6 ms·

Collapse of SVB shows why monetary policy is the wrong tool to fight inflation

24 points by neilwilson 4y ago

spicyusername 4y ago
Who's going to step in, instead? Congress? Hah
- strangattractor 4y ago
  I think article is suggesting that we might entertain the idea that raising interest rates, although effective in reducing inflation, has some rather nasty side effects and there might be other ways we might control inflation/deflation in addition to monetary policy.
  - FormerBandmate 4y ago
    Great. What are they, and how come raising interest rates is the only thing that has worked over 300 years? This just seems like the same line of logic that led to defund the police. The world isn’t a fairyland, sometimes bad things happen
    - thephyber 4y ago
      If I had to read the subtext, I would say fiscal policy changes can target different price inflations. Demand side inflation is more affected by monetary policy. Supply side inflations are less so, hence other tools might be better at targeting them. Baby formula inflation? Allow imports and authorize more venders.
    - dllthomas 4y ago
      Means tested welfare and progressive tax rates are two examples of countercyclical policies that react automatically without needing congress to change the rules in response to individual cycles.
  - thephyber 4y ago
    I think the parent understood that and jumped straight to laughing at the possibility of fiscal policy changes working, because Congressmembers are… not necessarily technocrats.
MrMan 4y ago
[dead]
bell-cot 4y ago
So...no mention at all of SVB's ultimately-successful crusade to convince Congress to change banking regulations, and allow SVB to do far riskier things? Plausible assumption: Authors are being paid to help cover up Congress's "crime".
exabrial 4y ago
Sigh. This is going to be hard for most HNers to hear... A certain political party was handed a blank checkbook. The result was as predictable as the sunrise. And no, raising taxes is not the answer. When you have a spending problem, literally the last thing you is "better make more money!" Just look at Nicholas Cage: the first thing you do is _stop buying dumb crap_. And before anyone accuses me of being a Republican, it happens both ways, every single time.
- bequanna 4y ago
  Agreed. I fail to see how any intelligent person could think the "Inflation Reduction Act" would actually lower inflation. It made it much worse and will make it last longer. Increased Government spending increases inflation, period. Also, don't forget the Modern Monetary Theory (MMT) bullshit that allowed our academic Central Bankers play along and justify this print and spend. Ask these academics: "But how does this money printing and huge gov't spending not cause inflation?" and the answer was/is: "We'll just raise taxes to remove liquidity, duh!". Any layperson can see that spending is easy, raising taxes is much, much harder.
  - vuln 4y ago
    When you "vote blue no matter who" you'll have things like this. People believe it because the color of the tie the other person is wearing. They don't need to look into anything as long as a celebrity movie or government has a twitter hot take or it "defeats orange man and Russia!1!1!1!"
    - yks 4y ago
      Alright, I’ll take the bait, what good did Reps do for the US economy this century? They borrowed from the future just as much as the other guys, jacked up the deficits, juiced the economy with low rates and now it's Dems problem to fix the mess by taking unpopular decisions, as always.
      - dye_lemma 4y ago
UncleEntity 4y ago
> Rather than change interest rates to control inflation it should pivot to a policy of stable interest rates with the goal of maintaining financial stability. And who decides what interest rate is optimal for maintaining financial stability? I have an alternate suggestion, maybe we let the market set interest rates through the pricing mechanisms which exist for every other good who’s price isn’t fixed by fiat.
dye_lemma 4y ago
Oh, the newsiest of all super authentic news with no conflict of interest whatsoever: paid lackeys write that banksters should be bailed out for taking ridiculous risks while keeping their fat bonuses. They already collect fat interest making risk-free loans using free money from the Fed, now they want the American People to foot the bill when they mismanage their portfolio. One hand washes the other. If you want to fight injustice -- start at the top and the Washington <-> Wall Street <-> News Media monolith.
duped 4y ago
> What is missing from the debates over monetary policy today is the understanding that the Fed was not established to control inflation. Luckily we don't have to speculate, since this is spelled out in the US Code. 12 USC 225a reads: > The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates. Emphasis mine. Stable prices means mitigating inflation. The author is confusing the mechanisms of the Fed with their mandate. (1) https://www.federalreserve.gov/aboutthefed/section2a.htm https://www.federalreserve.gov/aboutthefed/section2a.htm
- wjnc 4y ago
  That seems to be added in the 1977 amendment to the bill. Was the same goal in the 1913 bill? Edit: I stumbled upon [1] will trying to find an answer but my lack of US-legalese skill makes it too hard to comprehend. [1] https://uscode.house.gov/view.xhtml?path=/prelim@title12/chapter3&edition=prelim https://uscode.house.gov/view.xhtml?path=/prelim@title12/cha... [2] original text: https://www.llsdc.org/assets/FRAdocs/fra-lh-pl63-43.pdf https://www.llsdc.org/assets/FRAdocs/fra-lh-pl63-43.pdf No “stab” as in stable of stability in there, nor prices in the quoted context. Now that we’ve got that overboard, the article makes pretty good sense to me. Central banks having the function of keeping banks functioning at all times might not always be compatible with central banks have a primary duty to use monetary policy for governments sake. See the conundrum the ECB was and is in. Raise rates (at all or too fast) and states fail. That’s more important to them than banks failing. I have no opinion on what’s right - as an economist I always found monetary economics too hand-wavey (or hard, for a not very mathematical branche of economics). The Hills point might be right.
- strangattractor 4y ago
  I don't really think SVB is an example of anything other than they were a very large boutique bank. The depositors were primarily Startups with large amounts of cash. Most of their depositors were subject to the same economic forces and tended to behave similarly in unison. This is not a bank that Joe Sixpack opened an account in because he liked the convenience of the ATMs. This is a bank that cultivated relationships with VCs and VCs responded by suggesting their Startups store cash there. The question is "Was this a bank run by idiots or a "bank run" by idiots."
BigCryo 4y ago
Seems like the financial speculators want to keep on speculating the low interest rates.. what a surprise
FollowingTheDao 4y ago
Wrong tool for who?
deleted 4y ago
[deleted]
blippage 4y ago
No silver bullet. If there was One True Way we would have applied it by now. Instead, we just argue about policies, meaning that we don't actually know the answer. Post 2008, interest rates were held at historically low figures, and for a long time. Everyone should have been suspicious. The illusion of stability can hide risks that build up within the system. Anyone who follows Taleb would have long suspected that they'll be bad consequences. > The post mortem of a bank failure always reveals idiosyncratic mistakes the bank made. That contradicts the argument that the "collapse of SVB shows why monetary policy is the wrong tool to fight inflation", because it implies that SVB's failure is due to SVB's bad decisions. > If the Federal Reserve were to raise interest rates, the market value of these bonds would collapse, And had it not occurred to anyone, especially bankers, that interest rates could rise? > Rather than change interest rates to control inflation it should pivot to a policy of stable interest rates with the goal of maintaining financial stability. So, maintain the current interest rate forever? Job done, everyone can go home? And if you don't mean that, then you're going to have to supply a carefully worded definition of what "stable" means. Then again, there's that word "stable"; see above. > The first mistake was to sell the bonds before raising equity. Raising equity is harder than selling bonds. Raising equity might have triggered a panic in any event. If everything's going swimmingly, then what rationale are you going to offer the market for raising money? > The second mistake was doing business with Goldman Sachs. Lol. Well, they're not called the "Vampire Squid" for nothing. "Ripping your face off" is kinda their thing. I'm perhaps being unkind to Associate Professor Nersisyan, but my point is that he has no more answers than anybody else. He's just another talking head. Suppressed interest rates has led to a speculative bubble, particularly in tech investment. That's how you get internet-controlled juice squeezers. No-one was really looking that hard at what they were investing in. The good news is that the speculative bubble seems to be mainly isolated in the tech sector. Are we all doomed? Well, that's consensus opinion, and one that seems eminently sensible. However, I've also heard opinions to the contrary from experienced investors, so we're not dead yet.

24 points by neilwilson 4y ago

spicyusername 4y ago

Who's going to step in, instead? Congress? Hah

strangattractor 4y ago
I think article is suggesting that we might entertain the idea that raising interest rates, although effective in reducing inflation, has some rather nasty side effects and there might be other ways we might control inflation/deflation in addition to monetary policy.
- FormerBandmate 4y ago
  Great. What are they, and how come raising interest rates is the only thing that has worked over 300 years? This just seems like the same line of logic that led to defund the police. The world isn’t a fairyland, sometimes bad things happen
  - thephyber 4y ago
    If I had to read the subtext, I would say fiscal policy changes can target different price inflations. Demand side inflation is more affected by monetary policy. Supply side inflations are less so, hence other tools might be better at targeting them. Baby formula inflation? Allow imports and authorize more venders.
  - dllthomas 4y ago
    Means tested welfare and progressive tax rates are two examples of countercyclical policies that react automatically without needing congress to change the rules in response to individual cycles.
- thephyber 4y ago
  I think the parent understood that and jumped straight to laughing at the possibility of fiscal policy changes working, because Congressmembers are… not necessarily technocrats.

MrMan 4y ago

[dead]

bell-cot 4y ago

So...no mention at all of SVB's ultimately-successful crusade to convince Congress to change banking regulations, and allow SVB to do far riskier things? Plausible assumption: Authors are being paid to help cover up Congress's "crime".

exabrial 4y ago

Sigh. This is going to be hard for most HNers to hear... A certain political party was handed a blank checkbook. The result was as predictable as the sunrise. And no, raising taxes is not the answer. When you have a spending problem, literally the last thing you is "better make more money!" Just look at Nicholas Cage: the first thing you do is _stop buying dumb crap_. And before anyone accuses me of being a Republican, it happens both ways, every single time.

bequanna 4y ago
Agreed. I fail to see how any intelligent person could think the "Inflation Reduction Act" would actually lower inflation. It made it much worse and will make it last longer. Increased Government spending increases inflation, period. Also, don't forget the Modern Monetary Theory (MMT) bullshit that allowed our academic Central Bankers play along and justify this print and spend. Ask these academics: "But how does this money printing and huge gov't spending not cause inflation?" and the answer was/is: "We'll just raise taxes to remove liquidity, duh!". Any layperson can see that spending is easy, raising taxes is much, much harder.
- vuln 4y ago
  When you "vote blue no matter who" you'll have things like this. People believe it because the color of the tie the other person is wearing. They don't need to look into anything as long as a celebrity movie or government has a twitter hot take or it "defeats orange man and Russia!1!1!1!"
  - yks 4y ago
    Alright, I’ll take the bait, what good did Reps do for the US economy this century? They borrowed from the future just as much as the other guys, jacked up the deficits, juiced the economy with low rates and now it's Dems problem to fix the mess by taking unpopular decisions, as always.
    - dye_lemma 4y ago

UncleEntity 4y ago

> Rather than change interest rates to control inflation it should pivot to a policy of stable interest rates with the goal of maintaining financial stability. And who decides what interest rate is optimal for maintaining financial stability? I have an alternate suggestion, maybe we let the market set interest rates through the pricing mechanisms which exist for every other good who’s price isn’t fixed by fiat.

dye_lemma 4y ago

Oh, the newsiest of all super authentic news with no conflict of interest whatsoever: paid lackeys write that banksters should be bailed out for taking ridiculous risks while keeping their fat bonuses. They already collect fat interest making risk-free loans using free money from the Fed, now they want the American People to foot the bill when they mismanage their portfolio. One hand washes the other. If you want to fight injustice -- start at the top and the Washington <-> Wall Street <-> News Media monolith.

duped 4y ago

> What is missing from the debates over monetary policy today is the understanding that the Fed was not established to control inflation. Luckily we don't have to speculate, since this is spelled out in the US Code. 12 USC 225a reads: > The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates. Emphasis mine. Stable prices means mitigating inflation. The author is confusing the mechanisms of the Fed with their mandate. (1) https://www.federalreserve.gov/aboutthefed/section2a.htm https://www.federalreserve.gov/aboutthefed/section2a.htm

wjnc 4y ago
That seems to be added in the 1977 amendment to the bill. Was the same goal in the 1913 bill? Edit: I stumbled upon [1] will trying to find an answer but my lack of US-legalese skill makes it too hard to comprehend. [1] https://uscode.house.gov/view.xhtml?path=/prelim@title12/chapter3&edition=prelim https://uscode.house.gov/view.xhtml?path=/prelim@title12/cha... [2] original text: https://www.llsdc.org/assets/FRAdocs/fra-lh-pl63-43.pdf https://www.llsdc.org/assets/FRAdocs/fra-lh-pl63-43.pdf No “stab” as in stable of stability in there, nor prices in the quoted context. Now that we’ve got that overboard, the article makes pretty good sense to me. Central banks having the function of keeping banks functioning at all times might not always be compatible with central banks have a primary duty to use monetary policy for governments sake. See the conundrum the ECB was and is in. Raise rates (at all or too fast) and states fail. That’s more important to them than banks failing. I have no opinion on what’s right - as an economist I always found monetary economics too hand-wavey (or hard, for a not very mathematical branche of economics). The Hills point might be right.
strangattractor 4y ago
I don't really think SVB is an example of anything other than they were a very large boutique bank. The depositors were primarily Startups with large amounts of cash. Most of their depositors were subject to the same economic forces and tended to behave similarly in unison. This is not a bank that Joe Sixpack opened an account in because he liked the convenience of the ATMs. This is a bank that cultivated relationships with VCs and VCs responded by suggesting their Startups store cash there. The question is "Was this a bank run by idiots or a "bank run" by idiots."

BigCryo 4y ago

Seems like the financial speculators want to keep on speculating the low interest rates.. what a surprise

FollowingTheDao 4y ago

Wrong tool for who?

deleted 4y ago

[deleted]

blippage 4y ago

No silver bullet. If there was One True Way we would have applied it by now. Instead, we just argue about policies, meaning that we don't actually know the answer. Post 2008, interest rates were held at historically low figures, and for a long time. Everyone should have been suspicious. The illusion of stability can hide risks that build up within the system. Anyone who follows Taleb would have long suspected that they'll be bad consequences. > The post mortem of a bank failure always reveals idiosyncratic mistakes the bank made. That contradicts the argument that the "collapse of SVB shows why monetary policy is the wrong tool to fight inflation", because it implies that SVB's failure is due to SVB's bad decisions. > If the Federal Reserve were to raise interest rates, the market value of these bonds would collapse, And had it not occurred to anyone, especially bankers, that interest rates could rise? > Rather than change interest rates to control inflation it should pivot to a policy of stable interest rates with the goal of maintaining financial stability. So, maintain the current interest rate forever? Job done, everyone can go home? And if you don't mean that, then you're going to have to supply a carefully worded definition of what "stable" means. Then again, there's that word "stable"; see above. > The first mistake was to sell the bonds before raising equity. Raising equity is harder than selling bonds. Raising equity might have triggered a panic in any event. If everything's going swimmingly, then what rationale are you going to offer the market for raising money? > The second mistake was doing business with Goldman Sachs. Lol. Well, they're not called the "Vampire Squid" for nothing. "Ripping your face off" is kinda their thing. I'm perhaps being unkind to Associate Professor Nersisyan, but my point is that he has no more answers than anybody else. He's just another talking head. Suppressed interest rates has led to a speculative bubble, particularly in tech investment. That's how you get internet-controlled juice squeezers. No-one was really looking that hard at what they were investing in. The good news is that the speculative bubble seems to be mainly isolated in the tech sector. Are we all doomed? Well, that's consensus opinion, and one that seems eminently sensible. However, I've also heard opinions to the contrary from experienced investors, so we're not dead yet.