According to a recent CNBC survey, pessimism regarding the American economy is at an all-time high, with 69% of the public having a negative view. The leading reason is inflation in a weak economy. The latest report this week shows that inflation remains persistently high at near 5%, eroding slower-growing average weekly earnings year-over-year for 25 straight months.
The Federal Reserve recently raised its federal funds rate target for the 10th meeting in a row to 5.25%–the highest since August 2007. While these rate hikes were anticipated in light of ongoing inflation, they could have been avoided. But excessive government spending and money printing during the “boom” led to this government-failure bust, the effects of which we’ll feel for months and even years to come.
The sluggish economic growth has been rough on Americans, but inflation has been a killer. The survey also noted, “Just 5% say their household income is growing faster than inflation, 26% say it’s keeping pace, and 67% report they are falling behind.” This is devastating lower-income households’ standard of living.
The trend of declining real wages is particularly harmful to low-income Americans. But even the wealthy feel the effects, as more than half of higher-income Americans surveyed report spending less on eating out and entertainment. This has contributed to the anemic annualized economic growth of just 1.1% in the first quarter of 2023 after rising by only 0.9% from the fourth quarter of 2021 to the fourth quarter of 2022.
As prices increase, businesses spend more on production, making it more difficult to raise workers’ wages while remaining profitable. Employees who can’t be paid enough to fund costly goods like childcare and groceries, which have risen by 7.1% over the last year, spend less on other things or fall behind on their bills. Businesses earning less revenue will invest less, and so goes the vicious downward cycle.
Another hit on Americans has been the cost of shelter, which was up 8.1% over the last year even as there are signs that housing prices are cooling across the country. Still, housing prices have been “eclipsing the inflation rate by 150% since 1970.” This means many Americans can’t afford to own a home, and that’s getting further out of reach as mortgage rates have soared.
What’s to be done about inflation threatening Americans’ livelihoods? Legendary economist Milton Friedman had some advice about addressing sky-rocketing inflation that is valuable today.
There is one and only one basic cause of inflation: too high a rate of growth in the quantity of money—too much money chasing the available supply of goods and services,” he argues. “These days, that cause is produced in Washington, proximately, by the Federal Reserve System, which determines what happens to the quantity of money; ultimately, by the political and other pressures impinging on the System, of which the most important are the pressures to create money in order to pay for exploding Federal spending and in order to promote the goal of ‘full employment.’
Despite raising its target interest rate to fight inflation, the Fed has a bloated balance sheet of nearly $9 trillion, which is too high for disinflation to its target of an average 2% rate. When the Fed engages in excessive money printing compared with the supply of goods and services, inflation is the result, as Friedman described.
While it was appropriate for the Fed to raise its target rate, the ongoing increase to its balance sheet is just continuing to distort productive economic activity. And Congress must restrain spending. The national debt is nearly $31.5 trillion, with net interest payments on the debt set to exceed $1 trillion soon.
The government must borrow to finance the deficit when it spends more than it makes, driving up interest rates. Higher interest rates increase the cost of borrowing for businesses, leading to lower investment, which reduces the supply of goods and services. Add in the Fed buying the debt that increases the money supply with less supply of goods and services, resulting in more inflation.
House Republicans passed a debt ceiling bill that would return spending to 2022 levels and limit spending to just 1% growth over the next decade while eliminating other bad policies. Negotiations between the two parties continue, while a June 1 deadline looms. If they don’t reach agreement, it will make the debt issue an ongoing concern as defaulting on the debt nears, further raising interest rates that weaken the economy.
This means we can expect a deeper, longer recession. The Fed and Congress have a duty to stop flawed policies of excessive printing and spending, respectively. High inflation harms Americans, and the Fed and Congress must address this. If they don’t take action soon to address these government failures, the erosion of the American dream will continue.
The future of America depends on sound, pro-growth, pro-liberty policies instead that will let people prosper.
Originally published at Econlib.
In our system of federalism, competition matters among the states. This reality has been on full display the past few years as people fled big-government states like California and New York to more limited government states like Texas and Florida. But what works best?
The American Legislative Exchange Council’s (ALEC) “Rich States, Poor States” report is a recent comparison of states. Utah, a politically red state, ranks second best in economic performance and first in economic outlook for 2023. Texas, the largest red state, ranks seventh in performance and 13th in outlook. On the surface, this looks pretty straightforward, but a closer look shows that Texas is a leader but needs much improvement.
The report measures performance based on the growth of state gross domestic product, absolute domestic migration, and non-farm payroll from 2011 to 2021. The economic outlook is based on 15 state policy variables, including tax burden, debt and other factors.
Utah beats Texas for state GDP and nonfarm payroll growth rates, while Texas wins for absolute domestic migration. This is thanks to people leaving states like California and New York, which rank 45th and 50th, respectively, in outlook, and coming to Texas in search of more economic freedom.
Should Utah be a model for Texas? Not necessarily.
Note that Utah’s population is about 3.4 million. Texas has more than 30 million people or nearly nine times more people than Utah. Utah is also less diverse, with 77.2% of its population being white, 14.8% Hispanic, and 1.5% black, compared with Texas’ population being 40.3% white, 40.2% Hispanic, and 13.2% Black. Texas also has twice the share of foreign-born residents, with 17.0%, whereas Utah has just 8.5%. Utah has a much lower poverty rate at 8.6% compared with 14.2% in Texas.
Clearly, there are significant differences between these two red states. And what works well in Utah likely may not fit well in Texas, given their substantially different demographics and economies.
While the ALEC report is insightful, a cursory glance at the two ranks is just that. Considering all the metrics it provides along with state population and diversity, there’s a more holistic picture of which states are thriving.
A more reasonable comparison for Texas based on economic and population sizes and diversity is the second largest red state of Florida.
Florida has a population of about 22 million, with 52.7% white, 26.8% Hispanic, and 17.0% Black, while 21.0% is foreign-born, and the poverty rate is 13.1%. According to ALEC’s report, Florida ranks first for performance, better than Utah and Texas, and 9th for outlook, better than Texas.
Texas and Florida boast business-friendly policy climates, typically spend responsibly, have no state income tax, and are right-to-work states. And the performances of their economies are robust based on multiple indicators.
But two of the biggest factors that put Florida above Texas are the same ones that help put Utah above Texas now and for the foreseeable future: lower property tax burden and universal school choice.
According to the Tax Foundation, individuals have the 6th highest property tax burden in Texas, 26th in Florida, and 43rd in Utah. Texas’ outrageous property taxes, which are high in large part due to too much local spending, is causing an affordability crisis as home and property values have risen faster than wages for too long. If businesses perceive the cost of doing business as too high due to high property taxes, they may choose to locate elsewhere, which results in less investment, economic growth, and job creation.
This is why Texas should spend responsibly and use the at least $33 billion surplus to compress the school district maintenance and operations property taxes that are essentially controlled by the state’s school finance formulas. Combine this with spending restraint at the state and local levels and Texas could put property taxes on a path to elimination within a decade so that Texans can finally fulfill their right to own property while ending a bad wealth tax.
Finally, when it comes to school choice, Utah and Florida joined the universal school choice revolution this year, while Texas is still fighting for it. Universal school choice is critical for improved state economies as it’s linked to improved student outcomes and increased teacher pay, both essential to becoming more competitive and producing a population with less criminal activity and higher economic earnings, to name just a few benefits.
In short, competition matters! While it’s misleading to declare that Utah or Florida economically outperform Texas overall based on the differences outlined here, they do put pressure on Texas to improve or risk falling behind. Decreased property taxes and universal school choice mean more freedom, which empowers people to prosper. Time is running out this session so the Texas Legislature must act promptly.
Originally published at The Center Square.
If a state doesn’t provide tax relief, then it falls behind those that do. That’s simple competitiveness as taxes have consequences and influence families and employers’ decisions to move where they pay less in taxes. While true, it’s more pertinent now than ever given the extent of tax relief happening across the states during the flat tax revolution.
Patrick Gleason, vice president of state affairs at Americans for Tax Reform, recently said at a press conference, “We’ve gone from nine to 14 states with flat taxes. When you look at the states with a flat tax of zero — no income tax — or a flat tax above zero, we’re now at almost half the country that either has a zero income tax or a flat tax rate. This is really significant progress in just a few years.”
Louisiana ranks 25th in the country for its individual income taxes according to the Tax Foundation’s state business tax climate. It’s time for Louisiana to join the flat tax revolution or lose more people and businesses to other states. This is a pressing concern today as nearby states of Texas, Tennessee, and Florida have no personal income taxes and are leading the way in providing opportunities for people to flourish.
Income taxes reduce the incentive to work, save, and invest as each dollar of income is taken from checks before workers receive it. Progressive income taxes, like that in Louisiana with higher tax rates as incomes increase, disincentivize work and productivity even more as you lose more of your earned income as you earn more.
Clearly, progressive income taxes or just income taxes in general aren’t helpful to a family, business, or an economy and should ultimately be flattened then eliminated. These tax reforms must be accompanied with spending restraint to avoid running budget deficits, which are prohibited with the balanced budget requirement in the state, so the legislature may choose to cut spending or raise taxes.
Economic data comparisons show that the nine states without personal income taxes outperform, on average, the nine states with flat income taxes in economic growth, domestic migration, and non-farm payroll employment over the last decade. This is also true when comparing Louisiana with no income tax states, Texas and Florida, and the highest income taxes, California and New York.
There’s a once-in-a-generation opportunity this legislative session in Louisiana for lawmakers to increase the competitiveness of the state and fulfill the promise to taxpayers made in 2021 that they will provide tax relief when there’s enough revenue. There’s plenty of money available now.
Lawmakers should pass a Responsible Louisiana Budget that limits state appropriations to less than the rate of population growth plus inflation, pay down debt, and put extra money in the rainy day fund to hit the trigger for individual income and corporate franchise tax cuts. This would result in sizable tax cuts that Louisianans would feel in their daily lives through more money in their pocket, more jobs available, and more paths out of poverty.
There’s good progress in this direction so far this session but as the session is winding down there will need to be a focus on these priorities, especially hitting the revenue trigger for tax relief. If not, Louisiana will continue to fall behind nearby states which will mean more people and employers will move elsewhere. This is unacceptable and must be changed now to turn the tide of less opportunity and flourishing in the Pelican State.
Originally posted at Pelican Institute.
The U.S. dollar is the cornerstone of the global financial system but is facing a crisis of confidence from decades of reckless fiscal and monetary policies. If this continues, the dollar could soon lose its global reserve currency status. Global competitors such as China and Russia are taking advantage of these reckless policies, further threatening trust in the dollar.
Confidence in a currency is only as strong as that of the institutions issuing the currency. In the dollar’s case, those institutions are the federal government and the Federal Reserve. Both have been irresponsible in their respective fiscal or monetary policies, and the ramifications of their mischief for the dollar would be a weaker economy and higher inflation domestically and a reshuffling of economic power globally.
Since early 2020, Congress has added more than $7 trillion to the national debt from massive deficit spending. Congress financed this by issuing U.S. Treasury securities, crowding out investments like private sector equities and bonds. Additionally, net interest payment on U.S. debt is about 8% of the federal budget and increasing rapidly. Interest expenses are expected to exceed spending on national defense or safety nets soon if Congress fails to rein in excess spending.
While the House Republicans’ bill to raise the debt ceiling and cut spending is promising, it’s unlikely to go anywhere with Democrats in charge of the Senate and the White House.
Since the early 2000s, the Federal Reserve has held its target federal funds rate too low for too long. And in 2008, it started purchasing longer-term Treasury securities and other assets, known as quantitative easing.
The Fed operates under a dual mandate of encouraging stable prices and pursuing full employment. It violated the former part of the mandate through asset purchases that fueled inflation. It now violates the latter part of the mandate as it crushes employment with quantitative tightening and the resulting higher interest rates, hence what’s known as the “boom-and-bust cycle.”
These violations, combined with its early incoherent messaging on inflation, erode confidence in the Fed’s monetary policy prowess. And this is far from a domestic concern, as global trade partners see the writing on the wall and are acting accordingly. And if confidence in the dollar continues to wane, so will the Fed’s ability to conduct monetary policy effectively by not being able to substantially influence market interest rates.
Recently, the Saudi Arabian government approved partial membership with China’s Shanghai Cooperation Organization. This is part of China’s strategy to expand its influence beyond the West. China conducted its “first major lNG sale in renminbi instead of dollars” and made Brazil its main trading partner instead of the U.S.
Other countries are also beginning to move away from the dollar for international transactions.
Countries across the globe know the U.S. is in economic trouble and are changing the way they do business. We should react accordingly, beginning with ending these government policy failures weakening the U.S. economy and the dollar.
First, we should address excessive fiscal and monetary policy discretion by Congress and the Federal Reserve, respectively.
This can be achieved by rules-based policies, such as a strict government spending limit for Congress and the Taylor rule for the Fed. Doing so would reduce the costly mountain of debt created by Congress and the monetary mischief by the Fed, helping to provide confidence in the economy and dollar.
Second, the U.S. should eventually move off the fiat currency system eventually.
The dollar should be backed by real assets like gold and silver. Reimplementing the gold standard or something with underlying value from productive use of capital and labor, making it more attractive to domestic and international investors.
Finally, the U.S. must take international trade seriously.
It should adopt a foreign policy of peace and goodwill through free-trade agreements with countries that benefit all parties. Tariffs and other protectionist measures do not provide that path. They lead to trade wars and tension between countries and hurt people’s livelihoods across the globe. Encouragement of global trade would support a stronger dollar.
Failing to take these steps will continue the slide of confidence and value of the dollar globally. It also jeopardizes the economic future of our country. This will result in more U.S. global partners exiting agreements and reducing investment in America. The consequences will be a weak economy and dollar that will hurt Americans.
Originally posted at Daily Caller and co-authored with Chuck Beauchamp.
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.
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.
Commentary: States Must Join School Choice Revolution or Have Students and Economies Be Left Behind
The school choice revolution in the form of universal ESAs is sweeping the nation. This is extraordinary news for students, parents, teachers, and the economy.
Florida recently became the fourth state to adopt universal school choice in 2023. Earlier this year, Iowa, Utah, and Arkansas joined the rebellion against “public” school monopolies by passing universal school choice after West Virginia and Arizona ignited the revolution last year. There are now more than 10 states with education savings accounts (ESAs), and more likely coming soon.
But Texas, Louisiana, Ohio, Alabama, and other states must follow their lead or have their students and economies be left behind.
Although there are still naysayers slowing progress, the tide for school choice is growing as more parents and teachers are persuaded that school choice empowers them and their students. But an often overlooked benefit of school choice is it supports a stronger economy.
Evidence shows that school choice is connected to improved student outcomes, increased teacher pay, and growing economic opportunity, to name a few of its benefits. School choice’s positive effects on these measures counter the problems in the “public” school system, which is an oxymoron.
“Public” schools can exclude students, which a public good can’t do. Also, any positive benefit of this so-called “public good” is questionable at best, given declining test scores and long waiting lines for charter schools.
More accurately named, government schools are funded by taxpayers and operated by government employees. As the only “free” option and a monopoly in states without school choice, government schools have little incentive to improve the flawed one-size-fits-few approach.
This also contributes to many high-quality teachers being underpaid. Government schools have few reasons to efficiently manage funds because they keep getting more taxpayer money regardless of their outcomes. This helps explain why too much money goes to over-paid administrators instead of teachers, and taxpayers don’t get what they pay for regarding academic and work outcomes.
Taxpayers pay about $16,000 per student per year, and that continues to increase over time even after adjusting for inflation. And yet, our students are underperforming academically, falling behind kids in other countries. These outcomes were exacerbated by school shutdowns during the pandemic that left students even less equipped, but this has been a longer-term trend.
More school choice is needed to motivate government schools to stop promoting mediocrity.
In states like Arizona, where all students above the age of five who live in the state are allotted the same amount of funds, parents of all types now have a range of options, no matter their demographic or socioeconomic status.
School choice is finally letting free markets, meaning free people, work in an arena that’s been monopolized by the government for too long.
Yes, taxpayers would still fund ESAs. But until states decide to get out of the schooling market, the next best alternative is to allow competition whereby the dollars follow the child instead of to a system.
In states like Florida with ESAs, parents can vote with their dollars on the best schooling options for their children, forcing all schools, including government schools, to stay competitive if they hope to attract and keep students by providing the best educational outcomes and extracurricular activities.
Giving families more freedom to choose schools, tutoring, and other resources for their unique kids will better equip them to perform better academically and in their careers.
Instead of most students — and almost all underprivileged students — being shuffled through the same one-size-fits-few government schooling system, ESAs allow students to flourish into well-rounded adults, leading to better careers, a more productive workforce, and a faster-growing economy.
The positive economic ripple effects of a society with more access to better education are myriad.
More educated societies tend to experience less crime, decreasing burdens on public services and increasing social trust, which is crucial for the economy. Additionally, more education is linked to higher incomes and improved health. These reduce the number of people in poverty, which reduces the number of people dependent on safety nets funded by taxpayer money, thereby reducing government spending and taxes, resulting in even better economic outcomes.
All these elements are conducive to happier, healthier people with more means to prosper, produce, and innovate, which in many ways is the bedrock of a better economy and livelihoods.
With more than 10 states providing the option of ESAs, including four states providing universal ESAs this year, why not take it to all 50? Texas, Louisiana, Ohio, Alabama, and others ought to be next or risk their students and economies being left behind.
Originally posted at the Daily Caller.
In co-dependent relationships, there’s often an enabler compounding the destructive behavior. In the case of the Silicon Valley Bank collapse and a possible crisis for the banking industry, the Federal Reserve and its fast-and-loose monetary policy is that toxic enabler. If only couples counseling could fix the muddled relationship between the Fed and the banking industry.
Over the past three years, the Fed has monetized much of Congress’s excessive deficit spending, thereby bringing inflation to a 40-year high and distorting the banking industry and economy. To take advantage of that extra liquidity, SVB (and many other banks) invested in riskier assets: interest-rate-sensitive bonds.
Banks were unprepared for the Fed’s sudden pivot last year when it began increasing interest rates in an effort to control elevated inflation. To be sure, they ignored many warning signs, such as a bloated Fed balance sheet and supply chain disruptions. And when the Fed raised its target federal funds rate from near 0% to today’s range of 4.75% to 5%, bonds began losing significant value.
In SVB’s case, the bank had to realize huge losses when it made its mark-to-market calculations for its balance sheet, as it shifted investments from hold-to-maturity to available-for-sale status, hoping to satisfy its depositors by selling those assets. The losses proved too substantial, rendering the bank insolvent.
The actions of the Fed certainly incentivized the kind of risk-taking that led to SVB’s insolvency and failure, but the bank was far from an innocent victim as it abandoned basic risk management. It loaded its balance sheet with risky investments while prioritizing social agendas over profits, investing in ESG initiatives that performed poorly. At the time of its failure, SVB looked more like a hedge fund than a commercial bank.
But instead of letting SVB and its depositors face the consequences of the bank’s mismanagement, the Federal Deposit Insurance Corporation, Federal Reserve, Department of Treasury, and White House launched coordinated rescue actions, determining that all depositors of the failed bank would be saved. The FDIC’s traditional policy of insuring accounts up to $250,000 was seemingly obliterated by this decision, establishing an entirely new regime.
The Fed and FDIC justified the SVB rescue by claiming that the bank represented a “systemic risk” though it was only a mid-level-sized bank. This further muddied the waters as to how the Fed and FDIC determine which institutions are “too big to fail.” Further compounding the issue was Treasury Secretary Janet Yellen’s testimony to the Senate Finance Committee guaranteeing all deposits of “Too Big to Fail” banks.
The fallout from this new regime, which focuses only on the deposits of the largest banks, creates an incentive for depositors with more than $250,000 to shift their deposits to the largest banks that will accept them. This will put pressure on mid-level and smaller banks as they must now compete for larger deposits that will be uninsured at their banks. The result of this challenge will likely be more consolidation across the banking sector, thus making the big banks that much larger.
In a sane society, troubled banks such as SVB would be allowed to fail, and the depositors would lose their deposits above the $250,000 insured amount. But financial socialism is growing. Profits are privatized, losses are socialized, and everyone in government is tripping over each other to bail someone out.
The current rescue actions and the promise of more are not a part of the free market capitalism that has supported wealth and prosperity throughout America’s history. These actions send a loud and clear signal to all banks: go ahead and take the risk! We’ll finance your failure with a more accommodative monetary policy. It should come as no surprise when more banks begin backsliding due to this messaging.
As things stand, no sector, including the banking industry, is incentivized via market discipline to reduce risky behaviors thanks to the government’s outsize role. The ones who suffer most from this are consumers seeking services, who will inevitably be left with more mediocre options as government handouts cover competition.
To avoid this and strengthen the economy, Washington needs to end bailouts. The Fed needs to keep raising its target federal funds rate and more aggressively reduce its bloated balance sheet, which it increased by $300 billion recently, to rein in inflation and let markets work. Likewise, Congress should cut spending to stop issuing so many Treasury securities that fund the more than $31 trillion national debt.
This system where the Fed micromanages the free market instead of allowing the free market to work out problems on its own will continue to impoverish the economy. Indeed, Fed Chairman Jerome Powell’s suggestion last week that target rate hiking is nearing an end means Americans can expect more inflation and more economic distortions for a longer period of time.
The recent events provide further evidence that it is past time to reevaluate the structure, governance, and operating rules of the Fed. Indeed, Washington’s response to the SVB failure proves the entire financial arm of the government ought to be thoroughly reformed so that market discipline can be returned to the banking sector.
If significant change doesn’t happen, the troubled co-dependent relationship between the banking sector, the Fed, and Washington’s bureaucracy will never heal. For Americans, that means waiting on the next Fed-fueled boom and bust cycle.
Originally published at the Washington Examiner.
The push to ditch reliable energy is out of control. Politicians are manipulating the energy market through subsidies, tax breaks, and environmental, social, and corporate governance (ESG) initiatives in regulations and government pensions.
It’s also concerning that the “big three” investment institutions, which collectively hold over $20 trillion in assets, too often coerce the companies in which they have significant investments to bend the knee to their big-government political ideology, such as complying with the Paris Climate Accord.
Sadly, the result of this virtue signaling to prop up unreliable wind and solar comes at high costs for little benefits—if any benefits at all. And more than hemorrhaged taxpayer dollars are at stake: this green energy agenda increases poverty. It must stop.
While the media is constantly ringing alarm bells about the always-changing climate, not enough people are alarmed by the economic trade-offs these unreliable green energy initiatives create. But that requires an honest comparison of the climate change risks versus the economic costs, both of which impact future generations.
The International Energy Agency (IEA) finds that there were an expected 20 million more people without electricity globally, totaling 775 million people, in 2022. Many of these people are in sub-Saharan Africa, who are facing increasing hardship due to rising costs for food, fuel and other necessities. This situation is made worse by the left’s insistence on unreliable sources of energy that have forced many Europeans to use wood for stoves and heat instead of much cleaner-burning natural gas.
Forcing some of the population to depend on energy sources that don’t work ultimately pushes them into hardship and poverty when those methods fail.
Texas experienced this problem in a tragic way two years ago during its historic weather event of freezing temperatures and accumulations of ice and snow that left thousands without power, contributing to an estimated 246 deaths.
Such a tragedy should never have happened in America’s energy capital, but these are gambles that politicians take when offering subsidies to unreliable variable energy providers that make it difficult for reliable thermal energy to compete, even though thermal energy is the most stable and reliable form.
Fortunately, Texas let a property tax break for businesses called Chapter 313 expire in December 2022. That tax break was often used by renewable energy companies to lower their tax bills (and operating costs). Still, some already want to bring Chapter 313 or something like it back. This should be a non-starter.
That’s not to say that climate change couldn’t have consequences, but considering the projected minimal benefits from expensive initiatives by politicians and the need for adaptation, the trade-offs seem hardly worth it. And this says nothing of the benefits of more CO2, which is necessary for life on earth.
More broadly, if every signatory of the Paris Accord, including India and China, decarbonized by 2050, the temperature differentiation by 2100 would be just 0.17 degrees. And according to climate change activists, the cost to get there could be as much as $21 trillion through 2050.
Businesses attempting to go green would be forced to raise their prices significantly to make a profit, a normally tough task that’s only made harder by present-day sky-high inflation. But if subsidies and other artificial means of skewing the energy market continue, then businesses that don’t receive subsidies and can’t afford to “go green” simply won’t be able to compete. This would result in a massive reallocation of resources that will contribute to less economic growth, more poverty, and less energy stability.
Not only can over-dependence on unreliables lead to hardship, but it often counteracts the green energy innovation it wants to spur.
One of the reasons the U.S. is so prosperous is that it is the most responsible and efficient at producing and utilizing energy, having reduced criteria pollutants 78% in the last 50 years. And what has supported this is our wealth acquired via free-market capitalism.
That’s why the best thing for activists and politicians seeking improved adaptation to climate change is to get out of the way and let the free markets, meaning free people, work.
Subsidies, tax breaks, ESG initiatives, and other hindrances to a well-functioning market process should be abandoned. When politicians push funds into green energy agendas, often to win votes through virtue signaling, precious scarce taxpayer resources are wasted.
Markets work, but we have to let them.
Individuals and entities should be left alone when choosing which energy sources to direct their funds and business. Otherwise, the outcome is less prosperity and more poverty. There is a better way.
Originally posted at Real Clear Energy.
Vance Ginn, Ph.D.