I’m not sure what word to use for something that’s simultaneously infuriating and enlightening but that was my reaction to this observation by Hirsh Chitkara at Tablet:

In speeches, Biden said the CHIPS Act would produce 1 million construction jobs. It wasn’t until The Washington Post challenged this assertion that the White House admitted its mistake. The correct estimate, even when calculated by industry-backed research groups, was closer to 6,200 jobs — not exactly great bang for your 50 billion bucks. Workers without high school degrees can expect to earn around $48,000 from semiconductor manufacturers — only $8,000 above the median across all industries, and certainly not enough to afford the lifestyle of postwar factory workers. Ironically, the bill has probably been most effective as a jobs program for DC lobbyists, who received a tidy $100 million sum that will undoubtedly do wonders for Georgetown’s cupcake economy.

While reshoring advanced chip manufacturing is a security necessity, it’s not going to facilitate rebuilding the American economy from the middle out. What will?

Laissez-faire won’t do it. What that will do is create more minimum and sub-minimum wage jobs while further enriching those who are already prosperous. I’ve made my view pretty clear. I think we need to produce a lot more of what we consume than we are at present and reduce the pull factors on immigration with tough labor laws that are strictly enforced. What’s your preferred alternative?

It was gratifying to me to see this article in the Wall Street Journal by Te-Ping Chen. Guess what? Just as I’ve been saying around here for some time, a lot of the job listings are phonies:

A mystery permeates the job market: You apply for a job and hear nothing, but the ad stays online for months. If you inquire, the company tells you it isn’t really hiring.

Not all job ads are attached to actual jobs, it turns out. The labor market remains robust, with 10.8 million job openings in January, according to the Labor Department. At the same time, companies are feeling budgetary strains and some are pulling back on hiring. Though businesses are keeping job postings up, many roles aren’t being filled, recruiters say.

Hiring managers acknowledge as much. In a survey of more than 1,000 hiring managers last summer, 27% reported having job postings up for more than four months. Among those who said they advertised job postings that they weren’t actively trying to fill, close to half said they kept the ads up to give the impression the company was growing, according to Clarify Capital, a small-business-loan provider behind the study. One-third of the managers who said they advertised jobs they weren’t trying to fill said they kept the listings up to placate overworked employees.

Other reasons for keeping jobs up, the hiring managers said: Stocking a pool of ready applicants if an employee quits, or just in case an “irresistible” candidate applied.

I don’t know how to disaggregate the various reasons that companies post phony job listings which include they’re fishing, they’re trying to placate their own employees, they’re making a care for H1-Bs, and they’re trying to convince investors they’re growing faster than they actually are. But the message is clear: don’t believe them.

I want to concur with Luigi Zingales’s obseraations at City Journal that there needs to be an investigation of the bank failures:

Resilient institutions cannot be brought down by the failure of just one individual, even the CEO. In fact, banks have a number of important gatekeepers. The failure of these banks suggests that all these gatekeepers failed together. If we want to restore trust in the system, we need to understand why. Only an authoritative presidential commission can do so.

The first gatekeepers to be investigated are the boards of SVB and Signature Bank, which are responsible for ensuring that bank risks are properly managed. They were not. In June 2019, Delaware’s supreme court held that the board members of Blue Bell Creameries should be personally liable for losses the company suffered following a deadly listeria outbreak because they did not create a board-level process to oversee mission-critical risks for the company. Why should the same not happen to bank board members when the bank they supervise fails to adopt such basic risk-management techniques as hedging interest-rate risk?

The second gatekeeper to be investigated should be the auditors. On February 24, KPMG signed the audit report of Silicon Valley Bank. On March 1, it signed the audit report for Signature Bank. By law, auditors must state whether they have any doubt about a company’s ability to survive over the next year. In both cases, KPMG expressed no doubts. Within two weeks, both banks failed. If auditors are unable to detect fraud or risk, what are they paid for?

The last and most important gatekeeper to be investigated is the Fed. The knee-jerk reaction of many liberal commentators was to blame former president Donald Trump for these bank failures. Under Trump’s administration, midsize banks like SVB were exempted from the duty to conduct a stress test. If this relaxation did not occur, the claim goes, SVB’s risk would have been identified much sooner. This claim is false, however. As Nobel laureate Douglas Diamond clearly stated in the latest episode of Capitalisn’t, a podcast that I co-host, SVB would have passed the stress test with flying colors. The 2022 stress test did not evaluate banks’ exposure to the possibility of significant interest-rate increases. If the Fed did not fail in its role as regulator for lack of instruments, then why did it fail?

to which Aaron Klein at Brookings adds:

I count at least four classic red flags of the bank’s conduct that should have sent the alarm bells ringing, which the Fed appears to have slept through.

1. Explosive asset growth.…
2. Hyper reliance on uninsured deposits.…
3. Huge interest rate risk. …
4. Dash for cash to the Federal Home Loan Bank.…

Each of these red flags should have triggered greater scrutiny from the Federal Reserve. Combined, they become a red laser beam screaming for greater scrutiny. After all, SVB is not a Main Street bank and never was. Regional banks of its size ($200B) have around 1,000 branches: SVB had 16. This does not even include more potential red flags about the relationship between SVB’s venture capital arm and the bank’s customer base, a potential red flag the Fed’s regulation of the bank holding company should have analyzed.

He characterizes the Fed as “asleep at the switch”. That seems to be happening a lot lately. Allowing the Federal Reserve to investigate itself is insufficient. There needs to be a Congressional if not White House level investigation.

Not only is it important that the interests and responsibilities of bank management, boards of directors, the banks’ auditors, and the Federal Reserve need to be consistent and aligned, so do the interests and responsibilities of shareholders and stockholders in the banks.

There’s a sort of Spiderman rule here: with great covering of uninsured deposits comes great oversight.

This quote from Emma Sky, founding director of Yale University’s International Leadership Center, who served as political adviser to the Commanding General of U.S. Forces in Iraq, is the kernel of Tom O’Connor’s retrospective in Newsweek on the U. S. invasion of Iraq which began 20 years ago today:

“The Iraq War undermined the rules-based international order,” Sky said, “and America’s reputation as the standard bearer of democracy.”

I recommend reading the piece in full.

I have seen an enormous amount of historical revision connected with the U. S. invasion of Iraq over the last several days. Suffice it to say that IMO the only way you can characterize Iraq as freer today than it was 20 years ago is to define Islamism as freedom. That would make Saudi Arabia and Iran among the freest countries in the world which certainly goes against any Western idea of freedom let alone an American idea of it.

While we’re on the subject can someone explain Roku’s behavior to me? Why are they holding a whole year’s worth of operating revenue as a deposit in the late Silicon Valley Bank? Unless there’s some sort of ploy going on that sounds like corporate mismanagement to me. Roku management appears to be assuming that even uninsured deposits will be covered by the federal government, a clear instance of moral hazard, while not scrutinizing the risks as is its fiduciary responsibility to do.

So, we’ve got the bank not scrutinizing its risk profile, corporate management not scrutinizing the bank, shareholders scrutinizing neither the bank nor the corporations, and the Federal Reserve failing to scrutinize the banks.

That’s not how it works. That’s not how any of this works.

And I haven’t even touched on the reality that every single public/private hybrid, “parastatals”, on which we’ve been depending has been a flop in the U. S. They’ve become a method for avoiding accountability, either to the voters or under the law.

The editors of the Washington Post urge the Federal Reserve Open Market Committee not to raise interest rates when it meets next week:

The United States has a stubborn inflation problem. Food, rent and transportation costs remain high, and many parts of the service economy aren’t cooling off. It’s worrisome. But there’s a larger concern right now: the stability of the financial system. The rapid downfalls of Silicon Valley Bank and Signature Bank have zapped confidence in critical parts of the banking sector and triggered concerns about what is next to rupture. The Federal Reserve should temporarily pause interest rate hikes on Wednesday to give the financial system time to adjust to the new reality.

Bank failures are scary. This is not a repeat of the 2008-2009 financial crisis. But people are shaken. Many are moving money out of small and midsize banks and into larger ones. It’s getting harder to get a loan as banks have little appetite for additional risk. Regional banks remain under pressure. First Republic Bank needed a $30 billion cash infusion. Overall, banks have borrowed $308 billion from the Fed, up from $5 billion a week ago. A crisis abroad at Credit Suisse only adds more jitters. As the Wall Street saying goes, “When the Fed tightens, something breaks.” The nation needs certainty that nothing else is at a breaking point.

What I believe is being lost is that the OMC has already been too timid in raising rates as the inflation numbers clearly show and that inflation is a tax that falls hardest on the poor. Let it be noted that the WaPo is taking sides here and it’s not taking the side of the poor.

What I think this highlights is that if there is any target for the use of artificial intelligence it should be the Federal Reserve. Its failure to scrutinize Silicon Valley Bank would not have happened but for human error as is the case with stress testing banks at 2% interest rates when the interest rate has risen over 4%.

Let’s consider a tally of things that should be done all of which will require an act of Congress:

• Reimpose Glass-Steagall
• Require the Federal Reserve to observe the Taylor Rule.
• If all deposits are to be insured, let’s amend the law to reflect that and fees on the banks that correspond to that practice.

And we should pick one. Either the FOMC should stay the course or we should abandon the notion that the Federal Reserve can control inflation on the grounds that it’s politically impossible for it to do so.

Update

This morning on one of the talking heads programs the present chairman of the House Financial Services Committee sounded just the right notes. This matter may be a legal problem, a regulatory one, a bank mismanagement problem, corporate mismanagement, or all of the above and it’s the Congress’s job to determine what in the heck happened and make the necessary adjustments to laws and regulations.

In addition to Ukraine, Burma, Syria, Ethiopia, Somalia, and various other areas in West Africa, there’s another conflict that appears to be heating up according to this piece in The National Interest by Brandon Patterson and Dino Bozonelos. This one has the added complication of being between two NATO members—Turkey and Greece:

Turkish president Recep Tayyip Erdoğan has threatened an invasion of its neighbor and NATO partner Greece. The disputes between the two countries are numerous but lately have settled on the “militarization” of Greek Islands near the Turkish Aegean coast. Turkey claims that the military buildups in the islands are in reaction to Greek violations of the 1923 Treaty of Lausanne. Article 13 of the 100-year-old treaty states that “No naval base and no fortification will be established in the said islands.” However, the same Article 13 also states that “Turkish aircraft will forbid their military aircraft to fly over the said islands” and that “The Greek military forces in the said island will be limited to the normal contingent called up for military services.”

Greece’s counterclaim is that Turkey has repeatedly violated its historical treaty obligations through continuous military flyovers and a consistent naval presence in the region. Greece has said that this threatens not only the territorial sovereignty of the islands but also the economic sovereignty of Greece’s continental shelf. While this source of friction brought the neighbors close to war in the 1970s, the two countries largely agreed to try to develop a framework for drilling rights and natural resource extraction in the eastern Aegean.

Perhaps the better way of looking at this matter than as a new conflict is as a conflict that has been going on for the last millennium with periodic détentes. Turkey has been a NATO member in name only since the Kemalists lost power. Indeed, I think that the NATO member was a regime rather than a country. Since there’s no formal way of expelling a member of NATO, we have the specter of an armed conflict between NATO members. That would certainly place additional strain on the alliance.

At Evergreen Gavekal Michael Johnston provides some insights into the operations of Silicon Valley Bank worth reflecting on:

Taking a step back, SVB carved out a distinct and riskier niche that catered to early-stage technology and science/healthcare companies. Venture Capital (VC) firms and their portfolio companies often turned to SVB for venture debt due to its attractive debt packages that were much cheaper than those offered by nonbank lenders. SVB was also more willing to lend to higher-risk growth companies that many traditional banking institutions would only lend to at a premium or avoided altogether.

While SVB’s lending business is attempting to stage a comeback under FDIC-controlled Silicon Valley Bridge Bank, it’s unclear whether the bank with find a buyer for its loan book. It’s also likely that traditional bank lenders will take a more conservative approach that limits venture debt exposure while the dust settles.

This uncertainty opens the door for nonbank lenders and PE firms to fill a huge void in the venture debt market. Given that capital is the lifeblood for growth companies, and many of these companies are facing a triple whammy that includes (1) depressed valuations, (2) a more challenging fundraising environment, and (3) tech’s most popular banking partner on life support, founders may be more willing to accept higher borrowing costs offered by private credit lenders. This is bullish for nonbank lenders and PE firms that were previously boxed out of venture debt opportunities by Silicon Valley Bank.

Additionally, companies will naturally gravitate to private lending companies given the heightened solvency concerns with banks and bank liabilities. Unlike banks, private credit vehicles do not have a deposit base that can just leave. This should create less competition and increase returns for private credit – whether that’s through higher cash flow, more points up front, or larger equity kickers/warrants.

I for one think that commercial banks should be prohibited from engaging in investment banking, especially as long as the federal government is underwriting all deposits in them.

There’s new evidence that the raccoon dog might be the source from which the COVID-19 virus originated. Benjamin Mueller reports at Yahoo News:

An international team of virus experts said Thursday that they had found genetic data from a market in Wuhan, China, linking the coronavirus with raccoon dogs for sale there, adding evidence to the case that the worst pandemic in a century could have been ignited by an infected animal that was being dealt through the illegal wildlife trade.

The genetic data was drawn from swabs taken from in and around the Huanan Seafood Wholesale Market starting in January 2020, shortly after Chinese authorities had shut down the market because of suspicions that it was linked to the outbreak of a new virus. By then, the animals had been cleared out, but researchers swabbed walls, floors, metal cages and carts often used for transporting animal cages.

In samples that came back positive for the coronavirus, the international research team found genetic material belonging to animals, including large amounts that were a match for the raccoon dog, three scientists involved in the analysis said.

The jumbling together of genetic material from the virus and the animal does not prove that a raccoon dog itself was infected. And even if a raccoon dog had been infected, it would not be clear that the animal had spread the virus to people. Another animal could have passed the virus to people, or someone infected with the virus could have spread the virus to a raccoon dog.

But the analysis did establish that raccoon dogs — fluffy animals that are related to foxes and are known to be able to transmit the coronavirus — deposited genetic signatures in the same place where genetic material from the virus was left, the three scientists said. That evidence, they said, was consistent with a scenario in which the virus had spilled into humans from a wild animal.

A report with the full details of the international research team’s findings has not yet been published. Their analysis was first reported by The Atlantic.

We still don’t know. It could be a “chicken or the egg” situation in which humans spread the disease to raccoon dogs. Or vice versa. Or something else entirely. It does bolster the case for those who are promoting a zoonotic origin for the virus.