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This shows a level of confidence in the banking sector that I find questionable. Risks associated with raising bond interest rates were one of largest factors

by htag 3y ago

This shows a level of confidence in the banking sector that I find questionable. Risks associated with raising bond interest rates were one of largest factors in the recent bank failures. Surely more bank failures would be seen as worse for the economy than inflation. If more, larger banks fail in the next twelve months then the Federal Reserve will be sheepish about raising interest rates for the next hundred years. In inflation stays high then it seems likely the Federal Reserve will keep pushing those interest rates higher and higher until something breaks and we enter crisis mode. Personally, I'd like to see Congress take more action to reduce inflation. Ideally I think the answer is some combination of raising taxes and reducing federal spending, to start to decrease the amount of cashflow. I think some activity on their front can have an impact without introducing the same types of banking risks associated with raising interest rates, and we'll see better results with less negative impact. Of course, given the contents of the Inflation Reduction Act this seems unlikely. The legislative and executive branches seem content to leave inflation to the Federal Reserve, as it absolves them of responsibility.

ttul 3y ago
Inflation costs more than bank failures. The Fed can fix bank failures by providing liquidity on demand - without any limit, theoretically. But unless they tighten rates, inflation will just grow and make future tightening more urgent and less easy to control.
TinyRick 3y ago
> Surely more bank failures would be seen as worse for the economy than inflation. I disagree with this. Also keep in mind that the Fed has a dual mandate (price stability and maximum employment); they aren't guardians of the overall economy nor are the responsible for ensuring that banks don't fail. > Personally, I'd like to see Congress take more action to reduce inflation. 100% agree
Yeahsureok 3y ago
Congress has no electoral mandate to lower inflation, that's not their job. Using fiscal policy for inflation targeting is crude and horrendously slow.
- HFguy 3y ago
  They have a mandate to do sensible things. And a massive 2nd round of additional fiscal stimulus was not sensible. Additionally, fiscal policy is little slower or more crude than monetary levers. They could be part of the solution. But putting on the breaks is not going to get them elected. So we have the Fed who get to be the bad guys.
abduhl 3y ago
The Fed probably believes that any banking sector issues related to interest rate risk are adequately addressed by the Bank Term Funding Program which allows banks to gradually get past their low interest rate problems and that any banks with assets that can’t take advantage of this program are mismanaged and deserve to fail. And they’re probably not wrong since durational risk arbitrage is literally the core business model of a bank.
eftychis 3y ago
What banking sector? I think until the AT1 bond lawsuit gets resolved with a win for the bond holders, all but the biggest banks have serious liquidity issues. There is not going to be a sector but a few chosen survivor banks and some lucky ones. Private banks are the ones that "print" the money -- common misconception on who does. Fed is saying "well someone needs to lose the money or I will keep increasing rates (until I break the game)" while FDIC and executive branch are saying "nobody will lose any money." Who do you think is going to win this game of chicken? We need actions at the speed of "light" compared to Congress speed. That is the reason Congress does not directly handle these issues but a third party, the Federal Reserve, does. We are practically waiting for the real estate sector to collapse, commercial first, and that money to disappear right now.
avn2109 3y ago
> "...the Federal Reserve will keep pushing those interest rates higher and higher..." They really can't raise interest rates much above 5%, this follows straightforwardly from observing how much of the national budget is consumed by debt service as a function of the interest rate. (Higher rate = larger fraction of budget allocated to debt service, obviously.) If they go above five-ish percent, this implies that they'll need to either A) raise taxes to a level that would likely inspire mutiny, B) greatly reduce borderline-impossible-to-cut parts of the budget such as the military industrial complex + welfare spending broadly construed, C) increase productivity by a lot, D) monetize the debt or E) default on the debt. Probably they will attempt to pick F) all of these, in varying degrees, though obviously some are easier to implement than others. Anyway it is very unlikely that we will see rates much above 5% in the foreseeable future.
- dragonwriter 3y ago
  > They really can't raise interest rates much above 5% They really can. > this follows straightforwardly from observing how much of the national budget is consumed by debt service as a function of the interest rate. Decoupling monetary policy decisions from that kind of fiscal concern is a substantial part of the reason for an independent central bank setting monetary policy. > If they go above five-ish percent, this implies that they'll need to either A) raise taxes to a level that would likely inspire mutiny, B) greatly reduce borderline-impossible-to-cut parts of the budget such as the military industrial complex + welfare spending broadly construed, C) increase productivity by a lot, D) monetize the debt or E) default on the debt. Note that the first “they” is the Federal Reserve and all the other “theys” refer to Congress. Also, while government borrowing costs tend to move in roughly the same direction as the fed funds rate, they very much aren’t the same thing and can be very widely separated.
  - avn2109 3y ago
    Much is made of "independent central bank," though I typically think of that independence in the same light as "newspaper with independent newsroom which is firewalled off of the advertising/commercial side such that editorial decisions are never influenced by the business." In practice Congress and the Fed are sibling entities in the same system, which cooperate when stressed (there are many historical examples of this, e.g. WW2). The alignment is obviously not perfect, but there is much more coordination than "totally independent" as is often bandied about.
a_subsystem 3y ago
Congress isn't incentivized to fix inflation. On the contrary, stats are concocted from cherry picked consumer goods to show current inflation at lower levels than what is reflected in reality and the specific goods vary depending on their cost at the time stats are concocted. Assets also tend to accumulate value when inflation rises, and so congresspeople know this and accumulate assets that will do so.
zie 3y ago
Except the US treasury and the Fed gave all US banks a 1yr blank check to get their act together, if rising rates really are causing them trouble. This was during the SVB crash. So no, banks should not fail because of rising rates, if they don't have idiots in charge. Oh wait, SVB failed specifically because they had idiots in charge. Good thing they all got fired. How many more idiots are in charge of banks? The FDIC will find out for us in about a year I'm betting.
dragonwriter 3y ago
> This shows a level of confidence in the banking sector that I find questionable. No, it doesn't. Protecting the banking sector isn't part of the monetary policy setting mandate. > Risks associated with raising bond interest rates were one of largest factors in the recent bank failures. Surely more bank failures would be seen as worse for the economy than inflation. No, in terms of the Fed mandate, they are not. More business failures, including of banks, are a normal and expected cost of contractionary monetary policy. > If more, larger banks fail in the next twelve months then the Federal Reserve will be sheepish about raising interest rates for the next hundred years. They weren’t for the next hundred years after the wave of major banks that failed or needed intervention to avoid failure in the 2007 crisis, obviously, or after the huge number of bank failures during the high rate regime in the 1980s, so...probably not. > In inflation stays high then it seems likely the Federal Reserve will keep pushing those interest rates higher and higher until something breaks and we enter crisis mode. Surez if inflation (which is already low but has not stayed that way for as long as the Fed would like) were to bounce back up so the 12-month trailing rate stayed high rather than continuing to settle back to normal, that would be the Fed response. No reason to think that’s likely. > Personally, I'd like to see Congress take more action to reduce inflation That, this late in the game, would be a very good way to guarantee an overshoot the opposite way we just did, which would be worse than leaving the foot on the economic gas too long was.

by htag 3y ago

ttul 3y ago

Inflation costs more than bank failures. The Fed can fix bank failures by providing liquidity on demand - without any limit, theoretically. But unless they tighten rates, inflation will just grow and make future tightening more urgent and less easy to control.

TinyRick 3y ago

> Surely more bank failures would be seen as worse for the economy than inflation. I disagree with this. Also keep in mind that the Fed has a dual mandate (price stability and maximum employment); they aren't guardians of the overall economy nor are the responsible for ensuring that banks don't fail. > Personally, I'd like to see Congress take more action to reduce inflation. 100% agree

Yeahsureok 3y ago

Congress has no electoral mandate to lower inflation, that's not their job. Using fiscal policy for inflation targeting is crude and horrendously slow.

HFguy 3y ago
They have a mandate to do sensible things. And a massive 2nd round of additional fiscal stimulus was not sensible. Additionally, fiscal policy is little slower or more crude than monetary levers. They could be part of the solution. But putting on the breaks is not going to get them elected. So we have the Fed who get to be the bad guys.

abduhl 3y ago

The Fed probably believes that any banking sector issues related to interest rate risk are adequately addressed by the Bank Term Funding Program which allows banks to gradually get past their low interest rate problems and that any banks with assets that can’t take advantage of this program are mismanaged and deserve to fail. And they’re probably not wrong since durational risk arbitrage is literally the core business model of a bank.

eftychis 3y ago

What banking sector? I think until the AT1 bond lawsuit gets resolved with a win for the bond holders, all but the biggest banks have serious liquidity issues. There is not going to be a sector but a few chosen survivor banks and some lucky ones. Private banks are the ones that "print" the money -- common misconception on who does. Fed is saying "well someone needs to lose the money or I will keep increasing rates (until I break the game)" while FDIC and executive branch are saying "nobody will lose any money." Who do you think is going to win this game of chicken? We need actions at the speed of "light" compared to Congress speed. That is the reason Congress does not directly handle these issues but a third party, the Federal Reserve, does. We are practically waiting for the real estate sector to collapse, commercial first, and that money to disappear right now.

avn2109 3y ago

> "...the Federal Reserve will keep pushing those interest rates higher and higher..." They really can't raise interest rates much above 5%, this follows straightforwardly from observing how much of the national budget is consumed by debt service as a function of the interest rate. (Higher rate = larger fraction of budget allocated to debt service, obviously.) If they go above five-ish percent, this implies that they'll need to either A) raise taxes to a level that would likely inspire mutiny, B) greatly reduce borderline-impossible-to-cut parts of the budget such as the military industrial complex + welfare spending broadly construed, C) increase productivity by a lot, D) monetize the debt or E) default on the debt. Probably they will attempt to pick F) all of these, in varying degrees, though obviously some are easier to implement than others. Anyway it is very unlikely that we will see rates much above 5% in the foreseeable future.

dragonwriter 3y ago
> They really can't raise interest rates much above 5% They really can. > this follows straightforwardly from observing how much of the national budget is consumed by debt service as a function of the interest rate. Decoupling monetary policy decisions from that kind of fiscal concern is a substantial part of the reason for an independent central bank setting monetary policy. > If they go above five-ish percent, this implies that they'll need to either A) raise taxes to a level that would likely inspire mutiny, B) greatly reduce borderline-impossible-to-cut parts of the budget such as the military industrial complex + welfare spending broadly construed, C) increase productivity by a lot, D) monetize the debt or E) default on the debt. Note that the first “they” is the Federal Reserve and all the other “theys” refer to Congress. Also, while government borrowing costs tend to move in roughly the same direction as the fed funds rate, they very much aren’t the same thing and can be very widely separated.
- avn2109 3y ago
  Much is made of "independent central bank," though I typically think of that independence in the same light as "newspaper with independent newsroom which is firewalled off of the advertising/commercial side such that editorial decisions are never influenced by the business." In practice Congress and the Fed are sibling entities in the same system, which cooperate when stressed (there are many historical examples of this, e.g. WW2). The alignment is obviously not perfect, but there is much more coordination than "totally independent" as is often bandied about.

a_subsystem 3y ago

Congress isn't incentivized to fix inflation. On the contrary, stats are concocted from cherry picked consumer goods to show current inflation at lower levels than what is reflected in reality and the specific goods vary depending on their cost at the time stats are concocted. Assets also tend to accumulate value when inflation rises, and so congresspeople know this and accumulate assets that will do so.

zie 3y ago

Except the US treasury and the Fed gave all US banks a 1yr blank check to get their act together, if rising rates really are causing them trouble. This was during the SVB crash. So no, banks should not fail because of rising rates, if they don't have idiots in charge. Oh wait, SVB failed specifically because they had idiots in charge. Good thing they all got fired. How many more idiots are in charge of banks? The FDIC will find out for us in about a year I'm betting.

dragonwriter 3y ago

> This shows a level of confidence in the banking sector that I find questionable. No, it doesn't. Protecting the banking sector isn't part of the monetary policy setting mandate. > Risks associated with raising bond interest rates were one of largest factors in the recent bank failures. Surely more bank failures would be seen as worse for the economy than inflation. No, in terms of the Fed mandate, they are not. More business failures, including of banks, are a normal and expected cost of contractionary monetary policy. > If more, larger banks fail in the next twelve months then the Federal Reserve will be sheepish about raising interest rates for the next hundred years. They weren’t for the next hundred years after the wave of major banks that failed or needed intervention to avoid failure in the 2007 crisis, obviously, or after the huge number of bank failures during the high rate regime in the 1980s, so...probably not. > In inflation stays high then it seems likely the Federal Reserve will keep pushing those interest rates higher and higher until something breaks and we enter crisis mode. Surez if inflation (which is already low but has not stayed that way for as long as the Fed would like) were to bounce back up so the 12-month trailing rate stayed high rather than continuing to settle back to normal, that would be the Fed response. No reason to think that’s likely. > Personally, I'd like to see Congress take more action to reduce inflation That, this late in the game, would be a very good way to guarantee an overshoot the opposite way we just did, which would be worse than leaving the foot on the economic gas too long was.