Grounded by government

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MARY REICHARD, HOST: Coming up next on The World and Everything in It: The Monday Moneybeat.

NICK EICHER, HOST: Time now to talk business, markets, and the economy with financial analyst and advisor David Bahnsen. David heads up the wealth management firm The Bahnsen Group, and he is here now. 

Good morning, David!

DAVID BAHNSEN: Well, good morning, Nick. Good to be with you.

EICHER: Well, David, two years ago, federal regulators … in the Biden administration … blocked a merger, proposed merger, between Spirit Airlines and JetBlue. This in the name of protecting competition. 

Saturday morning, Spirit announced it is winding down operations—17,000 jobs affected, just gone, and travelers stranded.

So how to think about this: a deal in the private economy that might have kept these planes in the air, the government steps in and says it’s anticompetitive … and now you’ve lost an ultra–low-cost competitor.

BAHNSEN: Well, it’s one of the most atrocious stories of government intervention into the market that I’ve ever seen. And the reality is that the judges who, the DOJ blocking that JetBlue merger, said a private market solution was not good enough cause a certain thing was going to happen. And what that thing was is that consumers would lose a low-price option, potentially. And so their fear of something that may have happened led to it guaranteeing that it happened.

And it is just outrageous that JetBlue was willing to be the risk taker, they were going to put up $3.8 billion in debt and equity to take over the beleaguered airline. They probably would have made it work, cause the cost synergies that their combined airline, with more capitalized strength behind JetBlue’s more established brand and business operation, and they blocked it on something that made no sense whatsoever.

And then now, who were the people they were trying to protect? Consumers that liked paying $49 for a subpar airline. Well, now they don’t have that option anymore.

So it will be sold for parts, essentially, and they’ll have an orderly liquidation. And I’m very grateful that a government bailout didn’t happen, I’m very grateful that they didn’t try to go claim national security emergency, which is what was being proposed for a couple days.

But I’m really upset that what should have happened a few years ago that would have protected jobs, protected consumers, protected financial actors, whether it be investors or lenders, a JetBlue merger, it was the right solution that the free market presented, and the government blocked it, and now here we are with more people hurting.

EICHER: Well David, last week’s meeting of the Federal Reserve had a bit of an end-of-era feel—Jerome Powell’s final meeting as chairman of the Fed, but not his final meeting with the Fed. He is staying on as a member, highly unusual. 

But as for the meeting itself, again, no reduction of interest rates, but we did get a strong signal of division at the central bank. Dissenting views published among the members of the FOMC … the Federal Open Market Committee … suggesting some possible turmoil, a little bit of palace intrigue at the Fed. 

What is the story there?

BAHNSEN: Yeah, we’ll have to see if it becomes turmoil. I think it is certainly not what we’re used to. I think that the stage is being set for some potential turmoil because you know, you’re just used to there being a fair amount of consensus amongst Fed governors. There’s disagreement, there can be some dissent. It’s usually one vote that’s against the majority; there’s been two.

But the idea that we might get to a place where almost every Fed vote is a 50/50 or near 50/50 situation, I haven’t seen it. It hasn’t happened in my adult lifetime. I don’t know that it will go there because it’s very possible some votes that governors have been giving will go differently with a new Fed chair. There is a tradition of a lot of deference to the Fed chairperson.

And by the way, Kevin Warsh, incredibly convincing and persuasive person who now is going to have a chance to go make an argument and persuade his fellow colleagues, who are themselves quite accomplished senior people. He’s going to attempt to make an argument, and that’s what the point of Federal Open Market Committee deliberations is, is to make an argument.

The thing of Chairman Powell staying is very unfortunate, and I’m somewhat sympathetic to his argument in that I am so appalled by, I think, some of the lawfare overreach that took place here. But there are traditions and norms that I would have expected him to care about. And I still believe he will end up leaving, but I think he feels that this is the only leverage he has to make sure that there’s not some bogus criminal thing brought against him, and I think he’s using that leverage.

I hope he’s telling the truth that he intends to be quiet and allow Chairman Warsh to do his job, but these are just new things, and so we haven’t really seen them before. And I think there’s enough drama in our society in so many other things, that the one thing I’d prefer there not be drama in would be the deliberation of monetary policy. Let’s keep monetary policy boring again, shall we?

EICHER: Yes, definitely, and I think we need to do our part, so I'll further the objective by telling you I do have one more question on the, on the rate policy at the Fed. 

I went over to the FedWatch site, the federal funds futures market, to see what the betting was on rates, and it doesn’t look like traders are pricing rate cuts anytime soon. If anything, there’s a long hold and even some probability of hikes. 

All that pressure the president applied to get Jerome Powell to cut rates, and then to try to pressure him out … well, he’s sticking around … and FedWatch doesn’t see any rate cuts coming either. Is it safe to say that that backfired on the president?

BAHNSEN: Well, it’s most certainly backfired, and I think that this was pretty predictable if the objective was not punitive, if it was just simply to kind of put your thumb on the scale to make sure you got some control over interest rates, it’s definitely backfired. If it was just merely to be punitive, which I don’t think it was, I think it was an attempt to try to use leverage, and I think that that has not gone well.

But if it was just to be punitive, it’s definitely created a lot of disruption and punished some people. But now it’s resulted in—what you probably would have had if there had been no intervention at all, is Kevin Warsh being named chairman, Stephen Mirron getting an open position, Chairman Powell leaving, and the administration having more Trump appointees than other appointees on the Fed committee. But this is where they are now, and we’ll see if cooler heads can prevail. 

I really don’t know exactly how it’s going to shake out. But people mistake criticism of the way the administration handled it as defense of all the monetary policy that Chairman Powell has given us, and I don’t agree with that. I all at once feel very comfortable being critical of some of the monetary decisions that Chairman Powell made, and believing that nobody seriously thinks that there was criminal activity in the government going over a budget on a building.

EICHER: Well Davivd, this one will come as no surprise, but it does feel like a milestone worth reflecting on—U.S. debt has now crossed 100 percent of our Gross Domestic Product. In plain terms, that means we now owe about as much as the entire economy produces in a single year.

So is there some educational value in pausing here to mark the moment?

BAHNSEN: Well, let’s be clear that we had crossed 100% debt to GDP a few years ago as well, and then it did dip back below it. But I think that the round number of it is what it is. But just economically, is there really a difference between 101% and 97%? I mean, they’re both 100%. It’s just a staggering number.

And let’s be clear too, when people say, "no, I heard it was 120 or 128%," it’s the difference between the public debt as a percentage of GDP, which is the 100% number you’re speaking to now, and the total debt. And the difference between public debt is money that we owe to others, it’s called our bondholders, and it includes the people who own the bonds of the United States Treasury, which includes you and me and retirees and banks and insurance companies and foreign governments and just investors, public people that own the debt.

The total debt is another 20-something percent of GDP, which is about $7 trillion that we owe ourselves, that the right pocket is borrowed from the left pocket, almost entirely from the Social Security Trust Fund. There’s a few other odds and ends in there as well with Medicare. But they’ve taken from their own piggy bank as well.

And the reason we don’t include that is cause it isn’t comparable to other countries. We use the debt-to-GDP ratio to be apples to apples with Japan and with Europe and other places, and they don’t have this intergovernmental borrowing. So it kind of skews the numbers.

I mean, I basically think it’s bad enough at the 100%. We averaged something between 50 and 60% most of my adult life. 

When we were seeing our total debt go up substantially, a lot of people were very critical of the Bush administration, the George W. Bush administration because debt went up a lot, but debt to GDP did not. And then the financial crisis came, we broke trend line growth, we have no longer been growing at our normal trend line that had existed for about 70 years since World War II. And at the same time that we broke growth trend line, meaning we’re declining in the numerator, the denominator flew higher, the total debt. 

And so this has been a disaster, and it’s the single biggest economic metric that matters to Americans, to our children, to our grandchildren, for years and decades to come.

And it is, by definition, when you have a fraction, there are two numbers at play, and they both matter. And people that only want to address the growth and do not address the debt are not seeing the whole picture. But people who want to address the debt and not address the growth are not seeing the whole picture. 

We’re getting it wrong on both counts.

EICHER: David, let's try to squeeze one more in. We saw a wave of so-called May Day demonstrations on Friday. Schoolteachers threatening to call in sick … pressuring schools to close … kids being bused to participate in these socialist-communist protests around the country. 

Really discouraging to see in a lot of ways … but you spent some time last week lecturing on the wonders of the free market and you're seeing some evidence of a heartbeat of economic liberty. So some positives amid the negatives.

BAHNSEN: Yeah, I had a chance to speak at Taylor University in Indiana last week, and just see their launch of a Center for Innovation and Flourishing. I was at Biola University the week before, where they’re making a lot of steps to promote human flourishing and freedom.

A lot of the colleges, they’re inviting me, and it’s not just colleges; I see it in some Christian high schools too. 

Nick, let me just say very quickly, because I really hope this makes it in. You cannot promote freedom and markets and enterprise without attaching it to our faith and transcendent truths.

Now the Christian schools that have a moral framework and a creational theology to explain free markets have a chance to be a full antidote to the radicalism of May Day and protests and communism and all of these other failed experiments. 

But we have to do it fully armed with the Christian worldview. And I’m really heartened to see that some colleges are taking on this task.

EICHER: Yeah, such good news. Well said. 

David Bahnsen, founder, managing partner and chief investment officer of The Bahnsen Group. He writes at dividendcafe.com and at World Opinions. 

David, thank you, I hope you have a great week.

BAHNSEN: Thanks so much, Nick.

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