banks to defer principal payments—postpones the day of reckoning for zombie commercial real estate loans.  This “extend and pretend” tactic, as it has become known, is the equivalent of a balance-sheet makeover.  Regulators have played the role of enabler, focusing only on the tip of the iceberg:  namely, whether loan interest payments are current.

There is a marked difference with the residential mortgage market.  Because of the arm’s-length nature of the relationship between borrower and lender when loans are securitized, the potential for give and take between homeowners and their lenders is the victim of complexity.  Additionally, foreclosures in the residential mortgage market are rampant because individual homeowners are powerless to dictate terms to their lenders, compared with the typically much larger commercial borrowers.  To paraphrase Keynes:  “If you owe a bank thousands, you have a problem; but if you owe a bank millions, then the bank has a problem.”

Second, a zerointerestrate policy has been a bonanza for the speculative class.  With limited demand for money in the real economy, speculators have borrowed heavily and cheaply to finance trades in almost any asset, including U.S. stocks, which have doubled in price since the Fed began its helicopter assault.  But what about today’s retail investor?  When stock prices rise, dividend yields fall.  From today’s price levels for the S&P 500, dividends produce a historically paltry 2% yield to income-seeking investors, less than half the century-long average of almost 4½%.  Viewed through the lens of time, yields from common stocks fell to all-time lows of just over 1% at the height of the insanity during the Bubble and soared to record highs of near 14%, not surprisingly, in the depths of the Great Depression.

Third, low-cost money is a principal explanation of why Congress has been able to put off fighting the politically toxic twin battles of debts and deficits for so long.  Although the national debt has shot up a jaw-dropping 255% from $5.6 trillion in 2000 to $14.3 trillion today, our interest payments on that debt have risen a minuscule 14% over the same time period.  If interest rates had not been pushed lower by the Fed since early in the decade, our annual federal budget deficits would have moved up on the national agenda much sooner.

That is the predicament of America’s Forgotten Man.  He seeks a fair return on his savings, but none is to be found in his old familiar haunts.  The unintended consequence of a monetary policy that has tilted the playing field in favor of the borrower for far too long is that the purposeful, reliable saver must accept a yield of next to nothing or venture out of his comfort zone in search of it elsewhere.  Stocks and longer-term or lower-quality bonds could be the bait in the jaws of a bear trap.  Their dividend and interest yields are alluring compared with the meager interest of typical savings accounts these days, but if stock prices fall, credit quality deteriorate, or longer-term interest rates rise, the capital losses would be the equivalent of the jaws slamming shut on the family dog.  Should that final insult occur, it will be a generation before the Forgotten Man has the stomach to venture again.

Indeed, the Forgotten Man, through whom many of America’s most cherished values are handed down, will have borne a disturbingly disproportionate share of the burden of the socialization of risk and will have little but scars to show for it.  Ben Bernanke’s promise of an openhanded, zero interest rate monetary policy extended “as long as necessary” stealthily robs Peter to pay Paul.  It effectively offers up the Forgotten Man as a sacrificial lamb. A warning to those in power:  Societies have crumbled for lesser transgressions.

© Martin Capital Management, LLC, June 29, 2011.  All rights reserved.

[1] Public Theologian Reinhold Niebhur detailed this notion in the post-war era among American intellectuals with his book, Moral Man, Immoral Society.

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