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How Ignorance of Economics Among Senators Affects Economic Policy.
Why is Emergency Lending important?
Here is what we will be getting into today:
Flawed Economic Reasoning Unveiled in Senate Committee Hearing on Fed Policy.
From Stigma to Necessity: The Importance of Emergency Lending in Financial Crises.
European Banks Are Vulnerable.
Let's Dive In!
Newsletter: Nominal News
Title: Correcting Economic Understanding of US Senators.
Here are the key highlights:
The recent Senate Committee hearing regarding the Federal Reserve's interest rate policy and banking regulation has revealed some flawed economic reasoning among the senators. Many of the questions and statements made by the senators were based on erroneous assumptions, demonstrating a lack of understanding of fundamental economic concepts.
Senators John Kennedy and Elizabeth Warren made statements that misinterpret the relationship between unemployment and inflation and the nature of the US labor force. Kennedy's flawed analysis of historical examples and extrapolation led him to propose an unrealistic solution to the problem of inflation, while Warren's misrepresentation of the unemployment rate fails to capture the full picture of the labor situation.
It is critical for policymakers to have an accurate understanding of economic principles in order to make informed decisions that can positively impact the economy. Misinformed opinions can lead to faulty policies and detrimental outcomes.
Furthermore, policymakers must exercise caution when applying findings from past studies to current situations. Differences in contexts can drastically alter the effectiveness of policies, making the implementation of evidence-based policies much more complex than first appears.
Policymakers in reality need a comprehensive understanding of economic theories and principles instead of relying on past, potentially irrelevant, situations.
This economic understanding is important as the current state of the economy with high interest rates and increasing unemployment has become a widely debated topic among politicians. While some politicians argue that these economic factors are detrimental to the average American, the truth is more complicated.
The reality is that a high interest rate environment may make housing less affordable, but falling real wages are a much greater concern for the average American.
Furthermore, the count of jobless individuals varies due to changes in job finding and destruction rates, making it a very dynamic population. The loss of professional skills and knowledge during job cuts and long-term joblessness is a significant macroeconomic worry. Despite that, freshly unemployed individuals in the USA are able to locate new work quickly, limiting the drop in human capital. But, being out of work for an extended period affects job prospects, regardless of skill level. As a result, policies which result in higher real wages and greater likelihoods of joblessness may be more desirable than the present situation of declining real wages and low joblessness.
It is also important to note that the affordability of homes involves more components than just interest rates or mortgage payments. Home prices, property taxes, home insurance, and mortgage amounts all impact affordability. While high interest rates may make mortgages less affordable, reduced housing prices may balance out the cost. If prices continue to drop, fixed mortgage payments will also decrease, and adjustable rate mortgages could potentially be more economical. Mortgage interest payments are also tax deductible, providing another potential benefit.
Newsletter: Apricitas Economics
Title: The Fed's $300B Emergency Response.
Here are the key highlights:
The recent crisis in the US banking system has led to the Federal Reserve stepping in to protect banks and the overall financial system. The Fed has pledged strong material actions such as supporting the Federal Deposit Insurance Corporation (FDIC), opening up a new bank lending facility, easing the conditions of banks' emergency credit lines, and promising liquidity to any institution in distress.
The Fed has backed up these promises with more than $300B in fresh loans for American banks. This has worked to prevent further bank failures in the week since the crisis started, but many banking institutions still remain at risk.
The Fed has intentionally not published immediate breakdowns of the institutions they're lending to and how much they've borrowed, but it's clear that the lending is heavily concentrated in just two Fed banks, San Francisco and New York. This means that the crisis hasn't necessarily resulted in banks across the country borrowing from the Fed.
The main recipients of Fed emergency funding are American banks borrowing from the discount window. It's important for the banking industry to have access to emergency lending facilities and for the Fed to institutionalize reforms to improve financial stability. In the past, banks faced significant stigma when borrowing from the discount window, and any bank attempting to borrow using the discount window for genuine emergencies would face challenges from shareholders, creditors, depositors, and even government regulators. It was essentially a fire-able offense for bank executives.
Despite the lingering stigma, more than 60% of banks reported that they would borrow from the Fed if needed. Though the increase in discount window usage is a sign that the system is working, financial stability is still a concern, especially given the ongoing effects of the SVB crisis. The Fed's recent actions to backstop the US banking system have demonstrated the importance of emergency lending facilities in time of crisis.
The Fed's emergency efforts may not be enough to restore confidence in the financial system, but banks must return to stability without causing a credit crunch large enough to drag down the US economy. To avoid a credit crunch, it is crucial for banks to collaborate with the Fed and take advantage of the resources available to them to ensure economic stability.
Newsletter: Fidenza Macro
Title: How a regional US bank run turns into a European government debt crisis.
Here are the key highlights:
The recent takeover of Credit Suisse by UBS, enforced by the Swiss government to avoid financial contagion, highlights the vulnerability of European banks. This vulnerability is due to a combination of negative interest rates, impaired balance sheets, and the rapid rise in interest rates causing an inverted yield curve.
With Italy and Spain already struggling with debt-to-GDP ratios, the potential failure of a major bank in these countries could result in a European debt crisis.
The solution to this global bank run is for central banks to backstop banks with printed money, end quantitative tightening, and re-steepen the yield curve by cutting rates aggressively. It is essential for investors to consider the potential impact of a European debt crisis and prepare accordingly.
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