In an op-ed in the Wall Street Journal, Judy Shelton, whom I understand is persona non grata in some quarters for showing affection for the gold standard, opens the op-ed with a statistic I found sobering:
The 25 largest U.S. banks currently hold 45.7% of their assets in loans and leases, according to Fed data released Friday, down from 54.1% this time last year. Meantime, their year-over-year holdings of Treasury and agency securities increased 33.5%. This reflects more-stringent borrowing standards and diminished loan demand. But it also reveals a subtle yet persistent change in how banks operate.
going on to explain the ways that the Federal Reserve has discouraged banks from lending over the last dozen years or so. She concludes:
America’s future as a free-market economy depends on surmounting a fundamental quandary: All entrepreneurial endeavor that is potentially productive is inherently risky. It is the nature of capitalism. Nevertheless, access to financial capital is vital for improving a person’s prospects for economic prosperity—an essential aspect of achieving the American dream.
The Fed must avoid turning banks into government utilities through its carrot-and-stick approach of providing incentives for the accumulation of reserve balances while enforcing compliance parameters that discourage risk-taking. The goal is to stimulate, not stultify, productive economic activity—the kind that raises output and justifies increased wages. Workers do best when banks find it profitable to invest in private enterprise, to become reliable partners with the people who aspire to create products and provide services.
The decisions of the central bank are meant to support, not to supplant, the real economy. The Fed’s killing-with-kindness approach risks permanent scarring of banking relationships by curtailing access to credit. No wonder the movement to democratize finance is being pursued increasingly through nonbank institutions.
The United States hasn’t been a “free-market economy” for most of my adult life and that has never been truer than today. The best you could say is that the U. S. is a mixed economy, much of it poorly managed by the federal government. The federal government has been picking winners and losers for decades. It’s not hard to tell the difference. The winners are winning and the losers are losing. But also consider this:
The fastest growing component of GDP by far is net federal outlays. It’s nearly a third of GDP—more than at any time since World War II. The Democratic congressional leadership have made it clear that the $1.9T spending bill they’ve already passed is just a start. What the economy will look like when they’re done we can only speculate but it certainly won’t be a free-market economy.
For the second year in a row, half of all federal spending will be financed by borrowing. That’s an additional $3 trillion per year. Current federal debt is $28 trillion. That is 130% of GDP.
State and local debt amounts to another $3.3 trillion, bringing total government debt to 145% of GDP, or total government spending to 47% of GDP.
https://www.usdebtclock.org
Bingo! Just as I predicted now that we have a Dem as POTUS we will talk about debt. Let me make another prediction 3-7 years ahead of time. Once a Repub is back on office we wont talk about debt anymore and low rates will be just fine.
“Workers do best when banks find it profitable to invest in private enterprise”
How quickly we forget the aughts. We know that banks are not especially good at assessing risk, at least partially because banks and bankers have different incentives. Workers might actually do well if banks invest in real private enterprise, but bankers work to maximize their incomes knowing that their losses are socialized. Ok, that rant out of the way I doing think anyone would pretend that the last year has been a normal economy.
Steve
Interesting intersect with an observation Milton Friedman made in 1970 — during his “inflation is always and everywhere a monetary phenomenon” speech.
The observation was about bank failures during the great depression. Emphasis is mine.
“…. Perhaps the most decisive bit of evidence against that interpretation is that many banks failed because of a decline in the price of government securities. Indeed, it turned out that many banks that had made bad private loans came through much better than banks that had been cautious and had bought large amounts of Treasury and municipal securities for secondary liquidity. The reason was that there was a market for the government securities and hence when bank examiners came around to check on the banks, they had to mark down the price of the governments to the market value. However, there was no market for bad loans, and therefore they were carried on the books at face value. As a result, many careful, conservative banks failed.”
The US has a fiat system now; in theory the Federal Reserve can keep treasury prices at its permanent high plateau (which has its own risks). But even the safest assets, if too much of it, can be a risk in of itself, in unexpected ways.
LOL
Right on que. Steve wants to cite those evil, rapacious bankers. They don’t know credit!!!! Dumbasses. Why, its a wonder they can put their pants on in the morning. He cites, but conveniently forgets, that in the aughts bankers were instructed and incentivised to make home loans, and given the perfect vehicle to off load them from their balance sheets and onto the public: Fannie and Freddie. As advocated by a certain M Walters. Apparently Maxine and Steve share the same banking savvy. Two peas in a pod.
The only thing he gets right is the evil of socializing the costs. But of course that’s where Fannie and Freddie came in – government at its, uh, best. Expect no similar criticism of the “Covid Relief” (snicker) bailout bill of profligate blue states. That’s different, you see.
Stick to gall bladders, steve.
“Dumbasses. Why, its a wonder they can put their pants on in the morning.”
For once I agree with you. In 2004 (2005?) roughly half of mortgages were liars loans. They were handing out loans to people and they didnt even know if they had any income. Dumbass seems pretty accurate. Those incentives? It was making lots of money. Money is an incentive. Who knew. (Not Drew apparently.)
Also, you really dont know the history of Fannie and Freddie. It was conservative who complained that F&F was too restricted in its ability to hand out subprime loans. F&F got into them late. Yes, they were used to help socialize the losses incurred by the private sector. Those dumbasses are pretty smart at getting government to bail them out, will grant them that.
Steve