How a Shut-Down Stokes Systemic Risk
Although there’s been some talk of what a government shut-down does to the SEC, there’s lots, lots more to worry about. Risks are out there, risks that should be taken very, very seriously by the Members of Congress who seem to think that more chaos stokes their political fortunes. Perhaps it does, but it could well do a lot of damage to their finances, not to mention those of all the voters who might well bear a reasonable grudge.
Although there’s been some talk of what a government shut-down does to the SEC, there’s lots, lots more to worry about. Risks are out there, risks that should be taken very, very seriously by the Members of Congress who seem to think that more chaos stokes their political fortunes. Perhaps it does, but it could well do a lot of damage to their finances, not to mention those of all the voters who might well bear a reasonable grudge.
Where’s the systemic scary place? Or, better said, places? Some are right in front of us; others lurk in the closet waiting to pounce.
What worries me the most in the immediate future is the ability of bad actors to exploit what could be lightly- or even unguarded portals into critical financial market infrastructure. There are of course many, many bad actors out there with the sophistication and/or state sponsorship quickly to test and then attack critical points in the payment, settlement, and clearing systems and/or the grids on which they rely.
As I discussed on Tuesday, not all providers of critical financial market infrastructure are under the hopefully-eagle eyes of the federal banking agencies which, funded outside federal appropriations, will remain open. Some fall under the SEC or CFTC, agencies that will be hobbled, and some critical providers are wholly outside the regulatory perimeter. Even if their nodes of market access seem small, disruption has a bad habit of migrating at lightning speed. Even if power outages are …
Calm Before the Storm
And it’s not just because the weather around the world is so tumultuous, not to mention dangerous. The last week of August is traditionally the slowest week of the year other than the one between Christmas and New Year’s and thus it is in Washington, New York, London, Tokyo, and pretty much everywhere else that is blessed with peace and at least some prosperity. Still, the torpor is temporary. European and Asian markets wake up after September 4 and U.S. ones not too long thereafter.
Among the unmourned victims of 2022 is to be found modern monetary theory. Although it seemed clear from the start that MMT was a product of magical thinking, it engendered insouciance that kept fiscal deficits rising ever higher. Now, Republicans will press for fiscal austerity. Democrats will fight back, but they too will seek as much fiscal constraint as compatible with gaining power in 2024. Congress thus will look for new revenue sources that aren’t taxes and quickly find one at the Fed on which both sides agree: cutting payments to the nation’s biggest financial institutions.
It is difficult to calculate just how much the Fed is sending back over the transom into the financial system. One recent paper estimates it as over $100 billion a year and this might well be the case once interest on bank reserves is totaled up with the interest the Fed pays within the gigantic overnight reverse repo program (ONRRP). Whatever the sum now, it’s large and it will only go up in 2023. The more rates rise, the more the Fed pays out even as it is still saddled with billions of low-yield portfolio assets.
These interest payments are already on the radar of at least one conservative analyst. His arguments channel those Republicans raised when these interest payments were last on the fiscal chopping block, a time when Democrats also said pretty much the same about wanting billions for taxpayers, not banks.
To be sure, nothing came of all these …