Lending Your Staff: the Fed and Main Street Bank Way

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“I haven’t inherited the earth from my parents. I am borrowing it from my children.”—U.S. Senator, from Colorado, Mark Udall (D)

“The foolish notion that unlimited amounts of money and credit created out of thin air can provide sustainable economic growth has delivered this crisis to us.”—U.S. Congressman, from Texas, Ron Paul (R)

 

STAFF LOANS/Image: Michael Moffa

Imagine that, on analogy with Main Street commercial and Federal Reserve central banking, there were two ways to lend employees—two ways that would be similar to those employed by these two kinds of banks when money is lent. From such a comparison, there may be useful lessons for recruiters to learn from bankers and vice versa.

The Main Street Model vs. the Fed Model

The first way would be, like the common method employed by Main Street banks, to lend by reallocating a portion or multiple of current “deposited holdings” in the form of current employees (“dollars”) and then charging a fee, in the form of some kind of interest, for doing so, as a “risk premium”, to be paid before or upon the return of the “principal”, viz., the employee—say, a high school principal being temporarily reassigned within the school system.

Exactly what kind of “interest” is to be paid on the lending of an employee will be analyzed below.

The second would be to create employees, like physical and digital dollars created by the Federal Reserve somehow out of thin air. (It should be noted, however, that in, December 2010, of the $8853.4 billion in broad money supply (M2), only $915.7 billion (about 10%) consisted of physical coins and paper money.)

Like the Fed, the employee-lending department would then charge the other department’s management, or pass the charge onto clients and/or customers (on analogy with the Fed’s charging the government and ultimately U.S. citizens, through taxation)the “interest”, a.k.a. a “risk premium”, for the loan, despite the apparent lack of any risk in creating something by fiat or out of nothing and with no actual underlying assets as reserves.

Some critics have maintained that the only “risk” associated with fiat Fed money is that passed on to the taxpayers, in the form of penalties if they fail to pay their taxes, i.e., the interest on the Fed-created debt.

Yes, the Fed does “buy” T-bills on the open market and “pays” for them with with the equivalent of a check—but, according to its critics, it’s a check drawn on nothing but “thin air”.

For example, there is the scathing film critique of the Fed by the late movie mogul Arnold Russo and a barrage of criticisms of the Fed by the Chairman of the House Financial Services Subcommittee on Domestic Monetary Policy, Texas congressman Ron Paul (R), who is calling for elimination of the Fed.

(You are welcome to try, as I did,  to fathom the arcane accounting of the only partially audited Fed to get to the bottom of this apparently bottomless cash pit. I tried until my eyes glazed over.)

Costs are Not Risks

This is not to say that, using either of the two methods there wouldn’t be an associated cost in creating and lending employees or dollars at the Fed or in the office, e.g., the cost in time for doing the paper work for the employee transfer, physically completing the employee’s or bundled dollars’ move and the like—including, in the case of paper currency, the cost, passed on to the Fed by the U.S. Treasury, of ink, paper and printing. During the Fiscal Year 2008, according to government stats, the Bureau of Engraving and Printing delivered 7.7 billion notes at an average cost of 6.4 cents per note.

But that’s cost, not risk.

Interest on Lent Money, Interest on Lent Employees

The first “real” reserve-based lending method is the one that conventional commercial banks are constrained to adopt, the paradigm case being to lend other people’s money, including the Fed’s—money accumulated by depositors and held in trust by the banks as savings or investments. The usual practice is to create loans as multiples of the underlying deposits of clients, i.e., as multiples of “other people’s money”.

The analogue of this Main Street reserve-based lending in recruiting is to lend employees from one department or branch and shift them internally to another, which may put the contributing department at risk of a staff shortfall, unless the timing and circumstances of the move, e.g., the contributing department’s manpower needs, minimize or eliminate that. Alternatively, a debt-default is possible, to the extent that the employee is not returned or returned in worse shape or with less value than when lent to the borrowing department by which she has been seconded.

One key difference between recruiting and banking lending practices is that in employee lending, only a fraction of employees in a department are lent, not a multiple. (In this sense, employee lending is a more conservative, less risky and cautious practice than loan creation of banks is.) This is a difference worth noting, but otherwise not central to the analogies herein.

In all commercial banking, the compensation the depositors receive for allowing their funds to be lent out at risk is interest, paid as a risk premium on top of the repaid principal, minus what the bank skims off for operating costs, as profit, etc.

However, it needs to be noted that the difference between at-risk Main Street “reserve-based” banking and the zero-risk Federal Reserve-based banking is huge, important and instructive—“zero risk” here meaning risk to the Fed’s own member private banks issuing the fiat money and collecting interest on it. (Yes, the Fed is a private consortium of banks, not a government agency.)

Again, even though the Fed “buys” T-bills to increase the money supply, it does so with a check drawn against none of its own assets, according to most explanations of its operations I’ve seen.

So then, what is the counterpart of banking principal plus interest in the case of the transferred employee, to be paid to the department from which the employee was recruited?

Interest-Free Lending of Staff

Let’s start with the simplest case: an “interest-free” loan. In this Main Street bank model of staff lending, a pressing desire to have someone borrow the employee can translate into an “interest rate” of zero and the eventual return of the employee to his or her original department pretty much in her original condition, with no special compensation to his or her department required, either in the form of a cash payment or value-added to the employee’s skill, motivation or experience set.

If the reason for the eagerness to lend that employee is that worker’s incompetence and indifference, not only will no value-added “interest” be required, it will also be unlikely to be created, e.g., in the form of greater competence, enhanced motivation and the like. Hence the 0% “interest rate”.

Imagine an employee like that, whom the department wants to get rid of, but can’t fire. In that case, and especially if no one else wants that employee, a zero rate of “interest” on the loan of that subpar employee is virtually guaranteed. This is a precise analogy with banks offering 0% interest when desperate for loan business.

In contrast, a non-zero interest rate on the lent principal, viz., on the employee in her “as is” condition on the date of lending her as principal, would mean that somehow, upon return and “repayment”, she will have to have value added to her CV, motivation and skill set, or is returned with an additional staff member for the department, the latter being a second form of interest paid. (Unless, of course, the second employee is some kind of “Trojan horse” or just a dead-weight nag, like the incompetent worker described above. This latter case is analogous to repaying a loan with vastly inflated dollars.)

This much seems quite fair.

But see what happens and changes when the Federal Reserve lending model is applied.

Before that it should be reiterated that the Fed “lends” dollars, but not in the same real sense as lower-level chartered banks, which indeed put somebody’s real money at risk or the Fed’s fiat money at “risk” ( however, rarely, if ever, their own) when they lend it.

Of course, when the Fed-mandated “reserve requirement ratios” imposed on banks increase or decrease, the amount of money that can be lent will inversely decrease or increase. However, this does not alter the nature of the risk, just the amount that can be put at risk. Risk at the main street banks remains, at least as risk to real depositors’ holdings.

On analogy with this Main Street reserve requirement, the corresponding situation in recruiting would be imposed constraints on how many staff can be lent to other departments, which would not change the fact of risk at all, i.e., the existence of risk and therefore the argument for some risk-premium/interest are undiminished.

Lending Risk: Real and Imaginary

But when money is “fiat money”, literally created through Fed authorization to create it, where is the risk to the Fed? True, there is the cost of printing the money. But, again, where is the risk? Analogously, if a recruiter were to somehow create staff to lend “out of thin air”, with, say, the stroke of a pen, why would he (his department) require any special compensation—apart from the recruitment costs—upon the return of the staff to his department? (This question invites careful reflection on why the Fed requires interest to be paid—at levels that reportedly consume all income tax paid by Americans annually as “debt” servicing. True, the interest rate is a monetary regulator for cooling an over-heated or warming a cooled economy, but evidently it is not a risk premium for the “lending” by the Fed. Besides, interest rates can be set by the Fed for commercial banks to induce or reduce demand for loans, which undercuts the argument for direct interest payments to the Fed, which pocketed about $8 billion in profits in 2010.)

But how could a recruiter, as a middleman between two departments or as the resident recruiter in the lending department, create an employee to borrow from one and lend to another department, on analogy with Fed-created dollars, “out of thin air”?

The Art of Borrowing Without Lending or Assets

In both the Fed and HR cases, the answer is simple: Don’t borrow. Just lend—but without lending your own or anyone else’s real assets. This works for the Fed; it will work for HR recruiters. It is clear how the Fed does that. What remains to be explained is how a recruiter can do what is essentially the same thing.

Simple logic suggests that if money is created for lending, it is lent, but not borrowed from anyone! So, by parity of logic, and on analogy with the Fed’s practices, an employee can be lent by one department to another, but without being borrowed from the second or from anywhere else, for that matter—if that employee is “created” (a “fiat” employee).

By relentless application of the same Fed logic, even though the “lending” represents no correlative “borrowing”, interest can nonetheless be demanded upon “repayment of the principal”, i.e., upon the return of the employee (dollars) to the department that “lent” him or her.

In practical terms, and in terms of this Federal Reserve model of recruitment by lending, a recruiter in the “lending” department will extract interest in the form of an additional employee, a value-added returning employee or a “risk-premium” charge to clients for having created (recruited)—risk-free!—an employee to be lent out for some time.

Creating Fiat Employees

But how do you create an employee—one “lent” but not “borrowed”?

Creating an employee is simple: No, not cloning.

Just assume that the HR in-house recruiter is a very good one—one who can very successfully recruit off the street, at a very small cost to himself or herself (analogous to the comparatively insignificant costs of printing or otherwise creating trillions of dollars), or to the company, much as the grave-robbing Burkers of 18th-century England miraculously produced cadavers for university anatomists, literally “digging them up” as needed and selling them—until they were discovered, prosecuted and executed.

The analogy with the Burkers fails in two points: At least the Burker faced the risk of having their entire operation exposed and of being punished. So far, this has not been true of the Fed. As for the recruiter who could “create” employees, the disanalogy is even greater, for the recruiter’s efforts and intentions are entirely within the bounds of morality, law, intact conscience and commonsense.

Lessons for Recruiters and Bankers

The implications of all of this are whether you borrow or create employees—on analogy with commercial bank borrowing and Fed “borrowing”—you should

  • Exact a fair rate of interest in the form of “value added” to the lent employee, if you are the lending department or its HR recruiter.
  • Charge 0% “interest” if the employee is “created” or if the employee is one you are trying to get rid of.
  • Try to pass the recruitment costs of “creating” a “fiat” employee onto the borrowing department.
  • If, in addition to your recruitment costs, you invest more into the created recruit, you will have a right to claim a stake in that employee as an asset for future deals and negotiations.
  • Take pride in actually having created a real, tangible and growing asset for your department—a new employee, unlike recently  created, printed and precarious dollars.
  • Don’t literally dig up new employees. The borrowing department will sense something is wrong and you could go to jail for corpse abuse and grave robbing.
  • If you must create an employee, then, like the Fed, make it look as though you’ve taken a risk with your own resources, including real capital.
  • If you are looking for a loan-savvy HR recruiter to handle such lending of staff, take a look within the ranks of the Fed….

….Then take a second look.

By Michael Moffa