Bernanke Is Underwriting The Wealthy

by: John M. Mason

Ben Bernanke may not believe in asset bubbles, or, at least he doesn't seem to worry about them. (See "Bernanke Not Worried About Asset Bubbles.") But, smart, wealthy people like the way Mr. Bernanke thinks. And, they like it all the way to the bank.

Henry Kravis and George Roberts, co-founders and co-chief executive officers of KKR & Co. took home $137 million last year. This came in the form of both pay and cash dividends. (See "KKR's Kravis, Roberts Made at Least $137 million in 2012.") The company had reported earlier this month that net income more than quadrupled in 2012 from the previous year. The increase, they said, was driven by "KKR's more than 20 so-called liquidity events during the year, selling assets and stakes in holdings, and a 24 percent gain in the value of its private-equity holdings."

Scott Nuttall, KKR's global head of capital and asset management, reported earlier that, "Our portfolio is performing our cash distributions are starting to flow and our balance sheet is generating attractive returns." He added, "KKR returned over $9 billion to its investors, a record for the firm."

Why is this not surprising? Of course, not everyone wins like this. But, the crucial factor is that for those that have the money and are smart or have the money and can hire people that are smart, you take advantage of what the government is doing. That is where you can make really big bucks!

For example, the old rule, "Don't Fight the Mission of the Fed" still holds true today. Is this hard to figure out? The Federal Reserve has engaged in a policy of quantitative easing for how many years? For more than four years. Really? That many! Yes, that many!

The Fed has been creating a big tidal wave of liquidity through the financial markets…and it has just been pushing in one direction. How smart does one have to be to bet WITH this government's policy?

Ask George Soros. Wasn't he the one that took advantage of the policy of England's government to peg the value of the pound, something that almost everyone knew could not be done. And, he made millions.

And, we have déjà vu all over again: "Soros Make A Billion Shorting Japan." So did a lot of other "smart" people! In these latter two cases, the government tried to "peg" a price; in the current situation the Federal Reserve is trying to increase prices. So, betting with government mission depends upon the intent of the policy. The rest of the government also plays the game. As I wrote in the post about the mission of the Fed:

"Over the past fifty years or so, the federal government, supported by the Federal Reserve, created credit by the billions of dollars in order to keep unemployment at low levels and to foster home ownership for the middle class and below. We had a sustained period of "credit inflation."

Three things happen in a period of credit inflation: people take on more and more risk; people build up more and more financial leverage; and people engage in financial innovation. The last fifty years is known for all three of these things happening.

And, during this period, more and more people went to work in the financial and more and more companies added financial subsidiaries. By the early 2000s, a substantially greater percentage of Americans worked in the financial sector than ever before. And, many manufacturing companies, like General Electric (NYSE:GE) and General Motors (NYSE:GM), earned more than fifty percent of their profits from their financial subsidiaries.

The "mission" of the federal government and the Federal Reserve System was to provide the economy with high levels of employment and greater degrees of home ownership." And, what do the "players" do? Quoting Charles (Chuck) Prince, the CEO of Citigroup, ""As long as the music is playing, you've got to get up and dance."

And, it is important who takes the risks first, who increases leverage first, and who innovates first. The first movers in the financial markets are usually the biggest winners. Those that come later don't make as much. And, those that come last, well, they generally are on the losing end.

In most cases, it is less wealthy individuals that are the last movers. The Federal Reserve started QE1 in November 2008. So, the Fed has been pushing quantitative easing, more or less, for more than four years. Furthermore, the Fed contends that is will continue for a while longer.

Mr. Bernanke may not be worried about asset bubbles but asset bubbles do take place! Why do I say this? Because a lot of people make an awful lot of money from the extraordinary movement of prices in certain asset markets at certain times. This is the way markets work!

Take a look at the credit inflation of the last fifty-some years. The income distribution in the United States became more and more skewed toward the wealthy. Why? My answer to this is that if you carry on a policy of "credit inflation" for this long, people are going to learn how to "game" the policy. And, in general, the wealthier can "game" the system better…and they get wealthier.

Using this argument, one could argue that it is only fair that President Obama "tax the richest" more because President Obama's policies are benefitting the wealthiest the most! This is because they, the richest, are betting WITH President Obama's policies of credit inflation!

By-the-way, Stephen Schwarzman, the CEO and co-founder of Blackstone Group, L. P. an alternative asset (shadow banking once again) management group, made more than $213 million in 2011. The company said it would disclose compensation of its executives at the end of the month.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.