Tag Archives: Federal Reserve policies

Why the Banking System Is Breaking Up, by Michael Hudson

Inject enough liquidity into the financial system and you get inflation, which means rising interest rates, which means lower financial asset values. Eventually something’s got to give. From Michael Hudson at unz.com:

The collapses of Silvergate and Silicon Valley Bank are like icebergs calving off from the Antarctic glacier. The financial analogy to the global warming causing this collapse of supporting shelving is the rising temperature of interest rates, which spiked last Thursday and Friday to close at 4.60 percent for the U.S. Treasury’s two-year bonds. Bank depositors meanwhile were still being paid only 0.2 percent on their deposits. That has led to a steady withdrawal of funds from banks – and a corresponding decline in commercial bank balances with the Federal Reserve.

Most media reports reflect a prayer that the bank runs will be localized, as if there is no context or environmental cause. There is general embarrassment to explain how the breakup of banks that is now gaining momentum is the result of the way that the Obama Administration bailed out the banks in 2008 with fifteen years of Quantitative Easing to re-inflate prices for packaged bank mortgages – and with them, housing prices, along with stock and bond prices.

The Fed’s $9 trillion of QE (not counted as part of the budget deficit) fueled an asset-price inflation that made trillions of dollars for holders of financial assets – the One Percent with a generous spillover effect for the remaining members of the top Ten Percent. The cost of home ownership soared by capitalizing mortgages at falling interest rates into more highly debt-leveraged property. The U.S. economy experienced the largest bond-market boom in history as interest rates fell below 1 percent. The economy polarized between the creditor positive-net-worth class and the rest of the economy – whose analogy to environmental pollution and global warming was debt pollution.

But in serving the banks and the financial ownership class, the Fed painted itself into a corner: What would happen if and when interest rates finally rose?

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Bank Runs. The First Sign The Fed “Broke Something.” By Lance Roberts

Bank runs are an ever lurking possibility in a fractional reserve banking system. From Lance Roberts at realinvestmentadvice.com:

With the collapse of Silicon Valley Bank, questions of potential “bank runs” spread among regional banks.

“Bank runs” are problematic in today’s financial system due to fractional reserve banking. Under this system, only a fraction of a bank’s deposits must be available for withdrawal. In this system, banks only keep a specific amount of cash on hand and create loans from deposits it receives.

Reserve banking is not problematic as long as everyone remains calm. As I noted in the “Stability Instability Paradox:”

The “stability/instability paradox” assumes that all players are rational and such rationality implies an avoidance of complete destruction. In other words, all players will act rationally, and no one will push “the big red button.

In this case, the “big red button” is a “bank run.”

Banks have a continual inflow of deposits which it then creates loans against. The bank monitors its assets, deposits, and liabilities closely to maintain solvency and meet Federal capital and reserve requirements. Banks have minimal risk of insolvency in a normal environment as there are always enough deposit flows to cover withdrawal requests.

However, in a “bank run,” many customers of a bank or other financial institution withdraw their deposits simultaneously over concerns about the bank’s solvency. As more people withdraw their funds, the probability of default increases, prompting a further withdrawal of deposits. Eventually, the bank’s reserves are insufficient to cover the withdrawals leading to failure.

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The Federal Reserve’s Magic Trick: Big Tech, by Ron Paul

Virtually free money distorts companies and markets in all sorts of ways. From Ron Paul at ronpaulinstitute.org:

Now you see it … maybe soon you won’t.

Over the last year, the seeming ability of stock values of many technology companies to keep rising forever met resistance. This was true even for the major technology companies known collectively as “big tech.” During the last 12 months, Meta (parent company of Facebook, WhatsApp, and Instagram), Amazon, and Alphabet (parent company of Google and YouTube) suffered layoffs and big declines in stock prices.

These were the result of both bad decisions and changing market conditions. For example, the end of covid lockdowns obviously reduced demand for Amazon’s delivery services. Also, an increasing number of people are leaving Facebook and other Meta sites for newer social media sites. Many of those who use social media for political organization, education, or discussion are abandoning Facebook and YouTube for sites such as Rumble — sites that don’t deplatform individuals for sharing opinions and news that displeases “woke” bureaucrats and politicians.

The magician in this scenario — the Federal Reserve — played a major role in big (and medium and small) tech’s rise and fall. Technology writer David Streitfeld, writing in the New York Times, recently examined how the Fed’s 2008 market meltdown related policy of near zero interest rates led many investors to throw money at tech companies. In many cases, these investors would not have bought tech companies stock had the Fed not distorted the signals sent by interest rates, which are the price of money. The historic expansion of the Fed balance sheet thanks to “quantitative easing” also helped create a tech bubble. Now that the Fed is raising interest rates (although still keeping them well below what they would likely be in a free market), the tech bubble is being popped as investors are able to get a more realistic view of tech companies’ value. This is causing a painful but necessary correction.

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Doug Casey on the Fed Raising Its Inflation Target and Other Shenanigans

The government shouldn’t be involved in the production of money and there should be no central bank. From Doug Casey at internationalman.com:

Understanding Inflation

International Man: Recently, there have been whispers about the Fed raising its official inflation target above 2%.

But before we get into that, we should define our terms.

What is the proper way to think of inflation and the Fed itself?

Doug Casey: First of all, the word “inflation” should be viewed as a verb, not as a noun. Inflation is an increase in the amount of money. This is why Bitcoin—which may have other issues as a money—is inflation-proof; it’s a mathematical certainty that no more than 21 million will ever exist. There are absolutely no limits to the supply of fiat dollars, however.

Inflation is one of the most misused words; few even think about the word’s actual meaning. What is inflation? “Well, that’s prices going up.” No, it’s not. To say that is to confuse cause and effect. Inflation is an increase in the money supply. “Inflation”, a rise is the general price level, results when the money supply is increased by more than real wealth increases.

Do you think I’m just making an obvious, common-sense point? Au contraire. For instance, the Wall Street Journal of Feb 13 featured an article entitled “Inflation Is Falling, and Where It Lands Depends on These Three Things.” In the opinion of the clueless reporter, the three things are “goods, shelter, and other services.” Nowhere does she reference the money supply as the cause of inflation. It’s what she was taught in school, and she stupidly perpetuates the notion.

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Replace The Fed With The 2-Year US Treasury, by Ryan Ortega

Guess what, the Fed follows, not leads, the bond market, and there’s ample evidence to back that assertion up. From Ryan Ortega at zerohedge.com:

Last Wednesday, the Federal Open Market Committee (FOMC) wrapped up a two-day meeting to decide where to set the short-term Federal Funds Target rate. The meetings end with a highly anticipated press conference featuring Federal Reserve Chair Jay Powell just after 230pm ET.

Global market participants sit on the edge of their seats as they await the news of a potential rate hike with the possibility of more to come. Inevitably, both the equity and fixed-income markets will hang on Powell’s every word, searching for any clues as to what the Fed might do next.

What’s all the fuss about? Interest rates represent the price of money, arguably the most important price in the world.

This short-term rate influences all other rates in the economy including mortgages, auto loans, credit card rates, and more.

The Fed has manipulated the price of money for over a decade now, leading to the difficult situation we are in today.

Interest rates were kept too low for too long, even for years after the 2008 Global Financial Crisis.

Looking back on history, the Fed usually gets it wrong.

In this most recent case, waiting too long to remove historic accommodative policy and now risking over-tightening into a recession. But trying to micromanage the economy is like attempting to quickly steer the Titanic. It simply can’t be done.

Even with all the pomp and circumstance of the well-telegraphed meeting, it turns out the Fed historically follows the 2-Year Treasury Note anyway.

So, why not just let the free market decide the price of interest rates?

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Don’t Call It Capitalism: The Fed’s $8 Trillion Hoard of Financial Assets, by Ryan McMaken

There’s not an important area of the economy into which the government does not meddle, which means those areas are mixed economy, not capitalist. Nowhere is this more evident than in banking. From Ryan McMaken at mises.org:

It’s a sure bet that as the economy worsens, unemployment surges, foreclosures rise, defaults climb, and economic misery ensues, we’ll be told it’s all capitalism’s fault. The question one must ask, however, is, “What capitalism?”

The claim that “too much” capitalism drives every economic calamity is standard among anticapitalists on both the left and the right. They have many bullet points claiming government programs and government spending are everywhere retreating while free-market capitalism is experiencing a resurgence. This can be easily shown to be empirically false. Evidence can be found in everything from the continual flood of government regulations to rising per capita taxation and spending to the growing army of government employees. That’s all in the United States, mind you, the supposed headquarters of “free-market capitalism.” We might also point to how the US welfare state, including the immense amounts of government spending on healthcare and pensions, is on a par with European welfare states in terms of size. The supposed lack of social benefits programs in the US has long been a myth. The trend in spending, taxation, and regulation is unambiguously upward.

In recent years, though, one additional indictor of just how little capitalism is actually going on has surfaced: central banks around the world are buying up huge amounts of financial assets in order to subsidize certain industries, inflate prices, and generally manipulate the economy. This is certainly true of the American central bank, the Federal Reserve.

How the Federal Reserve Came to Dominate Financial Asset Markets

While the Fed has long bought government debt in its so-called open-market operations to manipulate the interest rate, wholesale buying of financial assets began in 2008. This included both US government Treasurys and—in a new development—private-sector mortgage-backed securities (MBSs). This was done to prop up banks and other firms that had bet on the lie that “home prices always go up.” The value of mortgage-backed securities was falling fast, so beginning in 2008, the Fed bought up MBSs to the tune of $1.7 trillion. That was all before covid.

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What if the “Black Swan” of 2023 Is the Fed Succeeds? by Charles Hugh Smith

Higher interest rates may end up hurting and helping all the right people. From Charles Hugh Smith at oftwominds.com:

If the Fed succeeding is a “Black Swan,” bring it on.

What if the “Black Swan” of 2023 is the Federal Reserve succeeds? Two stipulations here:

1. “Black Swan” is in quotes because the common usage has widened to include events that don’t match Nassim Taleb’s original criteria / definition of black swan; the term now includes events considered unlikely or that are off the radar screens of both the media and the alt-media.

2. The definition of “Fed success” is not as simple as the media and the alt-media present it.

In the conventional telling, the Fed made a policy mistake in keeping interest rates and quantitative easing (QE) in place for too long, and now it’s made a policy mistake in reversing those policies. Huh? So ZIRP/QE was a policy mistake, OK, we get that. But reversing those policy mistakes is also a policy mistake? Then what isn’t a policy mistake? Doing nothing? But wait, isn’t “doing nothing” maintaining ZIRP/QE or ZIRP/QE Lite?

This narrative makes no sense.

The other conventional narrative has the Fed’s policy mistake as tightening financial conditions, a.k.a. reversing ZIRP/QE, too much too quickly, as this will cause a recession. OK, we get the avoidance of recession is considered “a good thing,” but aren’t recessions an essential cleansing of excessive debt and speculation, i.e. an essential part of the business cycle without with bad debt, zombies and malinvestments build up to levels that threaten the stability of the entire system?

Yes, recessions are an essential part of the business cycle. So avoiding recessions is systemically disastrous. So according to this narrative, the Fed should “do whatever it takes” to avoid recession, even though a long-overdue recession is desperately needed to cleanse the deadwood, bad debt, zombie enterprises and speculative excesses from the system.

So this narrative is also nonsense.

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Ron Paul: Ben Bernanke Wrecked the U.S. Economy and Won a Nobel Prize

Ron Paul is a pretty fair armchair economist and would have been a far more suitable recipient of the Nobel Prize than Ben Bernanke. From Paul at theburningplatform.com:

Ron Paul: Ben Bernanke Wrecked the U.S. Economy and Won a Nobel Prize

Recently, the Nobel Foundation awarded Ben Bernanke (along with Douglas Diamond and Philip Dybvig) the 2022 Nobel Prize in economic sciences because they “significantly improved our understanding of the role of banks in the economy, particularly during financial crises.”

I already knew that Ben Bernanke was a student of the Great Depression. I wasn’t aware of his exact perspective, though, or his claim that bank failures were the cause of that brutal decade. The Nobel Prize committee explains:

…the [Great Depression] became so deep and so protracted in large part because bank failures destroyed valuable banking relationships, and the resulting credit supply contraction left significant scars in the real economy.

Now, at least, we can gain some understanding of his actions during the Great Financial Crisis. That understanding comes at a price, though – the cost is 40-year record-high inflation, and both you and I, along with every other American, are paying for it.

Here’s a real quick lesson in recent economic history, courtesy of Christopher Leonard’s masterful work, The Lords of Easy Money.

Between 1913 and 2008, the Fed gradually increased the money supply from about $5 billion to $847 billion. This increase in the monetary base happened slowly, in a gently uprising slope. Then, between late 2008 and early 2010, the Fed printed $1.2 trillion. It printed a hundred years’ worth of money, in other words, in little over a year, more than doubling what economists call the monetary base.


The amount of excess money in the banking system swelled from $200 billion in 2008 to $1.2 trillion in 2010, an increase of 52,000 percent.

Keep in mind, this is what Bernanke’s Federal Reserve did. (We aren’t even talking about Fed Chair Jerome Powell’s term.)

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Rate Hikes, Recessions and the Death of Spiritual Boomerism, by Tom Luongo

As debt implodes and the economy collapses, many will make their acquaintance with reality for the first time. From Tom Luongo at tomloungo.me:

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Death to Zombies, by MN Gordon

A lot of zombie corporations were being kept alive by extremely low borrowing costs. Now that interest rates are rising, many of those zombies will die. From MN Gordon at economicprism.com:

On Thursday, the Bureau of Labor Statistics reported that consumer prices, as measured by the consumer price index (CPI), inflated at an annual rate of 7.7 percent in October.  Investors went bananas on this apparent pullback in the headline CPI.

The stock market responded with one of its biggest single day rallies in history.  The S&P 500 jumped over 5.5 percent.  The NASDAQ jumped over 7.3 percent.  Of greater note, the yield on the 10-Year Treasury note dropped to just 3.81 percent – its lowest yield in over a month.

So, is raging consumer price inflation no longer a concern?  Has the ugly storm come and gone?  Can Powell now pivot?

Probably not.  More than likely, consumer price inflation will rage throughout the decade.  Regardless, now’s not the time to go all in on stocks.  We’ll explain why in just a moment.  But first several words on consumer price inflation.

Consumer price inflation, remember, is an effect of money supply inflation.  The Federal Reserve inflated its balance sheet with upwards of $5 trillion in digital monetary units – created out of thin air – between September 2019 and April 2022.

Since then, the Fed has contracted its balance sheet by about $300 billion – or by about 6 percent of the preceding inflation.  Clearly, there’s still plenty more inflation to be reckoned with.

And while the Fed, in concert with the Treasury and Congress, was busy spewing reams of printing press money into the economy between fall-2019 and spring-2022, other mistakes were also being made.

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