SVB Had It Coming
Why Central Banks Should Keep Raising Rates, Against the Deathly Combo of an Overheated Job Market and Bidenean Helicopter Money
“Six percent CPI inflation is an emergency that needs to be addressed with aggressive action. It should take a lot more than temporary instability in the community banking sector for the Fed to deescalate its response” —Michael R. Strain of the American Enterprise Institute, “The Fed Must Not Flinch,” writing in Project Syndicate
“Inflation is way too high, has responded way too little to policy so far, and so rate hikes will have to continue” —Kevin A. Hassett, National Review
“Without price stability, the economy does not work for anyone” —Jerome Powell
“If you drop money from helicopters, you’re going to get inflation” —John Cochrane of Stanford quoting Milton Friedman
“On one flank the Fed is trying to douse the red-hot embers of a crisis that began with a run on Silicon Valley Bank (SVB). On the other officials face stubborn inflation, having failed to wrestle it under control in the past year. The tension between stabilizing the financial system, which calls for support from the central bank, and reining in price pressures, which calls for tight policy, is extreme. But with two different sets of tools, the Fed is attempting to do both things. It is an improbable mission. And it is one that other central banks will have little choice but to emulate in forthcoming months.” — The Economist
“Now Biden and the Fed are caught in a stimulus trap: Higher interest rates increase the likelihood of financial instability, while keeping rates pat—or cutting them—will prolong the inflation. Doing nothing will perpetuate the current mix of declining standards of living amidst periodic chaos.
Biden has ruled out other options. Supply-side measures such as deregulating energy and reducing means-tested income transfers are off the table. Legal immigration won’t be made easier. Trade barriers won’t be reduced.” — Matthew Continetti “There Will Be No Soft Landing” ~ The Washington Free Beacon
How Hardly Having Any Hope to Begin With, I Totally Lost Hope in the Biden Administration
Some months ago in December, I argued against the Fed raising interest rates to bring inflation down by strangling economic growth, destabilizing the stock market, and possibly causing a minor recession, when what was really needed were government spending cuts and deregulation; or, since that would’ve been ridiculous to expect from Joe Biden: at least more immigration.
I argued that if policymakers would just unilaterally target the tight labor market problem by lifting restrictions on the free movement of people, with immigration and zoning reform—policies apparently a number of Democrats could get behind, and even some Republicans—then we could bring inflation down with an abundant supply of labor and housing. With the added labor, a cooler, more competitive labor market, and more abundant, cheaper housing would tamp down demand by pushing down on wage inflation; as well as by allowing supply to meet demand more efficiently, quashing price inflation.
It wouldn’t be all the government could do to stop inflation. Certainly not. If Biden weren’t so in love with his image as a working class hero, he might have lifted Trump’s tariffs, protecting steel unions and inflating prices and costing taxpayers $250,000 a year per steel job saved. If Biden weren’t so beholden to trendy climate panic, he might not have halted the construction of the Keystone pipeline, inflating the cost of gas and energy (though to his credit he did eventually make some changes and re-expand oil production, though it was not enough). He might not have issued 12,000 new financial regulations in one year. He also might not have spent half a billion dollars in an underrated but nevertheless egregious assault on the rule of law, to bail young people out of student debt, all to help the Democrats before the midterms. He surely didn’t have to gamble $400 billion on industrial policy, just to manufacture electric vehicles when carbon emissions from cars only contribute to 2% of green house gases, and to build semiconductor factories in the US when any of our allies who already have chip factories could do it for cheaper, nor did he have to constrict the supply of building materials with “Made in America” content requirements; half the purpose of this legislation being to pander to climate fanatics in the Democratic party; the other reason was to patronize the universally obsessed-over working class with good, (stable, dependable, secure, robust, strong, & c., & c.) union jobs…
Since declaring the pandemic was over, he might not have continued to write pandemic relief stimulus checks as a reward for sitting at home and not working, or maybe it’s just because he’s a nice guy. He’s even put people on welfare, who are simultaneously receiving his huge pandemic relief stimuluses and possibly working, at the same time! As I was reading in a Wall Street Journal op-ed, the government apparently ignored means-testing welfare benefits for recipients of pandemic aid, with the result that a ton of people who received pandemic aid also qualified for welfare benefits, and notably Biden drastically expanded welfare programs. Matt Weidinger writes,
“The policy of ignoring unprecedented pandemic payments when determining eligibility for means-tested benefits has been little noted. At least $1.4 trillion in federal pandemic payments have been ignored for the purpose of means-testing benefits in recent years. That includes three rounds of stimulus checks ($869 billion), expanded child-tax-credit checks ($110 billion), and unprecedented expansions in unemployment checks ($449 billion). The federal govern-ment turned a blind eye to all $1.4 trillion in determining eligibility for Medicaid and to more than $1 trillion of it in calculating eligibility for food stamps.”
Means testing entitlements also ignored unemployment payments too, at a time of record low unemployment!
“Under the legislation that added $600 at the start to all weekly unemployment checks, up to $22,500 was ignored in determining a recipient’s eligibility for Medicaid, and up to $12,300 for food stamps. An additional $1,800 in unemployment bonuses under yet another temporary pandemic program was ignored when determining eligibility for any “federally funded income assistance or resource-tested benefit programs.”
And to add insult to injury, I read in last week’s Economist “Theft From America’s Anti-Poverty Programs Seems Troublingly Easy,” apparently tons of money were just stolen from the SNAP program too,
Haywood Talcove a guy who sells technology for fraud prevention, according to the Economist, “…estimates that about $20bn could be stolen over the next six months from snap, an assumed fraud rate of 15%.”
They report, “Maryland recently announced that $2.5m was stolen from its food assistance programme between October and February; California says it reimbursed $7.4m in food aid and $39.7m in cash assistance due to electronic theft between July 2021 and November 2022.”
And they mention, summing up the insane damage I was just describing,
“Vastly more money may have vanished through unforced errors rather than outright crime. The Government Accountability Office estimates that $281bn was lost by the federal government during the 2021 fiscal year due to overpayment to eligible individuals or paying the wrong person.”
Whatever his motivations are—whether it’s because he’s a nice guy, or he really thinks it’s good fiscal policy to just unload free money onto the white hot demand side of the economy— seeking to broadly cut and limit oil and natural gas production, hiking up the cost of gas and heating; expanding the child tax credit so every woman who qualifies drops out of the work force—all but killing supply while simultaneously piling free money on demand—I wouldn’t have expected any of these Bidenomics to stop.
Since he has such a kind heart, and he’s such a decent man, so as not to think at all before condescending to give practically anyone a handout, the last of which were corporate welfare for electric vehicle and semiconductor manufacturers, before came the blanket deposit guarantees for Californian venture capitalists and crypto speculators, as much as he likes to hate on rich people verbally— I just hoped that he might extend that same kindness to the immigrants overwhelming the border, literally dying to get here for the jobs he’s always ranting about, rather than continuing the patently outrageous, unconstitutional Title 42 policy. Fascinatingly Biden’s free money comes to an abrupt halt when it comes to the prospect of free foreign labor. But perhaps that’s to be expected too, because immigration would threaten “AMERICAN JOBS!” And “WORKERS!” And “PRIDE” …
Andrew Caballero Reynolds
I think I underestimated the depths of his schizoid America first/climate hawk complex— i.e. His demented pathological need to appropriate Trump’s appeal to white “workers,” with “Buy America,” infrastructure, jobs and pride. All this blue collar sloganeering deliberately to the same racists and losers, wrapped in Confederate flags and Qanon merchandise, thronging and blundering, and beating cops unconscious, and shitting their way into the Capitol to stop him becoming president.
But just like anyone else who thinks they have a shot in hell of having a career in politics since 2016: gotta address the identity crisis, or should we say the needs rather, of old white American males. Gotta appease their status-inferiority by patronizing them with tariffs, tough talk on China who stole their jobs (whatever party you’re in, if you ever think you need some more political influence, just condemn China for something); and crack down on Wall Street with taxing stock buybacks; and indiscriminately paying “junk fees” for us. Gotta fight the globalists, robbing blue collar—blue mountain opioid addicts living on transfer payments of their well-earned dignity. Perhaps Biden’s next bill will be a $1 trillion or how about a $100 trillion or a $1 quintillion infrastructure bill, symbolically, to go after fentanyl dealers and Mexican drug cartels or something. Anyway.
How I Came Cheerfully to Embrace the Dark Arts of Monetary Tightening
Now that I’ve given up all hope that Biden would target the aggregate demand with addressing supply shortages and the productive capacity of the economy, I have become a less and less grudging supporter of aggressive monetary tightening. And considering that after two years, year-on-year inflation hovers at 5%, double the Fed’s goal of reducing it to 2%, I think the federal reserve must not allow the specter of a couple uniquely exposed banks, whose assets were poorly managed in the well-capitalized midsize banking sector—who had it coming moreover—to distract them from dealing with inflation, whatever broader financial instability it potentially augers. Inflation is more important. And we might actually have more financial instability if the Fed reveals itself to be more concerned about the banks than inflation.
Now all the talk in finance is about the looming credit crunch and commercial real estate. Should the fed raise interest rates if banks are already going to be disinclined to lend? The answer, however, is yes. We have no reason to believe consumer price and wage inflation will go down, regardless of what happens with midsize banks. A really hot job market is its own separate affair. Without supply side reform, even a recessionary monetary tightening of the screws is what is necessary, like it or not. Inflation and zero interest rates, precipitated this crisis as well. To buckle down on inflation would be better for the banks too in the long run.
No one would be that hurt anyway if more banks collapse, no one except for the banks, whose massively rich depositors are all even reallocating their money to money market funds, so they’ll be fine. But there is especially no reason for the fed to slow down on the rates, while it’s already backstopping the banks with liquidity. The bail out aspect of the SVB debacle is very bad, and that’s a subject for different blog post. I’m only saying— why slow down on interest rates, if you and the treasury are already willing to intervene to save everyone from collapse from rising rates?
And the bank run is SVB’s fault anyway!! Of course your zero interest rate government bonds and mortgage securities would lose market value with rising rates as they matured. Why did they buy those bonds? They knew the risk involved in taking on all this money in uninsured deposits. In “The Silicon Valley Bailout” Alex J. Pollock on Law and Liberty, writes,
“As everybody knows, for up to $250,000 per depositor per bank, they are guaranteed by the government. For any amount beyond that, as a lender, you are at risk, or supposed to be. If the banks fails, you become an unsecured creditor of the insolvent estate. Every big depositor in SVB knew this perfectly well. They nonetheless chose to make unsecured loans of huge amounts, in one case of $3.3 billion to one poorly managed bank. Thinking of them correctly as lenders, should sophisticated lenders who make bad loans suffer losses accordingly? Of course.”
They should have known better. They did know better, but they didn’t care, because they were cocky. Like a million banks before them. Because they defer managing risks to the regulators I suppose. And regulators, including the Fed, shouldn’t have given them a false sense of security by stress testing only short-term interest rate loans. As Stuart Kirk says in the Financial Times, “Banks Might Behave Responsibly if Treated Like Adults,” we need to start treating banks like “adults.” Not infants. Kirk says,
“Imagine if the million hours of annual regulatory training reported by some lenders were spent analysing risk.”
In Kirk’s opinion regulators make banks terrible lenders,
“Dismissed like children, bankers understandably felt they had nothing left to do except play.”
How About a Hard Landing?
Now the Fed shouldn’t have a guilt complex over its role in pumping the economy full of easy money, partly leading to the massive uninsured deposits. Powell said last week he would raise interest rates a quarter point, trying to finesse things to assure us inflation still matters and that banks are fragile. Some assurance. Most banks probably are not fragile. Even so as I said already, it doesn’t matter, and especially when Powell and Janet Yellen are to all intents and purposes willing to completely guarantee depositors’ money—they will be “made whole” Janet Yellen said—Powell would have done better to hike rates up further by a half point, rather than protracting markets’ self-doubt with confusing rhetoric a top a quarter point bump. Next time Powell should send a stronger signal to the markets and lenders he’s not kidding about bringing down inflation. He should not dally about with risk management. That’s the banks’ job! The Fed’s job is to be the lender of last resort in Walter Bagehot’s phrase, and to maintain price stability.
Some critics of monetary tightening like Patrick Horan who advocated in National Review that the Fed should “take a breath” argue the CPI index is misleading, and that a quick glance at it misses that inflation has been steadily receding, and that we’re likely still waiting to see how raise in interest rates will affect prices, and that with SVB and Signature, we’re probably facing a credit crunch which will serve to bring down inflation by itself. He is right to an extent. He misses the key problem that the main reason inflation is so persistent and remains so high, though dropping a little bit, is because the Fed has been too cautious. So more caution is not what we need. Powell risks making inflation worse by raising rates and then holding back, over and over, taking the Arthur Burns rather than Paul Volcker approach. And, even if we face a credit crunch we’re still going to be dealing with a tight, overly hot labor market.
Since Biden doesn’t want to broaden immigration or implement any supply side reforms, the only way we can deal with inflation for the moment is to aggressively raise rates. I think although it’s a blunt and a cruel instrument, monetary tightening is the best thing we have in this environment to restore price stability, and it’s all there is. And inflation is much worse than bank runs, the threat of which is really overstated. The Fed has special reason to be aggressive too, while Biden may continue hurling free money onto demand. Even if this provokes a recession, I don’t think we can afford to worry about the risks of recession anymore. We’re on the verge of recession whether the fed raises rates or doesn’t raise rates. Arguably we’re already in a kind of recession, though without unemployment. Now we need to choose whether on one hand we want to risk recession with persistent inflation; or intentionally make a recession more likely with monetary tightening, though with the certainty that inflation will be reduced. Not that such a decision is easy, or that either choice is good, but the latter option is obviously the logical solution.
At the grocery store where I work, every day I see my customers suffering from inflation. For a lot of these people every nickel counts. They even say things like that. I have had countless talks with them about inflation. On the most memorable occasion, when one mom realized how well informed I was, she burst out as if under torture, “When is inflation going to stop!” All but yanking me by the lapels.
It was bad enough that the Fed waited so long to raise rates since inflation started, after a decade of hosing the economy with easy money (with quantitative easing). The Fed should restore their own credibility as an institution by doing their job and sticking to the main task. Not cover their ass.
—Jay