#treasury

1 08, 2022

Karen Petrou: The Incredible Shrinking Fed

Arezou Rafikian2023-01-04T13:36:59-05:00August 1st, 2022|The Vault|

As seems increasingly the case, I spent more time last week than hoped with airport personnel. In the course of the economic-inequality discussion that prompted my travels, I mentioned that I had little confidence in the general-public inflation expectation data in which economists put such stock. So, I asked my aide what she thought and was told that her biggest fear is the “rising price of the dollar” and whether she will thus be able to afford her apartment and get her kids ready for school. The airport was packed and she is turning down overtime, but she has to take care of her kids and day care costs are higher than even more pay can manage. Pressing on, I got only a blank stare following mention of the Federal Reserve but then heard a diatribe about useless politicians including those she no longer thinks care for anyone but themselves. I think this lady’s views are emblematic of lower-wage workers who once were active voters and thus also an important warning signs not only of how unequal economies work at odds with the Fed’s macro models, but also of the outcome of the election this year and, should things only get worse, then in 2024.

I decided not to waste time by asking Kisha (not her real name) to agree that the recession is just an illusion because all the data boxes have yet to be checked as the President, Treasury Secretary, and Fed chairman insist. It’s hard to think …

12 07, 2022

FedFin on: U.S. Digital-Asset Policy

Arezou Rafikian2023-01-23T16:02:08-05:00July 12th, 2022|The Vault|

As part of its response to the President’s digital-asset executive order, the Department of the Treasury is seeking views on the broad policy questions on which it believes answers might guide the Administration’s next steps. The definition of digital assets on which comment is sought includes central-bank digital currency (CBDC) and other digital representations of value delivered via distributed ledger technology (DLT). As a result, Treasury’s inquiry is comprehensive and results could have far-reaching implications, but the nature of the questions posed are so broad as to provide little indication of how Treasury plans to frame its report to the White House and proceed thereafter.

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

18 04, 2022

Karen Petrou: Starry-Eyed Kids Stumbling in the Cryptoverse

Arezou Rafikian2023-03-02T10:55:51-05:00April 18th, 2022|The Vault|

One of the really sort-of sweet things about many who espouse the inevitability of digital assets is boundless hope for crypto domination derived from little knowledge of how the financial system actually works. Last week, a prime example surfaced on Reuters, which touted a plan by which $10 billion of bitcoins would supplant the dollar as the global reserve currency. Here’s to hoping, but the total USD money supply clocks in at close to $22 trillion, suggesting one might need more than a few billion to make even a bit of a dent. Digital currency may well reign supreme, but it won’t be much more than a speculative bet until someone figures out how to integrate it into legacy systems and market, policy, and regulatory realities.

One might say that using M3 as the measure of the dollar’s power is unfair. So, let’s use just currency in circulation. That’s a lot less, but still a formidable $2.3 trillion, a number not only humbling to entrepreneurs, but also progressive Democrats crafting a new form of digital currency via the U.S. Treasury.

Our in-depth analysis assesses this “e-cash” legislation. The idea here is to create a digital asset that is identical to physical dollars in all but physicality. This may be a worthy effort, but it won’t be easy.

Take just one issue: the bill mandates that e-cash be fully private and anonymous but also ensures effective AML enforcement. Quite simply, that can’t happen.

Still, as physical-cash transactions shrink, the absence …

21 03, 2022

Karen Petrou: How to Set Course to a Digital Future

Arezou Rafikian2023-04-03T13:18:42-04:00March 21st, 2022|The Vault|

Last week, we laid out the macrofinancial implications of the Ukraine crisis – i.e., its impact on the global financial-and-regulatory order. Some of this analysis is founded on President Biden’s digital-asset executive order, which also has profound and immediate impact on critical macroprudential issues at the border of innovation and regulation to which we now turn. To forecast how digitalization will come upon us, the digital-asset order must be read in the Administration’s broader context in which high-impact political issues, such as racial equity, weigh at least as heavily as the complexities of CBDC or even the benefit of a future financial crises foregone.

Administration policy based on Democratic politics is set not only by the digital-asset order, but also by other White House directives that will define the boundaries of what Treasury and the agencies – the Fed included at least to a point – will do. To forecast digital-asset policy, one must thus also divine the outcome of two other executive orders.

First, there’s the President’s competition directive. Every critical consumer-protection question under the CFPB’s purview is now considered first and foremost in terms of competition, with the agency’s director making it manifestly clear that almost anything done by any big bank is a target for structural reform. Director Chopra doesn’t like fintech or biotech much better than most banks do, but his approach to digital assets is likely only to squelch big banks as much as he can and thus to drive cryptoassets further into …

7 03, 2022

Karen Petrou: Why Armies Now March on Their Wallets

Arezou Rafikian2023-04-04T12:29:27-04:00March 7th, 2022|The Vault|

Napoleon famously said that armies march on their stomachs. Now, it’s clear that armies also march on their wallets.

The dollar’s blitzkrieg triumph isn’t due to any love of the greenback — even America’s closest allies have long hoped to counterbalance US. economic dominance with rival payment systems able to operate unscathed regardless of U.S. sanctions. However, the EU, U.K., and Japan have never gotten much past dreaming about payment-system challenges because the embedded dollar-based system has become essentially friction- and risk-free. That’s hard to beat.

China might still have a shot at a yuan-based substitute, but it would have to ensure liquidity (essentially impossible when a currency isn’t freely convertible) as well as political neutrality. China’s decision suddenly to mount de facto nationalization of what was once a thriving, privately-owned digital-commerce sector will at the least give pause to those whose funds would move through a Chinese-dominated system.

Any nation that wants to replace the dollar also has to have sovereign obligations readily understood to be a safe haven under acute stress that are issued in amounts sufficient to absorb extreme shock. China and the EU has no single issuer of sovereign bonds in quantity and quality sufficient to substitute for Treasury obligations. Most market participants think China is more likely to be the cause of a shock than ever to serve as a shock absorber, ruling out its sovereign debt even if it grows large enough to mount a challenge to the U.S. Treasury.

And, finally, there’s the …

21 01, 2022

Karen Petrou: Few Financial Fall-Out Shelters If Russia Invades Ukraine

Arezou Rafikian-12023-04-24T11:51:21-04:00January 21st, 2022|The Vault|

Perhaps nothing says as emphatically that market valuations are divorced from reality as the fact that equity and bond markets are essentially ignoring the increasing risk that Russia invades Ukraine. Investors have grown used to shrugging off geopolitical risks – see just the brief chills after Russia’s previous invasions of Crimea and Georgia as cases in point. But this time is different because this time Ukraine is a critical link in Europe’s energy supply, macroeconomic stress in Europe will have immediate global repercussions, and Vladimir Putin is making it more than clear that this time he’s not just playing around with minor nations he thinks of as vassal states. This time, he will go to the economic map if he believes the Western response to his invasion might pose too much risk to Russia’s economy and his popularity and there’s no reason to doubt him. As a result, I hope Treasury and the Fed are keeping a careful eye on the Treasury market and global payment system, not to mention on the cyber-security on which core market infrastructure rests. The threat is all too real.

Treasury has long known that the “nuclear option” when it comes to economic sanctions is denying Russia access to any financial institution with any kind of domicile in the U.S. or any point of access to the U.S. payment system topped off by SWIFT sanctions blocking Russian access to the global payment system. If Treasury fires these high-powered missiles – and it’s likely to have …

18 11, 2021

FedFin on: Omarova Nomination Threatened

Arezou Rafikian2023-05-25T16:01:16-04:00November 18th, 2021|The Vault|

As expected, today’s hearing with Comptroller-nominee Saule Omarova included an unprecedented amount of fireworks for what is normally a low profile appointment. In this report, we omit analysis of the debate on Ms. Omarova’s origins and alleged Marxism, instead assessing policy issues germane should Ms. Omarova succeed in what seems an increasingly difficult confirmation. Notably, moderate Democrats such as Sens. Tester (D-MT) and Warner (D-VA) were clearly concerned with Ms. Omarova’s opposition to the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), while Republicans lambasted her for previous comments about cutting off credit to the oil and gas industry and proposals they believed would nationalize U.S. banking.

The full report is available to retainer clients. To find out how you can sign up for the service, click here.…

19 10, 2021

FedFin on: Banking Dems, GOP Demand More, Tougher Sanctions

Arezou Rafikian2023-06-07T15:42:15-04:00October 19th, 2021|The Vault|

Today’s Senate Banking hearing with Treasury Deputy Secretary Wally Adeyemo showed bipartisan concern that the Administration is failing to implement sanctions required by law, especially when it comes to China, North Korea, and Russia. Senators also stated that they will not tolerate what they call continued defiance of Congressional mandates without making clear what they intend to do to enforce their will should Treasury fail to act.

The full report is available to retainer clients. To find out how you can sign up for the service, click here.…

4 10, 2021

Karen Petrou: How to Ensure Equitable Fed Intervention in the Crisis Next Time

Arezou Rafikian2023-07-05T15:57:30-04:00October 4th, 2021|The Vault|

With her unerring instinct for the jugular on which media thrive, Sen. Warren on Tuesday called Jay Powell a “dangerous man.” This promptly sent many into still more feverish speculation about the Fed’s next chairman, blotting out coverage of an even more consequential development in the House: Democratic plans to rewrite the Fed’s powers in the next financial crisis. Last week, I pointed to the political price for Mr. Powell’s renomination: the Omarova appointment. A structural one with even more lasting impact is the rewrite of the Fed’s emergency-liquidity powers to, as Democrats demand, end backstops for “Wall Street” in favor of Fed facilities for everyone else.

Although little noticed, HFSC Chairwoman Waters on Thursday said for the second time in as many weeks that “Our committee is committed to ideas to ensure that facilities like these [the Fed’s in 2020] can more directly support workers and small businesses as well as state and local governments the next time there is a crisis.” Holding fire on Mr. Powell, Senate Banking Chairman Brown also targeted Fed support for Wall Street in his opening statement on Tuesday. This follows an inconclusive HFSC hearing a week or so ago on just what these new facilities might look like but make it clear that an array of reforms is under active consideration.

Importantly, these demands for people-focused facilities aren’t an isolated case of progressive pique. After the 2008 crisis, there was much bipartisan ire over whom the Fed helped how. This led to a …

15 09, 2021

FedFin on: GSEs Get a New, If Familiar, Gig

Arezou Rafikian2023-08-03T14:58:42-04:00September 15th, 2021|The Vault|

As noted yesterday, Treasury and the FHFA pulled the Trump PSPA’s plug, although importantly and widely overlooked is that this is true only when it comes to near-term asset-purchase considerations. Still, with this action atop all the others redefining Fannie and Freddie since Sandra Thompson took over, the GSEs are being reconfigured into agents of Administration policy in concert with being still more critical agencies for housing finance.

The full report is available to subscription clients. To find out how you can sign up for the service, click here.…