J.P. Morgan CEO Jamie Dimon is making international headlines with his recent claim that the current U.S. banking crisis is “not yet over, and even when it is behind us, there will be repercussions from it for years to come.” With Congress’s ongoing excessive spending and the Federal Reserve’s continued monetary mischief, Dimon’s prediction seems pretty safe.
Following the collapse of Silicon Valley Bank (SVB), Signature Bank and Silvergate shut down shortly thereafter. Depositors with uninsured amounts above the Federal Deposit Insurance Corporation’s (FDIC) insured amount of $250,000 at both banks withdrew large sums, forcing the banks to sell assets that had lost significant value. Silvergate voluntarily liquidated itself, while bank regulators forcibly closed Signature Bank. While the specific circumstances of SVB’s collapse may be unique, the factors contributing to its failure are not. SVB, Signature, and countless other banks that have yet to make headlines invested in risky assets such as environmental, social, and governance (ESG) initiatives and less risky assets such as government securities. These actions were fueled by government interventions in the economy that pumped excess liquidity into the market, creating an artificial “boom.” Since early 2020, Congress has added more than $7 trillion to the national debt, and the Federal Reserve helped keep interest rates artificially low. This resulted in a flood of liquidity that found its way into the banking system, which led to banks taking on those less profitable investments, particularly interest-rate-sensitive government bonds. But banks weren’t prepared for the Fed to change its interest rate tune, raising its target for the federal funds rate from 0 percent to the latest range of 4.75 percent to 5 percent, and for those assets to lose significant value so quickly. This made these banks take a huge hit to their balance sheet when they marked-to-market those assets, and they didn’t have sufficient capital in a fractional reserve banking system to fund deposit withdrawals, hence bank runs. Now, we’re witnessing the beginnings of the inevitable bust that follows a prolonged “boom” fueled by government actions that just redistributed resources while distorting markets. Perhaps the worst part in all of this is that the Treasury, Fed, and FDIC are creating moral hazard for banks by insuring many deposits at big, “systemically important” banks. This has created a shift of deposits from smaller regional banks to bigger banks, given this guarantee for now. Therefore, there’s more reason for bigger banks to take on more risks with this backstop and flood of new deposits at the expense of smaller banks and the economy. To make matters worst, the Fed recently added even more liquidity to the market. After reducing its balance sheet by about $700 billion from its peak of $9 trillion in April 2022, the Fed added $400 billion to provide loans to financial institutions. Its balance sheet is now down about $100 billion since then to $8.6 trillion, or only 4.4 percent below its record high last year, when it should be down substantially more to get ahold of inflation. The Fed’s balance sheet provides a good indicator of inflation, which has started to improve, but including the aberrations in the Fed’s balance sheet and underlying inflationary indicators in the food and services sectors, inflation could easily stay elevated at a much higher rate than the Fed’s preferred 2 percent average for much longer. Adding to the pressure on the banking sector includes how the Atlanta Fed’s GDPNow estimate for inflation-adjusted GDP in the first quarter of 2023 is only 2.5 percent (and Blue Chip consensus estimate is 1.5 percent) as of April 14. This is after less than 1 percent growth from the fourth quarter of 2021 to the fourth quarter of 2022, which is the slowest growth during a year of recovery in decades. This will exacerbate problems at banks if Americans can’t pay their bills. And we’re likely to see even higher interest rates soon, even though the Fed expects to raise rates just one more time this year. Based on the well-respected Taylor rule, which calculates a federal funds rate target based on inflation and output gaps, the Cleveland Fed’s Taylor rule utility suggests at least a 6 percent federal funds rate target. This would further devalue the government securities on banks’ balance sheets. So strap up, Americans, as we’re in for a bumpy ride in the banking sector and overall economy. Only by allowing people to exchange freely with limited government interference that simply sets the rules of the game but is a referee thereafter, not a participant, can we better avoid these boom and bust cycles in the banking sector and across the economy that threaten our freedom and prosperity. A big part of this will be to unleash the banking sector from excessive regulations like those imposed by Dodd-Frank after the financial crisis. There should also be an effort to not increase the FDIC’s insured amount by $250,000, as depositors should also take losses if they’re not doing their due diligence to research where they deposit their funds. And there should be support for increasing capital requirements by banks in the marketplace rather than policy avoiding some of the problems with fractional reserve banking. Finally, the Fed should be led by a monetary rule, like the Taylor rule, and Congress by a fiscal rule, like the Responsible American Budget, to remove the discretion that plagues our economic activity and future. If not, there will be many more “booms” and busts and many more failures from government actions over time. We must let free people succeed and fail, as failure is essential for us to learn lessons, or we will keep making the same mistakes. But we should be eliminating government failures by ultimately shrinking government and ending the Fed. Originally published at Econlib. In Let People Prosper episode #41, I talk w Dan Mitchell, Ph.D., about the need government spending limits, benefit of flat tax revolution, Fed's booms and bust cycles, and more to let people prosper. On today's episode of the "Let People Prosper" show, which was recorded on March 24, 2023, I'm thankful to be joined by Dr. Dan Mitchell, President of the Center for Freedom and Prosperity and blogger at International Liberty.
We discuss: 1) Lessons from history on government spending and why strong spending limits are needed at every level of government; 2) Issues with the Fed creating artificial cycles of booms and busts; and 3) Reasons to be optimistic about the flat tax & and school choice revolutions happening in states across the country. You can watch this interview on YouTube or listen to it on Apple Podcast, Spotify, Google Podcast, or Anchor (please share, subscribe, like, and leave a 5-star rating). Dan Mitchell’s bio:
For show notes, thoughtful economic insights, media interviews, speeches, blog posts, research, and more, check out my personal website and subscribe to my Substack newsletter where you can get every episode in your inbox. ATR Senior Fellow Vance Ginn provided remarks at the Tax Day press conference at the House Triangle. Video of Ginn’s remarks can be viewed here. Ginn said: “It is often said that we don’t have a revenue problem, we have a spending problem. And that’s true. But also here on Tax Day, we have a tax problem. What we really need is for free market capitalism, which is the best path to let people prosper, to be able to flourish again. For people to get jobs and higher wages so they could pay for the higher inflation that’s come out of the Biden administration. And it’s just one thing after another. The latest account of this was the Inflation Reduction Act which does no such thing. It continues to raise inflation, raises the debt, and the latest estimates on this show that it will be about four times higher than what the CBO reported just last year. And a lot of this has to do with the tax credits for electric vehicle batteries, which are going to cost nearly $200 billion plus over time. This is another way that they’re infiltrating the overall size of the government through our economy throughout our lives. And fortunately, we have another way that we should go, that’s led by a lot of states that are leading the sustainable state budgets across the nation, that they should look at by spending less, and finding ways to provide tax relief and regulatory reform.“ Originally published Americans for Tax Reform. This Week's Economy Ep. 5: LATEST On Debt Ceiling, Rich/Poor States, Inflation Recession Act & More4/21/2023
In "This Week's Economy" episode 5, I discuss the latest news on the federal debt ceiling, findings from ALEC's "Rich States, Poor States" report, and exciting personal updates from this past week. Thank you for listening to the fifth episode of "This Week's Economy,” where I briefly share my insights every Friday morning on key economic and policy news at the U.S. and state levels. Today, I cover:
There's a lot of talk about the harms of social media on teens. Notable experts on both sides of the issue struggle to reach consensus. But state lawmakers are moving ahead with legislation to ban teens from social media.
The issue is, even if we assume the worst, a ban is a short-term fix to a potentially longer-term problem. Worse, it will likely do more to avoid dealing with teens’ underlying problems by taking control away from parents. And it could shortchange teens of many benefits online for education, networking, and more. If these issues are truly due to social media, when teens turn 18 and become “legal adults,” the issues will continue. The only difference a ban will make is that when teens become adults, and move away to start their lives, they won't have their parents to guide them online. They’ll have missed out on the opportunity to have productive discussions about safe practices with their parents. Despite what legislators are claiming, bans aren’t a pro-parent approach. Legislation to ban minors from social media gives the government (politicians and bureaucrats) the power to decide what’s best for children. And as usual, it's set to do a poor job of it. Earlier this year, Utah became the first state to ban teens from social media. The pair of bills ban teens under 16 completely and impose heavy-handed restrictions for sites allowing teens 16 to 18. Those restrictions include state-mandated curfews, intrusive age verification, punitive fines on companies with sites subjectively considered to be too appealing, and a presumption that any harm a child experiences is the result of social media. Parental consent is required for teens 16 to 18 to create an account, but that’s the end of a parent’s input into what they want for their teen. Now Texas, Arkansas, and other states are following suit. While legislators praise these bills as a solution to the mental health crisis facing teens, these provisions don’t address the underlying problems from many factors. Adding to the debate about whether social media is a significant cause of depression, experts are also grappling with how to reduce cyberbullying, curb exploitation, and protect teens from predators online. State efforts have done more to gloss over the problems teens are facing in the name of parental choice, missing opportunities to address specific issues and avoiding the unintended consequences of such actions. What’s more, the specifics in these bills, like state-imposed curfews and civil penalties, constitute a draconian approach that removes parents from choosing what’s best for their kids. Rather than banning teens from engaging in our connected world, we should separate the concerns into actionable items. Experts, stakeholders and parents alike should be given time to propose solutions with meaningful input that prepare teens to safely and responsibly enter the technology-integrated world. The hard part, of course, is reaching a consensus. To some, that’s why an all-out ban on allowing teens on the Internet would do the trick. But that would ignore the reality that teens will one day become adults and find themselves unequipped to contend with an online world, less productive, and more at risk of the concerns given for bans. It also takes the power out of the hands of parents, who are the ones best positioned to find what’s best for their kids, and puts it in the hands of bureaucrats. Government meddling in the parent-child relationship rarely works well, and there’s little reason to believe this time will be different. That goes for Utah, Texas, Arkansas, and any other state that tries to help kids by disempowering parents. If the warning signs are true, and social media is creating all the harm talked about in the news, we can’t simply ban the problems away. We’ll need to address them head-on with solutions that balance liberty, free speech, privacy, and parenting. Without these, we will fail to set up the next generation for offline and online success. Originally published at The Center Square. |
Vance Ginn, Ph.D.
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