Yves here. Sadly, your humble blogger had a sense of the Fed’s priorities when it engaged in a stealthy bailout of nearly all uninsured deposits: that the Fed had decided it was going to make damned well sure to protect the banks so it could continue with its program of hurting workers via increasing unemployment. And remember, as we’ve stressed, this inflation is not the result of too much demand but supply issues plus corporate price gouging, so the Fed is also engaged in economic malpractice in remaining determined to keep tightening the interest rate choke chain.
These bailouts are disastrously bad. They greatly increase overall support for financiers, allowing them to behave even more recklessly on the public dime. And note the central bank has breathed nary a word at to what if any constraints will be imposed, meaning they won’t bother until Congresscritters make enough of a stink.
In addition, the subsidies are biggest at the banks that demonstrated they were lousy at risk management, so the scheme is rewarding failure. The discount window changes allow banks to pledge Treasury and agency securities at the face amount. It’s called a discount window because normally the securities the bank pledge are discounted. Any bonds bought when interest rates were lower are sure to have a current value of less than 100%. And the banks that screwed up the worst will get the biggest upticks versus market value when they go to the (un)discount window.
Mind you, the official intervention was a very aggressive response, despite the deer in the headlight act, since the regulators didn’t want to admit they’d just made a nearly complete backstop of formerly uninsured deposits. Another aggressive response, that of announcing a pause on rate hikes and modes cut until banks had reoriented their affairs to handle them better, would have been a far more direct and fitting remedy to the problem, that the central bank had raised rates too far too fast. But now that the Fed has convinced itself it can continue on its labor-strangling course, it will.
By Jessica Corbett. Originally published at Common Dreams
Progressive economists and other experts blasted Federal Reserve leadership on Wednesday for raising interest rates yet again despite concerns about recent bank failures and how the quarter-point increase will impact the U.S. and global economies.
“Once again, interest rate hikes are going to fall hardest on low-wage workers and the poor—the same people who have already been hurt the most by rising prices,” tweeted University of California, Berkeley professor and former Labor Secretary Robert Reich. “Higher rates could also imperil more banks, and risk even more financial chaos. The Fed is playing with fire.”
Fed Chair Jerome Powell told reporters Wednesday that although the Federal Open Market Committee “did consider” a pause on rate increases following the Silicon Valley Bank (SVB) and Signature Bank failures, officials ultimately decided to raise the federal funds rate to a range of 4.75-5%, the highest level since 2007.
“The Fed under Chair Powell made a mistake not pausing its extreme interest rate hikes,” declared Sen. Elizabeth Warren (D-Mass.) a fierce critic of nine consecutive rate hikes since last March as well as the Fed’sregulatory rollbacks that proceeded the bank collapses.
“I’ve warned for months that the Fed’s current path risks throwing millions of Americans out of work. We have many tools to fight inflation without pushing the economy off a cliff,” added Warren, who has repeatedly called for ousting Powell.
Raising interest rates even further could weaken the strong labor market—and that was all before #SVB failed. The Fed’s continued rate hikes are bad for workers, families, and the economy. https://t.co/LuxCd2yO1N https://t.co/CwCxNQEcD9
— Economic Policy Institute (@EconomicPolicy) March 22, 2023
Patriotic Millionaires chair Morris Pearl—a bank bailout expert and former managing director at BlackRock—similarly contended that “the Fed’s decision to keep pushing forward with rate hikes no matter the circumstances is a dangerous mistake.”
Describing such hikes as “a blunt instrument,” he stressed that high interest rates “are not well suited to the economic realities the country now faces—and will inevitably end up doing more harm than good.”
In our modern economy, high interest rates are simply not an effective way to fight inflation. Rate hikes have disproportionately hurt just a few sectors, like housing, automobiles, and some banks and investors, while leaving many of the nation’s largest employers relatively unscathed.
Rising interest rates do nothing to address a major cause of inflation, corporate price gouging, and actually make another long-term cause, lack of investment in new housing, worse. Instead, the Fed is betting that lowering employment and cooling wage growth is the best solution to inflation.
Higher interest rates may be a cure for inflation, but if they end up causing another banking crisis, or pushing the economy into a recession, the cure may be worse than the disease.
An analysis released Wednesday by Accountable.US explained that “SVB’s failure was partly due partly to a ‘plunge’ in bond value and $1.8 billion in ‘paper losses’ amid the Fed’s rate hikes. By the end of 2022, the Federal Deposit Insurance Corporation (FDIC) had warned that U.S. banks were ‘sitting on $620 billion in unrealized losses’ that may make their balance sheets appear healthier than they really are.”
The watchdog group found that “at the end of 2022, the five biggest U.S. banks—JPMorgan Chase, Bank Of America, Citigroup, Wells Fargo, and U.S. Bank—reported a total of $233 billion in unrealized losses on held-to-maturity securities, including $54 billion in unrealized losses on Treasury securities. These same banks reported a combined $39.4 billion in unrealized losses on available-for-sale securities, including $12.7 billion in losses on available-for-sale U.S. Treasuries.”
Liz Zelnick, director of economic security and corporate power at Accountable.US, warned Wednesday that “hiking interest rates, even if more slowly, will devastate Main Street and Wall Street alike by wiping out millions of jobs while sending Treasury securities into a downward spiral,” acknowledging that the recent bank turmoil prevented an even bigger increase than 25 basis points.
“A recession and broken financial system are not worth the price of higher interest rates that have failed miserably to curb the corporate greed epidemic helping to drive up costs,” Zelnick added. “To date, the Federal Reserve and Chairman Jerome Powell have been more than willing to let average American families bear the brunt of their job-killing strategy—but are they also willing to let their banker friends on Wall Street go down with the ship?”
The Hill highlighted that ahead of Wednesday’s announcement, influential figures such as economist Paul Krugman and analysts for Goldman Sachs—in a Monday letter to investors—had advocated for pausing rate hikes.
“Bank stress calls for a pause,” wrote Goldman Sachs analysts. “Banking is not just another sector of the economy because financial intermediation is vital to every sector. As a result, addressing stress in the banking system is the most immediate concern and must take priority over other less urgent goals for the moment. We expect that policymakers and staff economists at the Fed will have the same view.”
It shouldn't take a lot of courage to resist another interest rate hike when the economy is this fragile.
— CEPR (@ceprdc) March 22, 2023
During his Wednesday press conference, Powell insisted that “our banking system is sound and resilient with strong capital and liquidity. We will continue to closely monitor conditions in the banking system and are prepared to use all of our tools as needed to keep it safe and sound.”
While Powell also emphasized the Fed’s commitment to learning from the recent SVB and Signature failures to prevent repeat events, both the bank collapses and a year of rate hikes have fueled calls for his ouster.
Asked by CNN‘s Jake Tapper on Wednesday whether she had ever directly told President Joe Biden that he should fire Powell, Warren said she wouldn’t talk about private conversations “but what I will say is I’ve made it very clear as publicly as humanly possible that I didn’t think that he should be reconfirmed as chair of the Fed. And I think he’s doing a really terrible job.”
“And he’s doing a terrible job on both fronts,” she said, referring to the Fed’s dual mandate. In terms of oversight, Powell “has spent five years weakening regulations over these multibillion-dollar banks,” and on monetary policy, he is “risking pushing our economy into a recession.”
“What he’s trying to do is get two million people laid off, and one of the things that we need to understand: He wants to raise the unemployment rate by more than a point within a single 12-month period. We have done that before in this country. In fact, we have done it 12 times before. And out of all 12 times, how many times has it resulted in a recession?” she said. “The answer is 12.”