As came out into the open last week, FSOC will finally turn to rewriting the Trump era rewrite of the Obama Administration’s FSOC protocols regarding systemic financial institutions and activities. Could the SIFI reaper be coming for Fannie and Freddie? We doubt it, but then again…
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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 …
Last Wednesday, the American Banker quoted me on the politics behind President Biden’s contradictory campaign to demand inflation-stifling policies while at the same time championing Fed independence. The article quoted me accurately, but as I read it, the brevity of my comments made them seem unduly pointed. As in Renaissance Florence, modern-day Washington is awash with nuance. To understand what President Biden meant, one has to watch for the equivalent of a carefully-arched eyebrow or a seemingly-offhand remark. Those I see and hear say that the White House will not hesitate to turn the Fed into the fall guy for inflation and then defenestrate it in political self-defense.
This isn’t to say that President Biden wants to sacrifice the central bank on the midterm’s altar. Despite entreaties of his more bloody-minded political aides, the President has so far heeded Secretary Yellen and given Jay Powell the equivalent of a royal pass. Still, the carefully calibrated comments last week show that this pass is increasingly conditional.
It’s not hard to understand why those frightened of a return to what Martin Wolf last week called a U.S. autocracy are willing to push the Fed in front of the firing line. I am less and less alone in thinking that Democrats in 2016 lost it all because they trusted conventional economic thinking far too much. Still, the Biden Administration has so far made the same mistake.
Starting in 2015, the Fed said that the American economy was a “good place.” President Obama took …
On Thursday, the Washington Post included an article on all the ways in which inflation hurts middle-income families, the acute shortage of baby formula, and the cooking-oil shortage’s cost impact in places ranging from a D.C. shop selling doughnuts to sub-Saharan Africa. Other articles chronicled stablecoins’ instability even as stock markets wobbled precariously above going so deeply into correction that investors are not just chastened, but also cudgeled. The same day, Chairman Powell won his second term by a wide margin even as he told Marketplace that he couldn’t promise a soft landing, didn’t mean to commit the FOMC to only fifty basis-point hikes, and knows how hard inflation hits for most households while being unsure that the Fed can do much about it. What markets make of this muddle remains to be seen by those not too faint of heart to look. What I know it means is that a White House under acute political pressure will ultimately do its best to transfer blame from 1600 Pennsylvania Avenue to 20th and Constitution at considerable cost to coherent policy.
One might discount my prediction of a political reckoning for the Fed by pointing to President Biden’s stout defense of his central bank last week when he tried to show the nation how much he was doing to quell inflation. But a careful read of Mr. Biden’s statements shows a focus more on the Fed’s independence than on its skill. So far, Secretary Yellen has persuaded White House …
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 …
The Great Depression’s role sparking the Second World War led the victors to create the Bretton Woods agreement establishing stable reserve assets under-girding a world prosperous and peaceful enough to prevent another conflagration. After 2008, the world reinforced another set of global norms, setting cross-border financial standards over the next fifteen years by newly empowered transnational financial agencies. Now, what was left of Bretton Woods is in ashes and national geopolitical interests will again dictate critical financial requirements. Although it’s of course possible that Russia’s devastating invasion will end without still more cataclysmic carnage, it has done irreparable damage to the largely frictionless cross-border finance on which it and its oligarchs relied. China should take a lesson.
To be sure, this globalized and increasingly financialized construct was imperfect even for the hegemonic states and systemic financial companies in whose interests it worked the best. As Rana Foroohar pointed out last week, it was premised on the optimistic “end of history” reasoning that expected an interdependent world to be all-for one and one-for-all. Quite simply, if you must go through someone else’s space to get where you want to go, then you are more likely to abide by the rules applicable in that space to ensure you get there. Over time, this creates a macrofinancial system in which currencies, payments, assets, and risks moved with few speedbumps from one end of the earth to the other. Even where rules might slow all of this down, safe-haven states constructed high-price bypasses. This, …
Taking action to advance President Biden’s competition order, 1 the CFPB is seeking views on fees which it believes exploit consumers by virtue of unfair competition. Although many of the fees it cites are covered by statutory
disclosure regimes designed to ensure both front- and back-end fee transparency, the Bureau believes that many of these fees are unfair due to large-bank market power.
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It’s not news that the latest inflation data are disastrous. Even if they won’t last, as Mr. Powell again assured Congress, it sure is hard to see how the combination of pressures detailed in the inflation data lead to ta rate even close to the FOMC’s median projection for 2022 of 2.6 percent. This means that real rates will remain negative throughout 2022 and well into 2023. Indeed, given that the FOMC’s median projection for the near-term fed funds rate never gets above 2.1 percent, even the Fed has tacitly conceded that negative real rates may well be prolonged absent either divine intervention or another devilishly-deep recession. In June of last year, I predicted that U.S. inflation would not prove transitory and forecast the political impact finally understood at the highest levels of the Biden White House. Much is also now being written about the inequality impact I described last year, but little is said about the sum total impact of these sorry facts of life on the financial system. These may also prove anything but transitory.
The first financial-system impact of high inflation and slow growth for anything but the S&P is both political and structural. With his back increasingly pushed to the wall by inflation’s toxic equality impact, Mr. Biden defended himself against the latest CPI numbers by arguing that many of them are due to monopolistic price controls best cured by rapid antitrust initiatives such as the one already launched against the meat industry.
Other …
As noted yesterday, the President’s Working Group on Financial Markets (PWG) was joined by the OCC and FDIC yesterday issuing a report calling for prompt Congressional action to regulate stablecoins and, even in its absence, also for fast action by federal regulators and the FSOC. In part because it poses the largest regulatory void, the most worrisome of the risks the report details arises from the role stablecoins may play in the payment system and resulting threats to systemic stability and competition. Issues germane to digital-asset trading (defined to include lending and related activities) are described but largely left to regulators; SEC Chairman Gensler has made it clear (see Client Report INVESTOR19) that he intends to act and the CFTC-chair nominee has done the same.
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Although the quadrennial kerfuffle over appointment of the Federal Reserve chair gets a good deal of public attention, I cannot recall a time when anyone outside banking’s inner circles cared much about who might be the next Comptroller or Vice Chair of Supervision. And, although they’ve garnered more attention of late in the diversity context, Federal Reserve presidencies were of even less public interest. Not only are all of these appointments now proving remarkably consequential, but they also pose a particularly thorny political equation for President Biden.
While all of these finance appointments are significant, that for Jay Powell as Fed chairman is of course the most important of them all. Although key lips are publicly zipped, Treasury Secretary Yellen would like to see Mr. Powell’s reappointment as would a host of other high-impact Democratic influencers. The plethora of coverage suggesting global financial markets will collapse if Mr. Powell is deposed peddle patent nonsense, but nonetheless signify the stakes some assign to his cause.
Despite this formidable support, the Powell reappointment was still proving difficult even before the Reserve Bank stock-trading disclosures. As I noted at the time, it’s a lot easier to understand individual financial bets than monetary-policy complexities. It’s thus unsurprising that Mr. Powell’s latest concessions are proving far from satisfactory to an array of high-impact Democratic influencers very emphatically not to be found on Wall Street. One of Mr. Powell’s strengths in the renomination battle has been divisions among Democratic progressives, making this resonant scandal particularly …