When Sunday began, donors were closing their checkbooks to President Biden. This is notable simply because the major Democratic Party donors are rich.
Except that rich people don’t generally get that way by carelessly throwing money around. The basic, insight-free truth is that money is ruthless. While economic pundits on the left and right routinely write about “easy money” and “costless credit” care of the Federal Reserve and its interest-rate fiddling, reality rejects their simplicity.
Pointing out what non-pundits and non-academics intuitively understand, the flow of money to Biden was slowing to a trickle as a reflection of the growing view that his chances of winning a second term in November were in decline. Markets work.
To see how they do in a political sense, it’s best to quote a New York Times account of Biden’s withdrawal from the presidential race brought to us by Theodore Schleifer and Kenneth Vogel. They reported that “Shortly before 5 p.m. Eastern time on Sunday afternoon, the Biden campaign filed paperwork formally renaming its campaign committee ‘Harris for President.’”
Where it gets interesting is what followed the re-filing. Schleifer and Vogel went on to report that “In the immediate aftermath of President Biden’s decision to exit the race, Ms. Harris was enjoying some broad, swift consolidation among major givers. Multiple Biden donors and their advisers said that they were hearing from previously despondent donors who were ready to give to support a Harris-led ticket. One Silicon Valley bundler raised over $1 million in a 30-minute period.” By yesterday morning, “Harris for President” had already raised $50 million, and it’s surely much more by the time you’re reading this.
The transformation of the Democratic Party donor class from despondent to ebullient in a matter of minutes instructs us in ways well beyond Joe Biden attempting to pass the torch to Kamala Harris. It’s a useful metaphor for the Fed and the silly view that by decreeing rates of interest low, the central bank can make credit easy for individuals and businesses. It can’t.
What makes money available and relatively easy is the existence of borrowers seen as capable to pay monies borrowed back. The cost of borrowing becomes “easier” as the creditworthiness of the borrower increases.
That’s why readers should always be skeptical about a low Fed funds rate that invariably tricks left and right pundits into believing that the Fed’s actions have rendered credit costless. More realistically, the low rate of interest is the surest sign of tight credit as those in the actual arena carefully lend at low rates of interest to those for whom payback is a foregone conclusion.
The always-and-everywhere truth is that money is never dumb. People who loan it, or invest it, or direct it toward political candidates want a return. It’s that simple.
When it became apparent that Biden had no chance of competing for or winning a second term, contributions to his campaign dried up. And when Biden stepped out of the way for Harris, the money returned. At least as of now, the donor class thinks Harris represents a more formidable challenge to Trump, but it’s not a reach to say that much bigger money flows will find their way to Democrats once it’s announced that there will be a competition among Democratic politicians for the candidacy recently vacated by Biden.
Whatever happens, what can’t be denied from what happened with Biden is that markets bend to no one, least of all the Fed. If entrepreneurs, businesses or candidates reveal potential, money will find them. If not, no amount of Fed fiddling can alter this truth.