I am not sure if this is relevant, but reading this note made me think of a tweet I saw yesterday. As for what Mr. Powell does or does not to see, I don’t know, but in the Open Market Committee meeting in 2012 he said the following :
"I think we are actually at a point of encouraging risk-taking, and that should give us pause. Investors really do understand now that we will be there to prevent serious losses. It is not that it is easy for them to make money but that they have every incentive to take more risk, and they are doing so. Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy."
Jerome Powell, Chairman of the Federal Reserve, then member of the Board of Governors, Oct 2012 Federal Open Market Committee Meeting.
Nice essay. Thesis is that a significant part of the problems (in not all) are due to Fed actions. It sounds similar to iatrogenic actions by physicians, who's misguided actions kill patients, because the physician's have poor, or limited understanding both of the problem and of their tools.
That might be the best line to conclude a well thought out scolding of the current economic ruling class ever! “Pocahontas is right, Jerome Powell should be fired.” Thanks again for another sober take baked in reality, truly appreciate you taking time out to write these!
Great article! Kudos on 4 points: You mad me laugh out loud with Daryl (you must be from ny, came out of nowhere), quoting Owen, clear and informative, and Summers being a megaschmuk. Now make Fig produce! JK
Ironic that this boils down to the ills of active Fed mismanagement and active bank mismanagement. One wonders what passive management of each might entail. (just a bit tongue-in-cheek)
The core problem is that we've had hyperinflation in assets - with active encouragement from the fed for decades. This is the consequence of the least progressive tax rates in decades and bank credit creation which has focussed on asset acquisition. And as asset rich citizens move into retirement all over the developed world they will monetize assets and spend the proceeds in the economy. Therefore all the money (which has grown at 8% per annum over decades) sitting in investor accounts and balancing an allocation to financial assets is no longer siloed off from the real economy.
The only possibility to bring the system back into balance is to tax these nominal fed-induced gains from asset holders using a progressive tax. But of course that will bankrupt the financial system - so it can only be done as part of a massive monetary reform.
And as part of that reform the fed needs stop only looking at consumer prices when measuring the price level. And it should refrain from requiring positive inflation - as that requires banks to make non-productive loans. And money creation needs to be strongly focussed on productive endeavors - not on what it mostly does now: enable asset purchases at ever increasing prices.
Tax reform is needed to keep the great incentives in the capitalistic system intact while stopping ever increasing wealth concentration. If you are very productive you should obviously earn more. But the relative wealth of different percentiles in the wealth distribution should stay fairly constant. There should always be the possibility for highly productive individuals to make it to the top.
Measure the success of the system by monitoring debt and money to incomes. If that ratio continues to rise as it has been in every single developed economy for decades the problem has not been solved.
It's a tough project - but there is no other way. Interest rates won't solve this - they aggravate the imbalance of cash in investor accounts vs the real economy. And the coming generations simply won't accept handing over the vast majority of what they produce to an older generation due to the mere fact that they came first.
On point as usual! By the way, credit to you for the world-class call on the US 2yr treasury being severely undervalued the other day before this massive pump.
Does the 1/n formula (where n is confidence in central bankers) for gold and bitcoin’s price mean that you are warming up to the idea of crypto as a hedge against central bankers tendency towards devaluation?
This bank insolvency crisis and bailout frenzy seems like exactly what BTC was made to hedge against. Clearly this is bitcoin’s time to shine and I feel foolish owning none. I would love to hear your current take and if still against it what you find more attractive to own as a long term hedge/investment against increased money supply.
I wish I had the time to write a longer comment but I'm too damn just busy trying to keep up with your intellect. This note reminded of pf professor Steve Keene's excellent book (Debunking Economics), I certainly recommend it for everyone. Thank you as always your thoughts and insights!
Great Note. Always appreciate the thorough detailed thinking. That's why we read.
One general concept that I and many peers struggle with is that this this episode in banking is an 'oops'. Not that you are saying it is, but in general the events of the past two weeks seem far too revolatory. The world is awash in low coupon debt. What did 'they' (the CBs and the holders) think was going to happen when rates took flight? Given that they are all in the same elitist club - note the Board membership of the CEO of SVB at the SF Fed - (you know, the Fed Branch that seemed to be worried about every other hip topic than 'banking') the herding of deposits from small/med banks to large has an unmistakable tinge of intentionality to it. What comes next once we're all left in 5 to 10 institutions? Seems like a nice condition under which to 'introduce' CBDCs... Oh, that's right - Powell just announced developments on that topic for a July launch. Interesting timing.
1÷n head here. Women, infants and children agree: the rent is still too damn high and serfdom in the new Neofeudalism is unappealing. Harley Bassman recommended the Fed sell MBS quite some time ago. Guess we'll be visiting the seers at the Eccles building this week. Bring yer pitchforks!
Out of interest the “Loans create deposits” view originally came from the “credit creation theory of banking” early last century as distinct from the subsequent “financial intermediation - New Keynesian/Tobin” and “fractional reserve banking/money multiplier - Monetarists” views of banking. It is certainly emphasised in the MMT framework and the similar Post Keynesian banking frameworks but it is not new and all three remain hotly debated even today. By the way, thanks Mike for all your work. I have learnt so much from you over the years. 😀
I’m not a banking expert, but in taking a cursory look at SVB’s balance sheet, it did not appear to me to be the balance sheet of a bank behaving recklessly. 26 billion in available for sale liquidity seems like a pretty ample reserve to meet the potential demands of depositors. I’m sure in hindsight some mistakes were made and additional measures could have been taken. But I agree with Mike, the policy conditions were already in place for a banking panic like this to take place - that is Fed interest rate policy and fiscal policy pre, during and post pandemic are the culprits. If the conditions for a banking panic were not in place, this would have been a single bank failure. Responsibility for the current situation rests with policy.
The jury is out on the bitcoin experiment. However, thus far the experiment has something to teach us about this crisis. Bitcoin is an effort to construct a monetary system based on the principles of decentralization and behavioral incentives. It doesn’t start with the premise that economic and policy experts are best suited to make policy for millions of people making millions of decisions every day. Decentralized systems are inefficient – true enough. But unlike centralized systems they are durable. Its hard not to look at Fed policy since the GFC and believe that through policy intervention they have made the financial system more resilient. On the contrary. I believe it has made it more fragile and the fact that the Fed and the government in the coming days or weeks are going to guarantee all deposits with amounts above 250k for all small and midsize banks is evidence of this fragility.
America has built a successful society and economy because it put the individual and the rights of the individual at the center of political life and it put the entrepreneur at the center of its economic life – not policy makers. Economists like George Selgin have done research on less centralized financial systems – systems that rely more on competition and incentives to achieve stability and durability rather than policy makers. It seems this is a good opportunity to consider alternative approaches. Another Fed facility or government bailout of the banking system, which is underway, will not build durability in the financial system over the long-term. It will only lead to more fragility. And emergency policy interventions in the financial system rather than being the exception will become the norm.
Simplify's Mike Taylor has had the most well informed pithy takes on the Biden admin and J. Powell that I have read. He does not see Powell finishing his term. He's expressed this in interviews which I cannot easily point to.
Thanks for yet another great post Michael.
I am not sure if this is relevant, but reading this note made me think of a tweet I saw yesterday. As for what Mr. Powell does or does not to see, I don’t know, but in the Open Market Committee meeting in 2012 he said the following :
"I think we are actually at a point of encouraging risk-taking, and that should give us pause. Investors really do understand now that we will be there to prevent serious losses. It is not that it is easy for them to make money but that they have every incentive to take more risk, and they are doing so. Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy."
Jerome Powell, Chairman of the Federal Reserve, then member of the Board of Governors, Oct 2012 Federal Open Market Committee Meeting.
https://twitter.com/memeatball/status/1637439922326863876?s=46&t=-6ei2FgIdSLjiKYY-s7mRA
Nice essay. Thesis is that a significant part of the problems (in not all) are due to Fed actions. It sounds similar to iatrogenic actions by physicians, who's misguided actions kill patients, because the physician's have poor, or limited understanding both of the problem and of their tools.
That might be the best line to conclude a well thought out scolding of the current economic ruling class ever! “Pocahontas is right, Jerome Powell should be fired.” Thanks again for another sober take baked in reality, truly appreciate you taking time out to write these!
Great article! Kudos on 4 points: You mad me laugh out loud with Daryl (you must be from ny, came out of nowhere), quoting Owen, clear and informative, and Summers being a megaschmuk. Now make Fig produce! JK
Ironic that this boils down to the ills of active Fed mismanagement and active bank mismanagement. One wonders what passive management of each might entail. (just a bit tongue-in-cheek)
Interesting hat tip to Frank Capra. Prelude to War is apparently available in archived format on wikipedia: https://en.wikipedia.org/wiki/Prelude_to_War
Time magazine 2/15/1999. All you need to know...
The core problem is that we've had hyperinflation in assets - with active encouragement from the fed for decades. This is the consequence of the least progressive tax rates in decades and bank credit creation which has focussed on asset acquisition. And as asset rich citizens move into retirement all over the developed world they will monetize assets and spend the proceeds in the economy. Therefore all the money (which has grown at 8% per annum over decades) sitting in investor accounts and balancing an allocation to financial assets is no longer siloed off from the real economy.
The only possibility to bring the system back into balance is to tax these nominal fed-induced gains from asset holders using a progressive tax. But of course that will bankrupt the financial system - so it can only be done as part of a massive monetary reform.
And as part of that reform the fed needs stop only looking at consumer prices when measuring the price level. And it should refrain from requiring positive inflation - as that requires banks to make non-productive loans. And money creation needs to be strongly focussed on productive endeavors - not on what it mostly does now: enable asset purchases at ever increasing prices.
Tax reform is needed to keep the great incentives in the capitalistic system intact while stopping ever increasing wealth concentration. If you are very productive you should obviously earn more. But the relative wealth of different percentiles in the wealth distribution should stay fairly constant. There should always be the possibility for highly productive individuals to make it to the top.
Measure the success of the system by monitoring debt and money to incomes. If that ratio continues to rise as it has been in every single developed economy for decades the problem has not been solved.
It's a tough project - but there is no other way. Interest rates won't solve this - they aggravate the imbalance of cash in investor accounts vs the real economy. And the coming generations simply won't accept handing over the vast majority of what they produce to an older generation due to the mere fact that they came first.
On point as usual! By the way, credit to you for the world-class call on the US 2yr treasury being severely undervalued the other day before this massive pump.
Does the 1/n formula (where n is confidence in central bankers) for gold and bitcoin’s price mean that you are warming up to the idea of crypto as a hedge against central bankers tendency towards devaluation?
This bank insolvency crisis and bailout frenzy seems like exactly what BTC was made to hedge against. Clearly this is bitcoin’s time to shine and I feel foolish owning none. I would love to hear your current take and if still against it what you find more attractive to own as a long term hedge/investment against increased money supply.
I wish I had the time to write a longer comment but I'm too damn just busy trying to keep up with your intellect. This note reminded of pf professor Steve Keene's excellent book (Debunking Economics), I certainly recommend it for everyone. Thank you as always your thoughts and insights!
Michael, you really put the pieces of the last 2 weeks events together eloquently and accurately!
Great Note. Always appreciate the thorough detailed thinking. That's why we read.
One general concept that I and many peers struggle with is that this this episode in banking is an 'oops'. Not that you are saying it is, but in general the events of the past two weeks seem far too revolatory. The world is awash in low coupon debt. What did 'they' (the CBs and the holders) think was going to happen when rates took flight? Given that they are all in the same elitist club - note the Board membership of the CEO of SVB at the SF Fed - (you know, the Fed Branch that seemed to be worried about every other hip topic than 'banking') the herding of deposits from small/med banks to large has an unmistakable tinge of intentionality to it. What comes next once we're all left in 5 to 10 institutions? Seems like a nice condition under which to 'introduce' CBDCs... Oh, that's right - Powell just announced developments on that topic for a July launch. Interesting timing.
1÷n head here. Women, infants and children agree: the rent is still too damn high and serfdom in the new Neofeudalism is unappealing. Harley Bassman recommended the Fed sell MBS quite some time ago. Guess we'll be visiting the seers at the Eccles building this week. Bring yer pitchforks!
Out of interest the “Loans create deposits” view originally came from the “credit creation theory of banking” early last century as distinct from the subsequent “financial intermediation - New Keynesian/Tobin” and “fractional reserve banking/money multiplier - Monetarists” views of banking. It is certainly emphasised in the MMT framework and the similar Post Keynesian banking frameworks but it is not new and all three remain hotly debated even today. By the way, thanks Mike for all your work. I have learnt so much from you over the years. 😀
great piece but, essentially, they will be who they are and do what they do, so we are screwed again.
At least I have a better perspective before the criticality arrives. thanks.
I’m not a banking expert, but in taking a cursory look at SVB’s balance sheet, it did not appear to me to be the balance sheet of a bank behaving recklessly. 26 billion in available for sale liquidity seems like a pretty ample reserve to meet the potential demands of depositors. I’m sure in hindsight some mistakes were made and additional measures could have been taken. But I agree with Mike, the policy conditions were already in place for a banking panic like this to take place - that is Fed interest rate policy and fiscal policy pre, during and post pandemic are the culprits. If the conditions for a banking panic were not in place, this would have been a single bank failure. Responsibility for the current situation rests with policy.
The jury is out on the bitcoin experiment. However, thus far the experiment has something to teach us about this crisis. Bitcoin is an effort to construct a monetary system based on the principles of decentralization and behavioral incentives. It doesn’t start with the premise that economic and policy experts are best suited to make policy for millions of people making millions of decisions every day. Decentralized systems are inefficient – true enough. But unlike centralized systems they are durable. Its hard not to look at Fed policy since the GFC and believe that through policy intervention they have made the financial system more resilient. On the contrary. I believe it has made it more fragile and the fact that the Fed and the government in the coming days or weeks are going to guarantee all deposits with amounts above 250k for all small and midsize banks is evidence of this fragility.
America has built a successful society and economy because it put the individual and the rights of the individual at the center of political life and it put the entrepreneur at the center of its economic life – not policy makers. Economists like George Selgin have done research on less centralized financial systems – systems that rely more on competition and incentives to achieve stability and durability rather than policy makers. It seems this is a good opportunity to consider alternative approaches. Another Fed facility or government bailout of the banking system, which is underway, will not build durability in the financial system over the long-term. It will only lead to more fragility. And emergency policy interventions in the financial system rather than being the exception will become the norm.
Simplify's Mike Taylor has had the most well informed pithy takes on the Biden admin and J. Powell that I have read. He does not see Powell finishing his term. He's expressed this in interviews which I cannot easily point to.
The Phillips Curve? Really?