Evaluating the free market by comparing it to the alternatives (We don't need more regulations, We don't need more price controls, No Socialism in the courtroom, Hey, White House, leave us all alone)
"Life has changed a lot over the last 60 years, and not every single
change has been for the better. This periodically results in some
version of this meme going viral:
The argument is essentially that the material living standards of the typical American family have gotten worse since the post-WWII era. This is completely wrong.
A
contemporary American family not only has access to all kinds of
technology that would have delighted and amazed people from 60 years ago
(luggage with wheels, microwaves, surround sound, ciabatta), but we
also consume much more housing, cars, and college education.
It’s
bad to lie to people about this, both on general principle and because
it obscures some plausible accounts of the ways in which some things
have gotten worse. Most of all, though, the nostalgic orientation sows
confusion about something fundamental: the pace of economic growth
really was much faster in the 1950s and 1960s. Americans are richer
today than they were two generations ago, but we are growing richer at a
slower pace. That’s not ideal.
There is something to the fact
that this poorer-but-faster-growing period is remembered fondly, but the
right takeaway isn’t nostalgia for the past — it’s impatience with the
current slow pace of growth.
People were poor in 1960
In
1960, there were roughly 400 vehicles per 1,000 Americans, about half
of today’s car ownership rate. In other words, a family in 1960 could
afford a car on one income, but today they would have two cars.
The average new house built in 1960 was about 25% smaller than a contemporary house, and much worse provisioned in terms of amenities like dishwashers, clothes dryers, and fireplaces.
Of course those were new houses. Many people in 1960 lived in older buildings that often lacked amenities that are now ubiquitous — you can read about cold water flats in New York that had no hot water.
And lots of people were living in rural poverty in extremely old structures.
Overall,
running water was about as common in 1950 as home air conditioning is
today. Dishwashers and washing machines were rare luxuries.
Broadly
speaking, if you think about how American life has changed, the
striking thing isn’t how much people used to be able to afford on one
income, it’s how much easier it is today to get by with just one adult
in a household. If you hear about a single mom who owns a car, your
first thought isn’t “wow, she must have won the lottery.” Doing laundry
and folding clothing with modern appliances is annoying, but objectively
much less time-consuming than it was in the poorer past.
Americans have become better-educated
The college point is more subtle because college really was cheaper in the past.
And there were two aspects to this.
One
is that colleges themselves spent less money per student. The
administrative staffs were smaller. There was no IT team maintaining the
campus-wide WiFi network. I think reasonable people can disagree about
the merits of some of the “extras” that are included in a contemporary
college education bundle, but there clearly is more stuff. Not all of it
has obvious educational value. All the IT expenditures, for example,
almost certainly have very little impact in terms of improving students’
education, but it’s also inconceivable that a college campus would just
refuse to create and maintain on-campus internet access. Nobody would
want to attend or teach at a school like that.
The other is that
college has become less subsidized over time. Medicaid didn’t exist
until the mid-1960s and it covered very few people in the early days.
Over time, it has become a bigger and bigger item on state budgets, and
they’ve compensated in part by reducing higher education subsidies. The
federal government has stepped in to fill part of the gap with the
student loan program, but that’s a less generous subsidy.
This
is relevant for two reasons. One is that the social calculus that
student loans were a “good enough” form of subsidy to continue expanding
access to higher education was correct. You don’t need to love the
student loan system, but it is true that qualified students are
generally able to attend college in the United States regardless of
ability to pay and that for those who graduate from reputable
institutions, it’s worth their while.
But the other thing
is that it’s much cheaper to subsidize college education when you don’t
have so many people going to college! Back in 1960, only 45% of high school completers attended college versus about 60% today. That itself understates the change because the high school completion rate has risen by about 10 percentage points since then.
If you eliminated one-third of the college students, that would free up
lots of extra subsidies for the remainder. But I’m not sure that would
be a change for the better.
At any rate, it’s definitely
not the case that the typical family 60 years ago was sending their kids
to college on one income, because most kids didn’t go to college.
We
also have a certain amount of what I think we should probably see as
problems of affluence. I read a funny study recently that looked at Swedish lottery winners.
It showed that when single men win the lottery, they are more likely to
get married. But when married women win the lottery, their odds of a
short-term (but not long-term) divorce rise. Somewhat along these lines,
I think because people in general are richer and because women in
particular have dramatically higher earnings potential than they did 60
years ago, you see more single parents than we used to. This is
downstream of material prosperity — mothers are less economically
dependent than they used to be — but I think it’s probably not ideal for
kids’ social and emotional development.
We have less malnutrition and a lower incidence of people being underweight than we used to, which is good, but we now have a large and growing obesity problem
that I think is mostly a consequence of more food availability. People
sometimes argue that healthy eating is more expensive, but this really doesn’t check out. Material abundance in the realm of food just turns out to have downsides.
There
are also some specific areas where public policy has made things worse.
The average home size has gotten larger because we’re richer. But we’ve
also taken a lot of regulatory steps to ban what used to be the lowest end of the housing market.
As a result, people who in 1960 might have lived in a rooming house or
an SRO now tend to end up in a homeless shelter or on the street. This
doesn’t directly impact the average person, but it has the indirect
consequence of creating the temptation to use mass transit systems and
other public facilities as de facto shelters, which thereby degrades the
experience for everyone.
But mostly I think it’s important
to be clear that if what you’re regretting is the demise of 1950s
family dynamics, you are regretting the consequences of prosperity. If
you want to have a two-parent, one-income family in a 1950s-sized house
with one car and not send your kids to college, you can almost certainly
afford that. Indeed, the stay-at-home mom will spare you the costs of
childcare, summer camp, and other things that genuinely have gotten more
expensive as a result of rising wages. And you’d even be able to take
advantage of modern advances like Netflix, out-of-season fruit, and
affordable domestic airfare. That’s just not the life most people
choose.
The future ain’t what it used to be
As
I mentioned at the top, where I think there’s some legitimate grounds
for nostalgia is that while Americans in the 1950s and 1960s were much
poorer than in the 2010s or 2020s, the rate of economic growth was
faster. Fast growth meant a broad sense of social mobility—not just a
shuffling of people in the class hierarchy but a very large share of the
population growing up to be dramatically richer than their parents.
But
American growth took a big blow during the energy crises of the 1970s,
which was probably unavoidable. What happened after that, though, was a
series of self-inflicted wounds.
The rapid growth of “the good
old days” meant that, in a literal sense, things were changing a lot
with tons of new stuff getting built — because that’s what happens when a
society experiences rapid economic growth. New technology is deployed,
physically, in space. The built environment alters as physical capital
is accumulated. And if a bunch of people build a bunch of stuff in a
bunch of different places over an extended period of time, there are
basically two options:
All the planning and execution can
be done by flawless superheroes who never make an error of judgment,
never experience blind spots, and are impervious to corruption.
Some of the stuff that gets built turns out to be a bad idea.
Since
the United States of America is populated by human beings, we got (2)
rather than (1). But the social reaction to this wasn’t just
to write laws like the Clean Air Act that require people to take
pollution externalities into account when they burn stuff. We also
implemented things like NEPA review, where the premise is basically that
any deviation from the status quo is inherently suspect and therefore
something like a congestion pricing plan for Manhattan should require a
three-year, 4000-page environmental review.
But this is very much not unique to NEPA. The premise of historic preservation policies in the United States is that old stuff is per se better.
The land use regime in essentially every jurisdiction puts a thumb on
the scales against adding more buildings on the premise that building
more stuff is bad.
Living standards still inch forward
under this regime, but it’s concentrated in computer and media, things
that can be achieved almost entirely through the diffusion of
information. There was a time a few years back when we had an explosive
diffusion of ramen shops, and you can now get a pretty good bowl of
tonkatsu in all kinds of places. Right now something similar is
happening with Nashville hot chicken and Detroit-style pizza. But we
could have much more rapid change if we wanted to, and that would let us
recapture some of what was legitimately great about this earlier era in
our history. But that requires letting go of nostalgia and embracing
dynamism.
"When supply chain issues caused a baby formula
shortage last year, Congress (eventually) cut tariffs to help get more
formula onto American store shelves.
It worked! Imports of baby formula soared during the second half of 2022 after tariffs and other regulations were lifted. Stores reported lower out-of-stock rates
and news stories about panicked parents being unable to feed their
infants abated. In short, the government removed economic barriers and
the market solved the problem.
Then, the government put those barriers back in place. On January 1, the tariffs on baby formula returned. Now, so has the crisis.
"It's getting harder and harder" to find baby formula, pharmacy owner Anil Datwani told Fox News this week. "[Mothers] go from one store to the next store to the next store" looking for baby formula.
Meanwhile, some consumers are complaining on social media that prices for baby formula have suddenly spiked and availability is once again a problem. A Forbes investigation
into a recent increase in the price of Enfamil baby formula noted that
the increases "follow the expiration of the U.S. government's suspension
of infant formula tariffs in January, which opened the door for formula
(both foreign and U.S.-produced) to become more expensive." (Another contributing factor: Reckitt Benckiser, the British-based company that owns the Enfamil brand, issued a recall in February affecting about 145,000 cans of formula.)
Because that's what tariffs do, of course. They are import taxes that
protect domestic industries at the expense of domestic consumers, who
are subjected to limited supply and higher prices as a trade-off for
industrial protectionism.
"Families who use imported formula aren't the only ones who suffer
because of these taxes," because the tariff-induced price increases
create an opportunity for domestic producers to raise prices too,
explains Reason contributor Bonnie Kristian in a piece at The Daily Beast. "For
instance, if tariffs make the price of European formula go from $24 to
$30 a jar, U.S. producers that might otherwise have charged $25 can hike
their prices to $27. Even with the 'cheaper' American option, you're
paying more."
It's obviously a bad deal for consumers, but one that's often
invisible. The baby formula shortage has changed that and made the costs
of this specific trade policy readily apparent.
It has also revealed the ways in which special interests pull the
strings on many protectionist policies. In this case, it was the dairy
industry, which benefits from the anti-competitive tariffs and other
regulations that effectively prevent foreign baby formula from being
sold in America. As Reasonreported
in December, the National Milk Producers Federation pushed Congress to
reimplement the baby formula tariffs, arguing at the time that "the
temporary production shortfall that gripped American families in need of
formula earlier this year has abated."
Except, obviously, it hasn't.
Meanwhile, on Tuesday, the Food and Drug Administration (FDA) announced
new plans to "increase the resiliency of the U.S. infant formula
market," including new regulations, more inspections of manufacturing
facilities, and an expedited review process for new products seeking to
enter the market. The FDA also promised to examine "other factors that
may influence the infant formula supply, such as tariffs and market
concentration" but did not promise to take any particular steps in that
direction.
The timing is convenient, as current and former FDA officials
are being hauled before Congress this week to answer questions about
the shortage and the agency's role in worsening it. The hearings are
likely to once again highlight how the FDA's internal dysfunction
led to delays in informing the public about the problems at the Abbott
Nutrition plant in Michigan, which was shut down in early 2022 due to
contamination, spurring the shortages.
The FDA has also backpedaled since the start of the new year. On January 6, it rescinded
some of the measures adopted last year to allow foreign formula
producers to sell their products in the United States. Now, only
applications from foreign producers who intend to have a permanent
presence in the U.S. market are being reviewed—potentially cutting off
suppliers who might be able to help on a temporary basis.
More than a year after the baby formula shortage hit, the federal
government is still struggling to figure out what should be blindingly
obvious. Want a more resilient market? Let more producers compete on a
level playing field—regardless of whether their products are made here
or not."
"Sen. Elizabeth Warren and other Democrats blame Silicon Valley Bank’s
failure on changes to the Dodd-Frank Act of 2010 enacted during the
Trump administration. That claim has no basis in fact. The Bank Policy
Institute concluded that SVB would have passed the original Dodd-Frank
liquidity-coverage test and that the 2018 changes were irrelevant."
"regulations tend to devolve into the check-the-box variety that makes
sense to lawyers and allows bureaucracies to implement them."
"bank supervisors from California, the Federal Deposit Insurance Corp.
and the Federal Reserve Bank of San Francisco failed to pick up some red
flags"
"The bank
had no chief risk officer between April 2022 and January 2023. This was
the period in which the Federal Open Market Committee raised rates
aggressively. The bank got into trouble because it had over-bought
longer-dated Treasury bills when rates were low—only to watch their
market value shrink as interest rates went up. Any risk officer would
know that a bank facing a potentially rapidly shrinking deposit base
shouldn’t overcommit to long-dated assets. Not having a CRO in place
should have been a red flag.
Bank examiners should have seen this as well."
"the San Francisco Fed . . . should have told the bank examiners under their
supervision to pay special attention to the impact on the banks they
examine."
"SVB committed $5 billion to a new environmental program, roughly the
bank’s average annual profit over the previous three years."
"There is also the irony that former Rep. Barney Frank, whose name is on the Dodd-Frank legislation, was on the board of Signature Bank,
which was also shuttered this month. Mr. Frank is a smart man with the
best of intentions, but the failure of Signature indicates a regulatory
mindset that misses the big picture. The regulations go over the asset
side of banks’ balance sheets with a fine-tooth comb for credit risk.
But SVB and similar banks are in trouble because of the liability side
of their balance sheets (with depositors who were quick to run) and the
term-structure risk embedded in their long-dated Treasury positions,
which had no credit risk."
"In August 2020 at its Jackson Hole, Wyo., conference, the Fed announced a
new policy framework to address what it saw as its biggest problem:
Inflation was too low at 1.7%. Zero rates and massive Fed purchases of
Treasurys and mortgages would be the cornerstone of the new regime."
"For most of 2022, inflation in the U.S. ran about 7% to 8% on an annualized basis"
"Inflation was never “transitory,” and it couldn’t credibly be explained away by war and pestilence."
"At its policy meeting just six weeks ago, the Fed said the economy was
softening and the inflation trend was encouraging. The Fed stepped down
its rate increase to a quarter point, signaling that rates were
asymptotically approaching the peak policy rate in the cycle. The job
was getting done—or so it said."
"Then, two weeks ago, in testimony to the Senate Banking Committee, Fed Chairman Jerome Powell reversed again. He said that the economy was decidedly stronger and inflation higher than expected."
"The Fed would have been wise to raise rates from zero earlier in the
economic cycle. The economy and financial system were decidedly
stronger. The country was much better positioned to handle rate
increases in 2021 than today. The terminal interest rate—the peak
interest rate in the cycle—needed to break the back of inflation was
lower. The longer the central bank waited, and the more uncertain its
trumpet, the more monetary might had to be deployed to quash the
inflation monster"
"To get inflation to fall meaningfully, economic theory and practice
suggest that the Fed’s policy rate should exceed the inflation rate on a
sustained basis."
"Dodd-Frank lets the Federal Deposit Insurance Corp. guarantee uninsured
deposits under its “systemic risk” exception.” But banks must fail for
the exception to apply and the systemic risk is supposed to be genuine.
Regulators stretched that exception with SVB
and Signature, and the Treasury Secretary is now making clear that they
will stretch it again to prevent more bank runs on her watch."
"Risk-weighted capital standards have made banks look healthier than they
are. The Dodd-Frank regulatory architecture failed to protect against
the interest-rate risk that landed Silicon Valley (SVB), Signature and
First Republic banks in trouble. Market discipline fell sharply with the
creation of too-big-to-fail banks as part of Dodd-Frank. Now Ms. Yellen
is throwing out residual discipline by telling even uninsured
depositors that they needn’t worry."
"Sen. Elizabeth Warren says no one should expect small businesses with
more than $250,000 in cash to be savvy enough to know the difference
between a well and poorly run bank"
"Sen. Elizabeth Warren says no one should expect small businesses with
more than $250,000 in cash to be savvy enough to know the difference
between a well and poorly run bank"
"Japan’s swing toward cultivating strawberries in freezing weather has
made strawberry farming significantly more energy intensive. According
to analyses of greenhouse gas emissions
associated with various produce in Japan, the emissions footprint of
strawberries is roughly eight times that of grapes, and more than 10
times that of mandarin oranges.
“It all comes down to heating,” said Naoki Yoshikawa, a researcher in
environmental sciences at the University of Shiga Prefecture in western
Japan, who led the produce emissions study. “And we looked at all
aspects, including transport, or what it takes to produce fertilizer —
even then, heating had the biggest footprint.”
Examples like
these complicate the idea of eating local, namely the idea embraced by
some environmentally conscious shoppers of buying food that was produced
relatively close by, in part to cut down on the fuel and pollution
associated with shipping.
Transportation
of food often has less of a climate impact than the way in which it is
produced, said Shelie Miller, a professor at the University of Michigan
who focuses on climate, food and sustainability. One study found, for
example, that tomatoes grown locally in heated greenhouses in Britain
had a higher carbon footprint compared to tomatoes grown in Spain (outdoors, and in-season), and shipped to British supermarkets."
"Early in the Covid pandemic, Moderna received $900 million from OWS for
trials to test its mRNA vaccine in partnership with the National
Institutes of Health."
"Mr. Sanders claims that taxpayers paid to develop Moderna’s Covid
vaccine, and the government thus should be able to dictate its price.
That’s nonsense. Before the pandemic, Moderna developed its novel mRNA
platform with $3.8 billion in private investment. In spring 2020, it
raised another $1.3 billion in private capital to scale up
manufacturing.
If not for the Moderna-OWS cooperation, the vaccine rollout would have
been much slower. Moderna’s vaccine has proven more durable and
protective against severe illness than Pfizer’s in real-world studies.
Yet the Administration has consistently paid Pfizer $3 to $4 more per
dose. As a result, Pfizer has received more than a billion dollars more
from the government than Moderna.
Yet progressives are targeting Moderna as “a poster child for corporate
greed,” to quote Mr. Sanders, because they believe this advances their
view that pharma companies profit from government innovation and
support. The truth is closer to the opposite."
"Biden officials hail the benefits of Covid vaccines and boosters. If
they are as effective as public-health officials say, then the benefits
from reducing hospitalizations among the elderly would more than exceed
the new higher price."
"Moderna’s price will be lower than for such vaccines as GSK’s shingles shot ($183) or Merck’s pneumonia vaccine ($216)"
"Under the Affordable Care Act, Americans with private insurance won’t
have to pay a penny out-of-pocket for the vaccines. Moderna will also
offer free vaccines to the uninsured."
"Policy news flash: Fighting crime reduces crime. The latest evidence comes from Seattle, of all places, where City Attorney Ann Davison’s efforts are showing results.
Ms.
Davison took office in January 2022 after voters elected her on a
law-and-order mandate. She has focused on the 168 troublemakers
responsible for a disproportionate amount of crime—nearly 3,500
misdemeanors in Seattle over a five-year period, by her office’s
estimates.
These
miscreants had an average of 6.3 misdemeanor criminal incidents
referred for prosecution in Seattle in a year. Their most common crimes
were theft to buy fentanyl or meth, which often led to more serious
charges, such as assaults and “robbery if someone attempts to stop
them,” the Seattle City Attorney’s office says in a new report.
But
new numbers show that on Ms. Davison’s watch the number of annual
misdemeanor referrals by this group has dropped to 2.7. What changed?
Well,
start with arrests and punishment. In the past year 142 of Seattle’s 168
top recidivists were behind bars at some point. King County jails had
limited bookings for most misdemeanors. But last spring Ms. Davison
brokered an agreement to make an exception for Seattle’s most prolific
misdemeanor criminals.
She
also pushed through a reform that excludes from Seattle’s notoriously
lenient Community Court anyone who had 12 or more charges referred to
the city attorney for prosecution over the past five years, including
one in the past eight months. Their cases are now handled by the
Municipal Court, where they can face bail requirements and jail time.
Ms.
Davison has persevered despite criticism from Seattle progressives, but
the facts vindicate her approach. Imagine: Crime falls when you arrest
and punish criminals."
"More than 95% of Mr. Johnson’s campaign contributions so far have come
from the unions. The CTU and its political action committee have given
Mr. Johnson more than $2 million and even dipped into the pot of
individual teachers dues to give him an extra boost before the April 4
runoff. Some CTU members publicly objected to the transaction that used
members’ dues money outside the portion that is typically earmarked for
political contributions.
The spectacle angered former mayoral candidate and community activist Ja’Mal Green, who noted on Twitter that the union is spending lavishly on Mr. Johnson’s campaign instead of putting children first."
"Some 83% of Chicago students graduate from high school but less than a
third are proficient in reading or math on the Scholastic Aptitude Test"
"Mr. Johnson collected a CTU salary while he was Cook County
Commissioner, and the Illinois Policy Institute reports that he has
continued to accrue a CTU pension that will likely be worth millions of
dollars, though he only taught briefly in the public schools."
There’s already academic evidence against UBI, as I wrote in 2021 and 2022.
Now we have new evidence this year. Three European academics – Timo Verlaat, Federico Todeschini, and Xavier Ramos – produced a study on the consequences of an experiment in Barcelona.
Here are their main findings, published by the Germany-based
Institute of Labor Economics, all of which confirm that a basic income
would be bad news.
"…we aim to advance the literature on unconditional transfer programs by
describing their employment effects in the context of an advanced
welfare state. Our analysis uses data from a field experiment in
Barcelona (Spain), trialing a generous and unconditional municipal cash transfer program. …we find strong evidence for sizeable negative labor supply effects. After two
years, households assigned to the cash transfer were 14 percent less
likely to have at least one member working compared to households
assigned to the control group; main recipients were 20 percent less
likely to work. …Another important finding concerns the persistence of
effects. Employment rates in the treatment group remain lower even six
months after the last transfer, indicating that households’ labor supply
decisions may be hard to reverse."
I have to give credit to Matt Weidinger of the American Enterprise Institute. I did not know about this new study until I saw his article, which also merits a few excerpts.
"That program is similar in many respects to universal basic income (UBI) programs proposed in Congress and being tested in multiple locations across the US. It also bears similarities to the unconditional expanded child tax credit payments temporarily made to tens of millions of households with children in 2021, which President Joe Biden’s latest proposed budget seeks to revive. Those similarities suggest American policymakers should take heed of the study’s findings… As Jon Baron, a longtime expert on evidence-based policy, recently described, the findings of the “high-quality” randomized control trial reflected in the study “suggest a need for caution in the design of anti-poverty programs, to avoid discouraging work effort.”"
Since I’m a policy wonk rather than an academic, I don’t need qualifiers
such as “a need for caution.” I can bluntly state that redistribution
programs have a very negative impact on labor supply."
"1. The collapse of Silicon Valley Bank seems closely related to the
fact that we recently experienced the largest drawdown in bonds in
history. That is, the bank made an imprudent bet on interest rates and
was very, very unlucky.
2. Contrary to the claims of some talking
heads, the relaxation of Dodd-Frank in 2018 appears not to be a big
part of the story. The "severely adverse scenario" in the regulators' stress test
did not include a major bond drawdown. Instead, it described a
recession accompanied by falling interest rates. That is, the regulators
would not likely have caught the imprudent bet the bank was making.
3.
I am not particularly concerned about the moral hazard associated with
insuring all bank deposits (though the expansion of deposit insurance
should be done explicitly, rather than through the implicit and ad hoc
process now occurring). It is not realistic to expect bank depositors to
monitor the health of their banks. A sophisticated depositor with a
large balance would instead spread his holdings in $250,000 chunks among
many banks. Those left with large holdings in a single bank are, by
revealed preference, unsophisticated.
4. People say we need better
regulation. Of course, but that is easier said than done. Don't expect
supervision to get much better, though we should try.
5. The
simplest way to avoid these problems is to push banks toward higher
levels of capital. Maybe that can be accomplished by making deposit
insurance fees depend more strongly on the bank's capital/asset ratio.
Or something along those lines."
"In yet another sign that the universe loves freedom, my latest Forbes column on the Silicon Valley Bank mess was published on the same day as Saule Omarova’s New York Timesop‐ed.
My column makes the opposite case as Omarova, which I’ll get to in just
a bit. It also points out something that seems to be getting lost
during these debates over whether to increase the FDIC insurance cap to
more than $250,000: Omarova and her fellow travelers want the full
provisioning of money by the government.
Further, they want to
“clarify banks’ place in U.S. society and their relation to the
government,” such that all money becomes “a governmental product.” They
actively hail a
“new monetary era” with central bank digital currencies, a digital
version of the dollar that ties citizens directly to the government.
They want to transform the Fed into a provider of first resort instead
of a lender of last resort.
In the New York Times, Omarova glosses over this issue and
claims her nomination to lead the Office of the Comptroller was sunk
because of her views on deregulation. Here’s the full paragraph:
The banking industry and its political allies waged
a highly public campaign to block my candidacy and called my academic
work, which examined the many failings of our financial system and
called for stronger public oversight, “un‐American.” But what
ultimately sunk my chances was the fact that I openly opposed loosening
regulatory restrictions on America’s banks.
Perhaps someone did view her work calling for stronger public oversight as un‐American. But the real controversy was her work
calling for “the complete migration of demand deposit accounts [at
commercial banks] to the Fed’s balance sheet.” It didn’t help when she pointed out that
the “compositional overhaul of the Fed’s balance sheet would
fundamentally alter the operations and systemic footprints of private
banks, funds, derivatives dealers, and other financial institutions and
markets.”
It’s pretty convenient to leave out the complete overhaul of private
financial markets and focus on looser regulatory restrictions.
Speaking of looser regulations, I’ve noted in Forbes (multiple times) and Cato at Liberty
that the Economic Growth Act of 2018 didn’t really roll back much. The
only thing it did was make a symbolic change to the threshold for
enhanced supervision, from $50 billion to $250 billion. But the Fed
maintained all the discretion they needed to regulate banks in the range
from $100 billion to $250 billion more stringently if they thought it
was necessary, and it’s not as if federal regulators couldn’t place activity restrictions on banks with less than $100 billion in assets.
Whether the 2018 changes had anything to do with Silicon Valley
Bank’s failure is an open question, but it’s very difficult to make that
case. Among other issues, it turns out the 2014 rules for one of the
so‐called enhanced regulations, the liquidity coverage ratio, used
a higher threshold of $250 billion from the very beginning (with a modified ratio at a lower threshold). Similarly, the 2014 rules for the Fed’s Comprehensive Capital Analysis and Review (CCAR), a close companion to the Dodd‐Frank stress tests, another of the so‐called enhanced regulations, also used the $250 threshold.
The threshold could have been lower, but the consensus leading up to
the 2018 bill—Democrats on the Senate Banking Committee could have
stopped the whole thing—was that the added regulations were redundant.
And in the case of Silicon Valley Bank, at least through 2022, it had
just as much equity and liquidity (if notmore) than even the largest, most stringently regulated large banks.
Regardless, the threshold was always arbitrary. There was no
objective reason to argue that a $50 billion bank was systemically
important and a $25 billion bank (or two of them) wasn’t. In hindsight,
it’s easy to argue the threshold should have been lower, especially
after the government scared the daylights out of everyone by invoking
emergency authority and making even uninsured depositors whole.
Of course, Omarova wants to undo the 2018 changes. But that’s not
enough. What she really wants now is to have the federal government take
a special “golden share” interest in “each individual bank above a certain size.” According to Omarova:
It would be structured to serve a single purpose: to give
the American public a seat at the table where banks make decisions on
how to manage—or perhaps not manage—the risks we ultimately may have to
bear.
The “golden share” would also “allow the federal government to place
one director on the bank’s board.” And while Omarova acknowledges that
“This model may seem like government takeover to some,” she’s careful to
point out “that’s not how it is designed to work.” Just in case,
though, the “beauty of the golden share” is that it “can be tailored to
serve any public goal.” (Ignore who gets to decide what the public goal
might be.)
I won’t quibble over whether the golden share is government
ownership. Either way, this idea puts too much faith in any individual
to be able to recognize those “credible reasons to worry about the bank
heading down a dangerous path” with, for example, “rapid growth in the
riskiness or concentration of the bank’s assets or liabilities.”
The mechanism Omarova envisions is just another version of what we
already have. Instead of a Federal Reserve or FDIC employee trying to
stop things before they get out of hand, this person will be a federal
official on the private bank board. Or maybe a Fed employee on the bank
board? Either way, if it doesn’t work, the government could just take
two seats on the board. That would be bulletproof."
"Fifty years ago today, on March 23, 1973, Alexander P. Butterfield, the Administrator of the Federal Aviation Administration, issued a rule that remains one of the most destructive acts of industrial vandalism in history.
“No person may operate a civil aircraft at a true flight mach number
greater than 1 except in compliance with conditions and limitations in
an authorization to exceed mach 1 issued to the operator under Appendix B
of this part.”
This text was slightly modified in 1989 and again in 2021, but the
upshot remains the same. The rule imposed a speed limit on US airspace.
Not a noise standard, which would make sense. A speed limit.
This speed limit has naturally distorted the development of civil
aircraft. For fifty years, the aviation industry has worked to improve
subsonic aviation. Commercial passenger aircraft are safer and more
economical today than they were in 1973, but they are no faster.
If we had propagated the rate of growth in commercial transatlantic
aircraft speeds that existed from 1939 to the mid-1970s, we would have
Mach-4 airliners by now. But the overland ban put an end to all that. It
made small supersonic aircraft, which need to fly shorter overland
routes, essentially illegal, closing off the iteration cycle that could
drive progress in the industry.
That’s Eli Dourado who notes that modern designs greatly reduce sonic boom. I would also add the following. In 2019 there were 811 million passengers on US domestic flights
and 241 million passengers on US international flights. The average
duration of a domestic flight is about 2.5 hours and an international
fight about 7.3 hours so Americans spend about 3.7 billion hours every
year on airplanes. If we could cut even 20% of that time that’s a saving
of 757 million hours which has to be weighed against a few people
experiencing sonic booms near airports. Indeed, since the people on the
airplane are subjected to a lot of the noise the total amount of noise
experienced could easily go down with faster aircraft!
Golden State bureaucrats admit that their plans to regulate carbon emissions will immiserate lower-income and minority residents.
By Jennifer Hernandez. She has practiced environmental and land-use law in California for nearly 40 years and is a senior fellow of The Breakthrough Institute and an adjunct professor at USC Law School. Excerpts:
"California’s new carbon-neutrality plan
proudly promises to change “every aspect” of how people “live, work,
play, and travel.” Blessed by what its authors call their “collective
leadership and commitment to break away from ideas that no longer
represent Californians’ values,” the plan conjures a future of new
technology in pursuit of a greenhouse-gas-free future. Yet the plan
offers not a single remedy for its own projections that climate policies
will enrich the wealthy and hurt the state’s less affluent, heavily
minority households.
…..
In keeping with this pattern, California policymakers have opted to
pursue a far-reaching, multidecade climate blueprint for the state—one
they admit will disproportionately harm people whom they deem
disadvantaged. In text added just before the final plan’s adoption,
bureaucrats disclosed that “households in lower income groups”—which
includes all households earning $100,000 or less per year—will “see
negative impacts, while households in higher income groups are
anticipated to see positive impacts” from plan implementation. Even
worse, the plan projects that since “more than 60% of households in the
race/ethnicity categories of Hispanic, Black, and other minority
communities are less affluent, these groups will “experience reduced
income,” compared with mainly “White and Asian households” in higher
income groups."
"This question could have several interpretations:
1. Did lax regulation from the Fed cause banks to take excessive risks?
2. Did the sharp increase in interest rates during 2022 cause the crisis?
Here I’ll focus on the second question, which itself is highly ambiguous:
1. Did a tight money policy at the Fed cause sharply higher interest rates, hurting bank balance sheets?
2. Did an easy money policy at the Fed cause sharply higher interest rates, hurting bank balance sheets?
In my view, the NeoFisherian model provides the best way of thinking
about this issue—it was easy money that triggered the problem. Market
interest rate movements have two components: changes in the natural (or
equilibrium) interest rate and changes in the gap between the natural
interest rate and the market interest rate. I’d estimate that roughly
90% of interest rate movements represent changes in the natural rate,
and roughly 10% represent changes in the gap between the natural and
market rate.
In 2021 and 2022, the Fed adopted a highly expansionary monetary
policy, which led to wildly excessive NGDP growth. The fast NGDP growth
pushed the natural interest rate much higher. In this sense, you could
say that the Fed contributed to the higher interest rate environment
that damaged bank balance sheets. The Fed raised its target rate by more
than 400 basis points in 2022, and this mostly reflected an increase in
the natural interest rate, which itself reflected faster NGDP growth
caused by a previous easy money policy.
Once the Fed created the extremely rapid NGDP growth, they had few
options other than sharply increasing the policy rate (fed funds futures
target.) Some people suggest that the Fed raised rates too fast in
2022. But if they had raised rates more slowly, then inflation
and NGDP growth would have accelerated even faster, the natural
interest rate would have risen even higher, and the Fed would have
eventually been forced into an even higher interest rate policy. The banking crisis would have been even worse.
Much of the discussion of this issue is marred by confusion, a lack
of understanding of the distinction between changes in the natural
interest rate and Fed actions that move the policy rate relative to the
natural rate. Some people don’t seem to understand that the problem was
excessive monetary stimulus, not excessively tight money. Thus the
appropriate counterfactual was not to scale back 2022 rate increases
from 400 to something like 200 basis points, the appropriate policy
would have been to raise rates by 200 basis points in 2021, so that NGDP
growth would have been much lower in 2021 and 2022, so that the Fed
would not have had to raise rates so high in 2022.
In other words, if you always strive to have NGDP return to a 4%
trend line, the natural interest rate will stay at much lower levels,
and banks will have fewer problems with their balance sheets.
In theory, fast rising interest rates can be due to either the
Fisher/Income effects (fast rising NGDP), or tight money (the policy
rate rising relative to the natural rate.) It just so happens that in
this case the rising interest rates were mostly due to fast growing
NGDP, i.e. easy money. You don’t solve that problem by holding interest
rates below equilibrium, just as you don’t solve the housing problem
with rent ceilings.
When people blame the crisis on rising interest rates, they are
reasoning from a price change. They need to be more specific. Was
monetary policy too loose in 2022 or too tight? I say too loose. Yes,
rising interest rates were a problem, but not in the way that most
people assume. At a more basic level, it was the thing that caused the
rising interest rates that was the real problem—easy money.
One other point: When I blame banking problems on unstable monetary
policy, I am only discussing one factor. A well-run banking system (as
in Canada) can survive NGDP instability. The US does not have a well-run
banking system. In our system, NGDP instability creates periodic
banking crises. We can fix the banking system or we can fix monetary policy. Why not fix both?"
By David Griffith. He is Associate Director of Research at the Thomas B. Fordham Institute. Excerpt:
"Opponents of public charter schools frequently contend that they
drain resources from traditional public schools—a potentially serious
charge. But of course, it makes sense that traditional school districts
get less money when they enroll fewer students. So from a policymaking
perspective, the real question is whether districts’ financial capacity
to meet students’ needs is compromised by charters’ presence. This brief
addresses that question and several key subquestions by synthesizing
the latest and most rigorous research on charters’ fiscal and academic
impacts on district schools.
Q: Do charter schools increase or decrease districts’ total revenues per pupil?
A: Charter schools may increase or decrease districts’ total revenues
per student, depending on who authorizes them, how they impact the local
housing market, and the policies that states and localities adopt.
Q: Do charter schools increase or decrease districts’ instructional spending?
A: Competition from charters may push districts to increase or decrease
their instructional spending (though it has mostly positive effects on
specific instructional inputs such as teacher salaries).
Q: Do charter schools make districts more or less efficient?
A: While few studies address the efficiency question directly, what we
do know suggests that charters make affected school districts more
efficient, at least in the long run.
The Bottom Line
In the long run, districts will adjust to charter-driven enrollment
declines, just as they do when their enrollments fluctuate for other
reasons, so the challenge for policymakers is managing any transition
costs—that is, any temporary fiscal or operational challenges that
districts face—in a way that is fair to students and taxpayers.
Recommendations
1. Ensure that local dollars follow students to charters on an equitable basis.
2. Ensure that any compensatory funding that districts with declining enrollments receive is temporary.
3. Prioritize the needs of displaced students in cases where the consolidation of under-enrolled district schools is inevitable."
"Additional U.S. tariffs imposed under section 232 on imports of steel
and aluminum products and under section 301 on certain imports from
China reduced U.S. imports of these products and increased U.S.
production and prices of these products, affecting the many industries
that produce or sell these products or use them as inputs, according to
the U.S. International Trade Commission (USITC) in a report released
today.
The report, Economic Impact of Section 232 and 301 Tariffs on U.S. Industries,
was prepared in response to a direction by the House and Senate
Committees on Appropriations in an explanatory statement accompanying
the Consolidated Appropriations Act, 2022, enacted on March 15, 2022.
As
directed by the explanatory statement, the USITC, an independent,
nonpartisan, factfinding federal agency, conducted a retrospective
analysis of any tariffs imposed under section 232 of the Trade Expansion
Act of 1962 and under section 301 of the Trade Act of 1974 that were
active as of March 15, 2022. These actions included section 232 tariffs
imposed on certain steel and aluminum products beginning in March 2018
and section 301 tariffs imposed on thousands of products imported from
China beginning in July 2018. The explanatory statement directed that
the report focus on the effects on trade, production, and prices in the
industries directly and most affected.
The report includes:
A
description of the statutory provisions and recent actions under
sections 232 and 301, including the major findings from the U.S.
investigations that led to imposition of the tariffs.
A description of the status and chronologies of tariffs under sections 232 and 301 as of March 15, 2022.
A review of recent trade, production, and price trends in the directly and most affected industries.
An economic analysis of the effects of these tariffs on the directly and most affected industries.
The report finds that on average from 2018 to 2021:
U.S.
importers bore nearly the full cost of these tariffs because import
prices increased at the same rate as the tariffs. The USITC estimated
that prices increased by about 1 percent for each 1 percent increase in
the tariffs under sections 232 and 301.
Section 232 tariffs
reduced imports of affected steel products by 24 percent, increased the
price of steel products in the United States by 2.4 percent, and
increased U.S. production of steel products by 1.9 percent. U.S.
production of steel was $1.3 billion higher in 2021 due to section 232
tariffs.
Section 232 tariffs reduced imports of affected
aluminum products by 31 percent, increased the price of aluminum
products in the United States by 1.6 percent, and increased U.S.
production of aluminum products by 3.6 percent. U.S. production of
aluminum was $0.9 billion higher in 2021 due to section 232 tariffs.
Section
232 increased domestic sourcing, and reduced production in downstream
industries in the United States that use steel and aluminum products as
inputs because of increased prices, although the magnitude of those
effects varied across industries. Section 232 tariffs increased prices
in downstream industries 0.2 percent on average, and decreased
production in downstream industries 0.6 percent on average. U.S.
production in downstream industries was $3.5 billion less in 2021 due to
section 232 tariffs.
Across all affected sectors, section 301
tariffs reduced imports from China by 13 percent, increased the value of
U.S. production by 0.4 percent, and increased the price of U.S.
products by 0.2 percent.
In specific sectors, effects of section
301 tariffs varied. For example, section 301 duties reduced imports of
computer equipment by 5 percent, increased the price of computer
equipment in the U.S. by 0.8 percent, and increased the value of U.S.
production of computer equipment by 1.2 percent. The section 301 tariffs
reduced imports of semiconductors by 72.3 percent, increased the price
of semiconductors in the U.S. by 4.1 percent, and increased the value of
U.S. production of semiconductors by 6.4 percent."
Fearful of angering public-employee unions, politicians bend to their will at taxpayer expense. Can this arrangement be challenged in court?
By John Ketcham. He reviews Not Accountable: Rethinking the Constitutionality of Public Employee Unions by Philip K. Howard. Ketcham is a fellow and director of state and local policy at the Manhattan Institute. Excerpts:
"In 2008,
six years after securing control over New York City’s public schools,
Mayor Michael Bloomberg and schools chancellor Joel Klein put forward a
program to tie teacher tenure to student performance. The goal was to
reward the best-performing teachers with job security, encourage better
student outcomes, and hold teachers accountable for demonstrated
results. To most New York residents, it surely sounded like a good idea.
To
New York’s teachers’ unions, however, the program was utterly
unacceptable. Union leaders lobbied Albany, threatened state lawmakers
(who could pass legislation binding the mayor) with the loss of
political support, and walked away with a two-year statewide prohibition
on the use of student test performance in tenure evaluations. In short,
the union thwarted the mayor’s authority over the city’s schools and
commandeered the state’s legislative power.
In this case and many others, a public-sector union served its own interests at the expense of the public’s."
"public unions—that is, unions whose members work for the government—are
forbidden by the Constitution. The argument, he notes, would have been
familiar to President Franklin Roosevelt and George Meany, the longtime
president of the AFL-CIO, both of whom championed private-sector labor
but believed that public workers—teachers, fire fighters, policemen,
civil-service employees—had no right to bargain collectively with the
government."
"a world in which inefficiency is “mandated by contract,” and
out-of-control, unfunded pension liabilities threaten service cuts.
Meanwhile, arbitration stymies accountability, and a morass of work
rules “add up to personnel policies where there’s always a reason not to
do what’s needed.” Nothing much gets done, he says, because elected
executives “no longer have effective authority over the operations of
government.”
Armed with vast revenue from members’ dues, nearly all such unions
operate from the same playbook: elect pliant public officials as their
future bosses; negotiate with those officials for more favorable pay,
work rules and fringe benefits in the next round of collective
bargaining; and push for laws that expand the government workforce and
make reform impracticable. Political leaders intrepid enough to propose
legislative fixes can expect fierce resistance and, with few exceptions,
defeat at the hands of labor-aligned lawmakers and union-backed primary
challengers."
"He sees political authority being usurped by union authority—or, to put
it another way, politicians giving over essential governing choices to
unions. In response, he cites the “nondelegation doctrine,” a legal
theory positing that a branch of government can’t delegate its core
powers and responsibilities to a private entity. This doctrine, a
sibling of the one often raised when Congress tries to give broad
legislative discretion to the executive branch’s administrative
agencies, applies, he says, to public-sector unions: If these unions
wield an effective veto over government operations—a private entity
obstructing legislative or executive powers—then they contravene the
constitutional assignment of public responsibilities."
"It requires that the U.S. guarantee to each state a republican form of
government. By taking away key decisions from elected officials, Mr.
Howard says, public unions obstruct republican government. He also
quotes Federalist 39, where James Madison describes a republican form of
government as one that requires political officials to serve for a
limited term of office and remain subject to removal through the ballot
box. Structural union controls—in statutes and collective-bargaining
agreements—evade such accountability by persisting across terms,
impervious to executive authority. Worse still, laws in many
jurisdictions allow unelected arbitrators to resolve public-sector labor
disputes through binding decisions, permitting lawmakers to evade their
constitutional role and avoid making difficult trade-offs."
"Like SVB,
First Republic benefited from the Federal Reserve’s zero-interest rates
and quantitative easing, which caused deposits from its wealthy
customers to soar. It used these deposits to fund loans that appeared
safe at the time but now look much less so. Markets today are enforcing
more discipline.
This
is another illustration of how the Dodd-Frank regulatory apparatus has
failed. Democrats blame the 2018 bipartisan banking reform, which freed
regional banks from many burdensome regulations applied to the big
banks. But First Republic’s Tier 1 leverage ratio is greater than that
of most big banks, though it still may not be enough to absorb losses.
The
underlying problem is that the Fed’s modern monetary experiment and
Dodd-Frank regulation distorted bank balance sheets. Vulnerabilities are
emerging as the Fed corrects its inflationary mistakes. The more the
Biden Administration insists the economy and banking system are A-ok
when they’re manifestly not, the more markets get nervous."
A central function of the central bank is to act as the lender of last resort. Why did it fail to do so?
By Hal Scott. He is an emeritus professor at Harvard Law School and director of the Committee on Capital Markets Regulation. Excerpt:
"The Fed
(along with the Treasury) must answer two key questions: Did it know
there was or could be a run on SVB, and if so, why didn’t it lend enough
to the bank to prevent such an outcome?
Some
believe that SVB couldn’t borrow sufficient cash from the Fed to stem
the run because it lacked collateral. But the fair-market value of its
entire portfolio of government-backed securities was $102.2 billion as
of Dec. 31. Even allowing for a significant decline in value by March 9,
SVB would still have substantial collateral to borrow from the Fed to
cover the run on its deposits. Moreover, the Fed had no credit risk
taking government-backed securities, even at par rather than fair-market
value, as it could itself hold them to maturity.
Further,
under Section 10B of the Federal Reserve Act, loans at the discount
window need to be secured only to the satisfaction of the Fed, giving
the central bank plenty of leeway. During the 2008 crisis, the Fed used
this same leeway (then also available under 13(3) of the act) to lend to
nonbanks against unsecured commercial paper through a special-purpose
vehicle—a much riskier proposition.
When
SVB, the country’s 16th-largest bank before last week, was announced to
be insolvent, depositors at other banks predictably began to panic. In
response the Fed established its new Bank Term Funding Program to extend
loans to eligible banks at longer terms (up to a year rather than 90
days) and with more favorable collateral valuation (par value rather
than fair-market value minus margin) than would normally be available at
its discount window. But by that point the Fed was playing catch-up."
"It’s no coincidence that real wages have fallen during his
administration while real investment returns have turned negative.
Retirement savings plans have lost $4 trillion in value since Mr.
Biden’s inauguration"
"degrowth policies since 2020 will cumulatively reduce Medicare and
Social Security tax revenue by at least $400 billion—and perhaps as much
as $900 billion. The tax base will shrink even more if Mr. Biden
succeeds in levying higher wealth and business taxes."
"Mr. Biden’s insurance, regulatory and tax policies as implemented will
eventually combine to reduce the nation’s labor income by 5% to 6.5%,
with an additional reduction in the long term due to education policies
in blue states. In two years under the Biden administration, the labor
market is already falling short. Real employee compensation per
adult—which reflects the fraction of adults working, the number of hours
they work, and the inflation-adjusted cash and fringe benefits they
receive per hour of work—is 3.3% below the pre-pandemic trend."
"even if the Biden economy had attained 2% annualized growth per adult
from the first quarter of 2021—a tepid rate for a normal recovery—real
compensation per adult would be 2.5% above where it is now."
"remote-learning policies will reduce labor income nationally by almost
0.6% during the working lives of all students enrolled in K-12 education
during the 2020-21 school year. For context, 0.6% of current Medicare
and Social Security tax revenue would be $10 billion a year. Because
those earnings losses—47 years’ worth for each student after reaching
normal working age—are in the distant future, I discount them to the
present using a 6% real annual rate. By this measure, remote-learning
policies reduced prospective Medicare and Social Security tax revenue by
$118 billion in present value."
"[FIFA president Gianni] Infantino
said that equalizing prize money for the men’s and women’s tournaments
in 2026 and 2027 would depend in part on broadcasters’ bids for the
Women’s World Cup. He criticized “public broadcasters in big countries,”
whom he said submitted bids that were far too low for the 2023 Women’s
World Cup for the event’s audience size."
"it didn’t hold exotic derivatives, structured debt products or other
horrors that caused so much financial carnage 15 years ago."
"SVB held boring Treasurys and highly rated mortgage-backed securities in large quantities."
"The banking rules they introduced after 2008 made sovereign bonds such as Treasurys and the mortgage securities of Fannie Mae and Freddie Mac the coin of the realm for bank capital standards."
"Banks, especially the largest, now are required to hold a larger
quantity of highly liquid assets to avoid panics, as well as larger
capital buffers"
"regulators put sovereign bonds of various durations on the preferred list for each type of buffer."
"sovereign bond markets tend to be highly liquid."
"But what about interest-rate risk? For at least 15 years the Fed and other central banks have downplayed this risk"
"Their promises to suppress interest rates to abnormally low levels for
extended periods encouraged banks and others to believe sovereign bonds
would hold their market value."
"U.S. accounting rules allow banks to avoid recognizing losses on assets
they declare they’re holding to maturity, while they must mark-to-market
assets they designate as “available for sale” in case of distress."
"it creates an incentive for banks to shift more assets into the hold-to-maturity pool as interest rates rise."
"No law, rule or regulation can spare the economy from the consequences of bad policies, especially bad monetary policies"
"SVB’s failure is the bill coming due for years of monetary and regulatory mistakes."
"SVB executives made mistakes, and they will pay for them, but they were
encouraged by easy money and misguided regulation. As the Fed flooded
the world with dollar liquidity, money flowed into venture startups that
were SVB’s customer base. The bank’s deposits soared—far beyond what it
could safely lend.
In a
world of near-zero interest rates, SVB put the money in long duration
fixed-income assets in search of a higher return. Regulators after the
2008 crisis had deemed these Treasury bonds and mortgage-backed
securities nearly risk-free for the purpose of measuring bank capital.
If regulators say they’re risk-free, banks and depositors may be less
careful.
"But
those securities declined in value as the Fed took interest rates up
quickly to break the inflation it helped to cause. SVB had enormous
capital losses if it were forced to liquidate those assets before
maturity. That’s exactly what happened as SVB customers withdrew their
deposits. The San Francisco Fed regulates SVB and somehow missed this
rising vulnerability."
The FDIC
created an entity to protect SVB’s insured depositors up to the legal
limit of $250,000. But something like 85% to 90% of SVB’s deposits are
uninsured. The worry is that depositors in other banks will now flee.Thus the cries for federal intervention."
"The feds said they will guarantee even uninsured deposits at SVB"
"Typically in a bank failure those depositors would get their money back
with a 15% to 20% haircut. This would no doubt be a hardship for many
customers, but the $250,000 limit was known."
"Congress set the $250,000 insured limit to protect average Americans, not venture investors in Silicon Valley.
The FDIC may have resorted to its “systemic risk exception” for SVB and Signature, but this is a stretch considering their size."
"The Fed is acting as it should as a provider of liquidity to all comers.
But it’s going further and offering one-year loans to banks against
collateral of Treasurys and other fixed-income assets. The Fed will
value these assets at par, which means banks don’t have to sell their
assets at a loss. The Fed is essentially guaranteeing bank assets that
are taking losses because banks took duration risk that Fed policies
encouraged. This too is a bailout."
"The critics have a point. For the second time in 15 years (excluding the
brief Covid-caused panic), regulators will have encouraged a credit
mania, and then failed to foresee the financial panic when the easy
money stopped."
