Tag: federal reserve
Jerome Powell

When 'Free Marketeers' At Silicon Valley Bank Begged For A Federal Bailout

On Sunday, March 12, Biden Administration officials announced that Silicon Valley Bank (SVB) depositors would have full access to their funds the next morning. The announcement came two days after SVB's collapse.

SVB lobbyists has been highly critical of federal banking regulations. But The Nation's Jeet Heer, in a biting article published on March 13, emphasizes that bankers who rail against regulations are the first to ask for help from the federal government when they run into problems.

Heer explains, "In 2015, Greg Becker, then president of Silicon Valley Bank (SVB), lobbied Congress to exempt his institution from what he saw as onerous and unnecessary regulations imposed on the banking industry after the 2008 financial meltdown…. Over the last few days, the many critics of SVB have been vindicated. It turned out that SVB's 'strong risk management practices' were nonexistent. In fact, the bank was carrying out an extremely risky strategy that ended with its collapse on Friday, (March 10), making it the second-biggest banking failure in American history."

SVB, Heer notes, had a problematic business plan that emphasized serving tech start-ups in the Silicon Valley. But the bank didn't plan for interest rate hikes by the U.S. Federal Reserve. Under Chairman Jerome Powell, the Fed has been gradually increasing interest rates as a way to fight inflation.

"SVB's strategy of putting all its eggs in the basket of long-term bonds itself made sense only as long as interest rates remained low, and as long as the start-ups were flush with enough cash that they continued to pump money into the bank," Heer observes. "The rise of interest rates changed both dynamics, creating a situation where depositors were pulling out more cash — which the bank didn't have on hand, because its investments were tied up in long-term bonds…. As SVB circled the drain, Silicon Valley plutocrats and their political allies started agitating for a bailout of depositors. Very quickly, the very free-market absolutists who love agitating for austerity and a pull-up-by-your-bootstraps ethos for the poor suddenly discovered the value of collective action and government intervention in the economy."

Republican presidential hopeful Nikki Haley was quick to attack President Joe Biden in response to SVB's problems. In a March 13 tweet, the former U.S. ambassador to the United Nations and ex-governor of South Carolina, tweeted, "Joe Biden is pretending this isn't a bailout. It is. Now depositors at healthy banks are forced to subsidize Silicon Valley Bank's mismanagement."

Haley didn't mention that she was a major Donald Trump ally during his four years in the White House, or that Trump did everything he could to roll back Barack Obama-era financial regulations.

Heer warns that a "reprise of the Tea Party backlash that started in 2009" following the 2008 crash "might be in the cards."

"Given the potential for demagogic abuse, it's imperative that the Biden White House develop a counternarrative — one that emphasizes the role of Trump’s deregulation," Heer argues. "There needs to be an active push to restore and enhance regulations, not just because it is good economic policy, but also, as a way to counter demagoguery. If Democrats don't offer more than bailouts for rich investors, then they’ll face the wrath of a righteously — and rightly — angry citizenry."

Reprinted with permission from Alternet.

How Much Blame Does Biden Deserve For Inflation Woes?

How Much Blame Does Biden Deserve For Inflation Woes?

President Joe Biden's standing with voters has taken a beating on multiple fronts. He is perceived as not focusing on issues they care about, particularly inflation.

Inflation is a president slayer. Richard Nixon imposed wage and price controls. When they were lifted, prices soared even higher. Would Nixon have been removed over Watergate if the economy had been better?

Gerald Ford issued red and white lapel pins proclaiming "WIN," which stood for "Whip Inflation Now." Inflation was unimpressed. Ford got whipped by Jimmy Carter in the 1976 election.

Inflation dogged the Carter presidency as well. Carter did eventually appoint a determined inflation hawk, Paul Volcker, to lead the Federal Reserve. He threw the nation into a recession by hiking interest rates. Ronald Reagan defeated Carter in 1980.

Does Biden deserve the blame for inflation? Not to the degree people are saying.

Senate Republicans held a press conference in July blaming the "insane tax and spending spree of President Biden and the Democrats for six straight months of raging inflation." In December, Sen. Mitch McConnell tweeted: "It is unthinkable that Senate Democrats would try to respond to this inflation report by ramming through another massive socialist spending package in a matter of days."

Whoa. Biden did pass a large COVID-19 bill early in his term, but the rest of the "socialism" Republicans are fulminating about did not pass.

Republicans are suddenly crying "socialism!" but let's be fair. While the government has been pumping money into the economy at a record clip over the past 14 years, most of that has been the work of the Federal Reserve, and former President Donald Trump was the most vociferous proponent of easy money we've ever seen.

Since the financial crisis of 2008, the Federal Reserve has been shoveling money out the door with pitchforks, and in the wake of COVID-19, both the central bank and the federal government have been "dropping money from helicopters," to use the image coined by Milton Friedman.

Many economists believe the Fed was right to do this as a response to the financial crisis of 2008. The controversy arises about when it was time to stop. Arguably, the Trump years were the right time. But that's not what the Trump-led GOP favored.

Trump's money gusher began in 2017 with the $1.9 trillion tax cut that wasn't matched with any spending cuts.

Trump appointed Jerome Powell to the Fed but quickly soured on him when he didn't increase the money supply quickly enough for Trump's taste. Powell was soon on the receiving end of Trump tweets. He argued that "we need rate cuts and easing" (exactly the opposite of what we needed).

If Republicans were worried about inflation, they might have spoken up about Trump's attempt to flood the economy with easy cash (to say nothing of eroding the norm about political influence on the Fed).

Then came COVID-19. Most people think the big federal cash infusion, the $2.2 trillion Coronavirus Aid, Relief and Economic Security Act, was a necessary response to the emergency. It saved many from destitution. But that money, combined with the trillions of dollars of quantitative easing and near-zero interest rates over the past decade and a half, certainly set the stage for inflation. Congress passed an additional $900 billion in December of 2020 — which Trump signed — for a grand total of over $3 trillion in COVID-19 relief.

Again, all of this money sloshed into the economy before Biden took the oath of office.

Was it wise for Biden to pass yet another COVID-19 relief package, the $1.9 trillion American Rescue Plan, in 2021? I don't think so. But did it cause the inflation we're experiencing now?

The annual inflation rate for most things Americans buy was already at the highest level in a decade before Biden entered the White House. And inflation is global. According to the Organization for Economic Cooperation and Development, inflation among its 38 member states is running higher than at any point since 2008.

So, even if Biden is only partially responsible for the inflation we've got, there are steps he can take. One would be to remove the Trump-imposed tariffs, which are taxes that raise the price of goods to Americans. Another would be to promote more legal immigration. We are suffering a severe labor shortage in all areas. More labor would ease bottlenecks at ports and in transportation. Make keeping schools open a priority. Remote learning has been terrible for kids, and many parents cannot work if their kids are not in school.

Biden should forthrightly address what's on voters' minds. He's gotten tangled up in internecine fights with other Democrats over matters voters don't know or care about and that he can't even win. If they sense he's not really engaged in controlling the inflation menace, it could well do to him what it has done to other presidents.

Reprinted with permission from Creators.com

In Debt-Limit Impasse, Federal Reserve Will 'Come Out Swinging'

In Debt-Limit Impasse, Federal Reserve Will 'Come Out Swinging'

By Ann Saphir

(Reuters) -Treasury Secretary Janet Yellen says failure to raise the U.S. debt limit could lead to the unthinkable: a default on government payment obligations. That's an outcome the White House on Friday warned could plunge the economy into recession.

If the impasse in Congress over the $28.5 trillion debt limit isn't resolved before an October deadline, what would the Federal Reserve - the backstop for U.S. financial markets as the lender of last resort - be prepared to do?

As it turns out, Fed Chair Jerome Powell may already have something of a game plan. The country faced a similar crisis over the debt limit in 2011 and again two years later, and at an unscheduled October 2013 meeting, Fed policymakers - including Powell, who was then a Fed governor, and Yellen, who was the Fed's vice chair - debated possible actions in response.

'Loathsome' was how Powell described some of the most aggressive options contemplated, transcripts show, though he was among those who said they might be needed in the face of what could be a drastic market catastrophe

The plan included a process for managing government payments, given the Fed's expectation that Treasury would prioritize principal and interest but would make day-by-day decisions on whether to cover other obligations.

Changes to the Fed's supervision of banks were also planned. Banks would be allowed to count defaulted Treasuries toward risk-capital requirements, and supervisors would work directly with any bank experiencing a "temporary drop in its regulatory capital ratio." The U.S. central bank would also direct lenders to give leeway to stressed borrowers.

Policymakers also mapped out approaches to managing market strains and financial stability risks stemming from a technical default.

They readily agreed to some measures, including expanding ongoing bond purchases to include defaulted Treasuries, lending against defaulted securities and through the Fed's emergency lending window, and conducting repurchase operations to stabilize short-term financial markets.

Other actions sketched out in briefing notes and during the meeting were more controversial, including providing direct support to financial markets buying defaulted Treasury securities, or simultaneously selling Treasuries that are not in default and buying ones that are.

It was those last actions that Powell described as "loathsome," while others referred to them as "repugnant" and "beyond the pale." The issue, transcripts suggest, was the worry that such purchases could be seen as crossing a line into direct financing of government.

"The economics of it are right, but you'd be stepping into this difficult political world and looking like you are making the problem go away," Powell said at the time.

A larger number of policymakers, including Yellen and John Williams, who at the time was San Francisco Fed president and is now head of the New York Fed, felt that such an intervention ought to be part of the U.S. central bank's response if needed. Even Powell agreed it might need to be "under certain circumstances."

Congress resolved the debt limit impasse in 2013 and the Fed never had to activate its game plan. Since then it has managed through a number of crises, including the coronavirus pandemic, to which it responded aggressively and with never-before-used tools like purchases of municipal debt. "We crossed a lot of red lines that had not been crossed before," Powell said in an interview in May 2020.

Analysts say that the Fed helped stave off a financial crisis and an even worse economic downturn.

Christopher Russo, a post-graduate research fellow at the Mercatus Center at George Mason University, says the Fed's experience may color how it responds to future crises.

"The lesson learned is: if they are going to do something, come out swinging," he said.

(Reporting by Ann SaphirEditing by Paul Simao)

Donald Trump

If Trump Loses, He May Try To Punish America

Reprinted with permission from Independent Media Institute

What could happen to America if Trump were to further, severely crash the U.S. economy the day after Joe Biden is announced as the winner of the 2020 presidential race?

As Trump tweeted on June 15, 2019, "if anyone but me takes over… there will be a Market Crash the likes of which has not been seen before!"

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