The Fed is playing with fire: SVB proves it 

Federal Reserve Chairman Jerome Powell and the Fed’s governing board want more rate hikes, but the failure of Silicon Valley Bank (SVC) has put them at a standstill. They know that in 2022 he will have 7 rapid fire rate increases, adding to the damage the higher rate has already done.

With report after report showing, why is the Fed so eager to raise rates? inflation is decliningThe answer is that Fed monetarists believe that slowing the economy is the way to combat even this COVID-related inflation, making the Fed’s original role as overseer of the private financial system essentially unnecessary. It means I believe. A laissez-faire view of regulation fosters a crisis.

The SVB’s failure reinforces the need to oversee private finance. Instead, the Federal Reserve has become the proverbial one-trick pony. It does not attempt to address the specific sectors of the economy that are actually driving inflation today, nor does it give due attention to the Fed’s key regulatory responsibilities.

Inflation is now low and the Fed should take its foot off the brakes. Retailers are rebuilding inventories, which puts downward pressure on a wide range of prices. These costs have stabilized as transportation bottlenecks have been eliminated.According to other reports, house prices and rents are Likely to soften in coming monthsRents have eased as office space is in oversupply. Food prices are also likely to stabilize or soften.

The key question is why isn’t inflation faster and falling further? The answer is not that the economy is growing as fast as Fed policy suggests. That is, there are war-related issues in the life energy field. Energy has been a major part of the inflation story that began 18 months ago and may continue to do so. The Federal Reserve does not seem to understand this.

everyone knows Gasoline prices are down from their 5-gallon peakBut other energy prices remain a major source of inflationary pressure. This also applies to natural gas for home heating and electricity generation, and diesel to power trucks and machines. Kerosene, propane, LNG and fertilizer have also surged for war-related reasons.

Inflation in the energy sector has a direct impact on consumers’ heating and electricity bills. Although poorly understood and measured, energy inflation continues to put upward pressure on the cost of goods, agricultural products, commercial transport, private and public services. Nevertheless, overall inflation remains low, with analysts saying it could fall to 3-4% by the end of 2023.

But the Fed has bees under its hood. 2% inflation has become a magic number, much like the deficit hawk’s unemployment rate in the 1980s and his 90s was below his 6%. At the time, most people believed that inflation would skyrocket when the unemployment rate dropped below his 6%, following a model called the Phillips Curve. That magic number turned out to be ridiculously wrong.

But to quickly reach 2% Nirvana, the Fed has more than doubled mortgage rates from December 2021 onwards. Fed policy is also pushing up interest rates on credit cards, autos and other consumer loans. Such increased borrowing costs will always be more difficult for credit-dependent workers and small businesses than for wealthy large corporations. Well-financed people have money to rely on that less wealthy consumers and businesses do not. When prices fall, wealthy people lick their chops and buy cheap small businesses and other assets that rely on credit. This could be happening with assets that SVB is currently forced to sell.

Powell and the inflation hawks are not just downplaying the fact that inflation is falling. They ignore the history of recession following the kind of deflationary policy they pursue. Periods of falling prices and wages have been many times more frequent, painful, and prolonged in American history than periods of inflation. In fact, periods of inflation in the United States have almost always been periods of war.

The Great Depression of 1929-1940 and the subsequent World War II (1941-45) are prime examples. Franklin Roosevelt took office in his March 1933. Prices and wages had already fallen about 30% since his 1929 crash. The new president shared with the reactionary elite of the time the conviction that government spending would crowd out private investment and cause inflation. Nevertheless, his first New Deal administration from 1933 to 1937 spent large sums of money on new employment and public works programs like the Civil Protection Corps and the Bureau of Labor Progress. and undertook a fundamental reform of the related regulatory system. By 1937, these New Deal spending programs and actions had reduced unemployment to below his 15%. 25% in 1932.

Then came the revival of the old tight-money legitimacy that is so grotesquely familiar today. Jobs did not recover until wartime spending saved the free world, wiped out the unemployed, and empowered his decade of postwar prosperity.

The government found a way to fund World War II. Roosevelt’s Secretary of the Treasury, Henry Morgenthau, set aside his strict financial convictions and ordered the Federal Reserve to purchase all bonds issued by the Treasury at no more than 2%. , the Federal Reserve followed suit. When the war ended, Morgenthau boasted that he financed his $200 billion government spending for the war at 1.94%.

Americans should be very frightened by the Fed’s continued preference for deflation given the collapse of the SVB and the long history of US recessions associated with monetary tightening. The past 200 years of unemployment and commercial failures have taken steps to raise interest rates, limit credit-based purchases, and cut government spending.

Albert Einstein said that the definition of insanity is “doing the same thing over and over and expecting different results.” Americans should ask whether the Fed’s deflationary policy and indifference to regulation of the financial system fit this definition of insanity, and whether it will lead again to a needless and politically dangerous recession.

Dr. Paul A. London was a Senior Policy Advisor and Deputy Undersecretary for the Department of Commerce’s Bureau of Economic Statistics in the 1990s, Deputy Assistant Administrator for the Federal Energy Management and Energy Administration, and a Visiting Scholar at the American Enterprise Institute. rice field. A legislative assistant to Senator Walter Mondale (D-Minnesota) in the 1970s, he has served as a diplomat in Paris and Vietnam and published two of his books, including The Competition Solution: The Bipartisan Secret Behind American Prosperity. (2005).

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