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Fat-Cat Bankers Hiss Back at Washington

Rick Newman

BEVERLY HILLS, CALIF. - Since the 2008 financial meltdown, Washington politicians and many of their constituents have vilified the financial industry for greed and indifference. Now the fat-cat bankers are hissing back.

At the Milken Institute's annual gathering of financiers and other corporate bigwigs here, the favorite punching bag is the U.S. government, including the Federal Reserve, the Obama administration and Congress.

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"The Fed is trying to counteract a number of very poor policies coming from the executive and legislative branches," Ken Griffin, CEO of the hedge fund Citadel, said to a packed ballroom. "It's damn near impossible to overcome [those] headwinds."

The financial sector, of course, is a prime beneficiary of the Fed's easy-money policies, which have pushed down interest rates (among other things, nudging big institutional investors toward hedge funds, as they look for higher returns), while boosting stock prices.

Wall Street also profited directly from the 2008 and 2009 bailouts and other policies meant to stabilize the financial sector first, in order to nurse the broader economy back to health.

But in an alignment of Wall Street and Main Street sentiment, financial executives reflect the same disdain the American public holds toward the Beltway political establishment, whose reputation has plunged lately. Politicians' inability to compromise and solve problems is especially noxious to dealmakers used to overcoming big obstacles.

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The spending cuts known as the sequester, which went into effect March 1, are a popular target at the Milken conference. Congress reacted to one consequence of the sequester by hastily passing a bill in late April allowing the Federal Aviation Administration to end furloughs of air-traffic controllers and relieve nationwide flight delays.

But business leaders are unimpressed. "Politicians play with this stuff," said Terry Duffy, CEO of the CME Group, parent of the Chicago Mercantile Exchange. ""They have these furloughs that affect the airlines, and deploy them in a way that makes it look like a total disaster."

It's hard to quantify the actual harm done to the economy by poor policymaking. For one thing, it's hypothetical to compare the economy under current policies to one under "better" policies that aren't actually in place. There's also a lag before most policies impact the real economy. And other factors, such as a lack of credit, hold back the economy too.

But there are still reasons to think government intervention in the economy is causing more harm than good. Griffin thinks that by keeping interest rates so low, the Fed has given companies a strong incentive to spend money on new technology and other types of equipment - which they can finance at very little cost - rather than hiring people.

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"If you reduce the cost of capital, it creates an incentive to substitute technology and automated processes for people," Griffin said. "Fed policies are leading to job destruction."

It might be worse than that, according to "Dr. Doom" - Nouriel Roubini, the New York University economist and global economy consultant. "Like they did before, the Fed will keep rates too low for too long," he said. "The last time, we went into a crash and a bust. They're going to make the same mistake."

For anybody hoping to time the next crash, Roubini says it will happen in about two years.

Many economists feel the whole economy would be far worse, with much lower hiring, had the Fed sat on its hands. But most also acknowledge that there will be unknown and perhaps serious consequences of so much government intervention.

"Markets are very assisted by the Fed," says Mohamed El-Erian, CEO of bond firm Pimco. "That causes distortions in markets. Capital is being misallocated. That's why excitement in the market is coupled with anxiety."

If there's any consolation for U.S. policymakers, it's that their European counterparts have a tougher job - and may be performing even worse. The U.S. economy, at least, is growing, while Europe's vacillates between stagnation and contraction. The name-calling there may have only begun.

Rick Newman's latest book is Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman.

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