Discover more from American Economy Daily
Operation Squeeze Credit. Addressing the Consequences of Quantitative Tightening.
Deutsche Bank fines, money laundering & manipulation.
Here is what we will be getting into today:
Forced Reunification: The Key to Stabilizing the Banking Sector Amidst Balance Sheet Policy Failure.
Deutsche Bank: A Tale of Controversy, Legal Challenges, and An Interconnected Threat to Global Stability.
Public Choice Theory in the Modern World: Understanding the Dynamics of Collective Decision-Making.
Let's Dive In!
Newsletter: The Last Bear Standing
Title: A Solution for QT .
Here are the key highlights:
The recent Federal Open Market Committee (FOMC) speech and press conference mainly focused on interest rates, the primary monetary policy tool of the Federal Reserve. Very little attention was paid to balance sheet policy, specifically quantitative easing (QE) and quantitative tightening (QT).
Organic credit expansion has played a relatively minor role in money growth since the pandemic. The primary driver of money growth since then has been QE.
Until the problems with QT are addressed, there will be more collateral damage. To address this issue, Operation Squeeze Credit has been proposed as a solution where commercial banks can increase the quantity of bank deposits and the money supply by writing loans instead of printing money. The quantity of bank deposits they hold determines the purchasing power of all non-bank entities. Therefore, the quantity of bank deposits and the money supply are critical to overall economic growth, financial asset pricing, and the prices of goods and services (inflation).
The banking sector has been facing a crisis in recent times due to the Federal Reserve's balance sheet policy and a series of failures. The most effective solution to this crisis is to forcibly reunite money market funds and banks. This move will ensure that the banking sector is stable and does not face any crisis in the future. It will also provide much-needed relief to those banks struggling to cope with deposit outflows and competition.
The Federal Reserve's response to this crisis has been to create new emergency lending facilities to improve liquidity. However, this is only a temporary solution that does not address the root cause of the problem. The Fed is content to let QT continue to eat away at bank cash without interest in engaging seriously with the problem. This is a dangerous approach that is likely to make things worse rather than better.
The use of the Reverse Repo Program (RRP) by the Federal Reserve has proven to be a beneficial tool in managing liquidity and reducing the strain on the financial system. By reasonably estimating cash flow effects of any given counterparty limits and targeting a level that offsets the liquidity drain of QT, the RRP allows the Fed to maintain its overall pace of quantitative tightening while also improving or maintaining bank liquidity.
The current state of the financial market is at a critical juncture. The role of money creation and destruction, inflation, and financial stability must be refocused to bring public attention to these pressing issues. It is crucial for the Federal Reserve to take decisive action and address the root cause of the banking sector crisis.
Website: Wall Street On Parade
Title: Powell and Yellen Say the Banking System Is Sound as Another Global Bank Teeters
Here are the key highlights:
Deutsche Bank, Germany's largest bank, has been at the center of controversy in recent years due to investigations into alleged money laundering and other infractions. The bank has faced numerous legal and regulatory challenges, including fines for rigging the Libor interest rate and for its involvement in the packaging, securitization, marketing, sale, and issuance of residential mortgage-backed securities.
In addition, Deutsche Bank has been fined for manipulating trading in the precious metals market and for helping a Tuscan bank commit fraud in derivatives deals. The bank has also been convicted in Italy and fined in Germany for failing to submit Suspicious Activity Reports regarding potential money laundering activities.
Deutsche Bank's legal and regulatory challenges have put the bank's practices under intense scrutiny and highlighted the need for greater transparency and oversight in the banking industry. The bank has significant interconnection to Wall Street's mega-banks as a result of its activities, and its interconnections to other global banks have led the International Monetary Fund (IMF) to indicate that Deutsche Bank posed the greatest threat to global financial stability in 2016.
Deutsche Bank has been raided by German federal police, criminal prosecutors, and the country's financial watchdog, BaFin, at its headquarters in Frankfurt in April 2022. This raid came just four days after the body of Valentin Broeksmit, the son of William Broeksmit, a key executive involved in assessing risk on Deutsche Bank's balance sheet, was discovered outside of Los Angeles. Valentin Broeksmit had obtained confidential bank documents left by his father, which provided insight into the internal workings of Deutsche Bank.
The bank had also been planning to create a "good bank/bad bank" strategy to separate toxic assets it planned to sell from its core banking activities. However, Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen both insist that the US banking system is sound and stable, contrasting the instability seen in European banking stocks. Specifically, Commerzbank, UBS, and Societe Generale have all demonstrated weakness. The global financial stability is constantly being threatened by various factors, with one of the biggest threats being derived from counterparty derivatives.
Newsletter: Knowledge Problem
Title: People are People: Public Choice and the Logic of Collective Action.
Here are the key highlights:
Public choice theory is a crucial field in understanding social institutions, particularly in situations that require collective decision-making. This theory can help analyze situations where profit-maximizing firms try to influence regulatory or legislative decisions, as well as examine the benefits and costs of concentrated benefits and diffused costs. By applying this theory, we can identify and examine the benefits and costs of various situations and ultimately promote the public interest.
One example of this is labor unions, which can be analyzed using a ‘club good model’. Labor unions raise wages for union members but reduce the number of non-union jobs due to firms' budget constraints. While club goods are non-rival, they are still excludable. Those who are part of the club benefit while non-members do not.
Understanding the complex dynamics of collective action and lobbying is crucial in shaping policies that balance benefits and costs for all parties involved. The concentration of benefits and the diffusion of costs in interest group politics can lead to inefficiencies and undermine the public interest.
It is critical to recognize that certain groups have more incentives and abilities to organize into powerful interest groups, while others may lack these opportunities. This power asymmetry can lead to policies that primarily benefit the organized few at the expense of the diffuse many. We need to be vigilant in fostering a more competitive and decentralized interest group system that distributes power more equitably among different actors, making it easier for ordinary citizens to form groups and make their preferences known to policymakers.
In today's complex and interconnected world, regulatory proceedings are necessary to ensure that individuals and organizations comply with laws and regulations. The success of such proceedings is dependent on the ability to engage with the wide range of interests represented by the people. One of the primary challenges in regulatory proceedings is the diverse and dispersed nature of the interests involved. These interests are often not organized, and have no clear representative of the group.
Removing the asymmetry of power is a difficult, if not impossible task, but it is vital to make efforts to address it. One way to do this is by implementing counterweights that help level the playing field. Counterweights can act as a buffer to the asymmetry of power. These counterweights may be individuals, groups, or organizations that help to balance out the power structures in regulatory proceedings. By including all relevant interests and bringing them into the conversation, counterweights can help facilitate successful regulatory proceedings.
Thanks For Reading!
Are you interested in staying informed about the latest developments in macroeconomics?
Our newsletter is the perfect resource for you!
By subscribing, you'll receive exclusive access to expert insights, analysis, and commentary on the most important topics in the field. Our paid subscription service offers even more value, with a daily breakdown of every source we cover. You'll never miss a beat with our comprehensive coverage.
But don't just take our word for it - our community of informed readers can attest to the quality of our content. Join them today by hitting the subscribe button! And if there are any specific topics or sources you'd like to see covered in our newsletter, just let us know.
So what are you waiting for? Sign up now and start receiving the latest macroeconomic insights delivered straight to your inbox.
Thanks for reading The Macro List! Subscribe now to receive new posts and support our work.