Swamponomics: It’s The Fed’s World – And We’re Just Living In It
Federal Reserve balance sheet, stress tests, and Johann Norberg.
Wait a minute. Is the Federal Reserve‘s balance sheet supposed to be exploding to contain the coronacrisis? Did someone forget the philosophy of “do whatever it takes and buy all the assets“ for the second week in a row? The Powell Putsch has taken a breather.
A Perfect Balance
Last week, the Fed’s balance sheet posted its first contraction since the end of February, which also happened to be the steepest reduction in 13 years. It happened again. For the second consecutive week, the balance sheet fell $12 billion to $7.082 trillion as currency swaps and repurchasing agreements tumbled.
Here is what happened in the week ending June 24:
- Fed added $52 billion in Treasurys and mortgage-backed securities (MBS).
- Currency liquidity swap plunged $77.5 billion.
- Outstanding repo agreements slumped by $8.9 billion.
As Liberty Nation recently reported, the Fed’s balance sheet is closely monitored by Wall Street. Is it a mere coincidence that volatility on The Street has coincided with a curtailing balance sheet? But while its asset-buying blitzkrieg remains a critical component to monitor, the Fed is still expanding the money supply. Here is the M2 money stock from the first half of June:
When the Federal Reserve recently announced that it would be adding Coronavirus scenarios to this year’s bank stress tests, it was expected that the results of 34 banks were going to be ugly. Well, about as expected as CNN contradicting itself. The U.S. central bank was not pleased by what it saw.
Under a traditional stress test without COVID-19, the banking system was healthy and well-capitalized. However, once the virus outbreak was tossed into the mix, these banks would be testing their capital buffers and nearing their minimum capital standards.
The Fed voted 4-to-1 to mandate that large financial institutions would preserve capital by capping dividend payments in the third quarter and halting share buybacks. The Eccles Building will tie the distribution of dividends to a formula based on recent income, which would involve setting Q3 dividends at a figure equal to average net income over the last four quarters.
Not everyone was on board with the decision. Fed Governor Lael Brainard was the lone dissenter, urging for a blanket suspension of dividends. “Past experience shows that banks operating close to their regulatory minimums are much less likely to meet the needs of creditworthy borrowers, and the resulting tightening of credit conditions could impair the recovery,” she wrote in a statement. Overall, the Fed is expected to move forward one quarter at a time.
But there is one question that perhaps the smart folks either at the Fed or on Wall Street can answer: The big banks have received a $2 trillion cash injection since January, so how could they be short on capital?
If It Swipes, Tax It!
The credo of big government acolytes is simple: If it moves, tax it. While the state is drowning in red ink, officials are wailing about income inequality, and policymakers are looking for new revenue streams, the brightest minds in the Swamp are coming up with ingenious ways of making your life a bit more expensive. One such idea? Tax credit card rewards.
Brookings Institution fellow Aaron Klein wrote an op-ed in The Los Angeles Times, titled How credit card companies reward the rich and punish the rest of us. The piece was written in December, but it has attracted new attention after Newsmax offered input on the concept.
Even something as benign as credit card rewards is now a target for the smartest men and women in the room. Why is a credit card reward the new bogeyman? They say that customers pay the same with cash as they do with a piece of plastic, but the owners keep more money with cash. Therefore, according to Klein, impoverished shoppers are subsidizing wealthier, card-wielding customers. Huh? Exactly.
There are a few things wrong with this suggestion. Holding cash is expensive and dangerous for retailers. Moreover, restricting a financial mechanism can lead to a myriad of unintended consequences. Finally, taxing credit card rewards will lead to a reduction in benefits that are enjoyed by all income demographics. Why is it so hard for the central planners to allow people to enjoy even a modicum of economic freedom?
So Long, Mr. Norberg
If you ever wanted a three- or four-minute free market lesson on YouTube, Johan Norberg would give it to you. Since December 2015, the Swedish author and historian has produced 172 episodes of Dead Wrong with Johan Norberg – and they have always been a delight. Unfortunately, Norberg will be shutting down the video series for the Free to Choose Network. Thankfully, he will come back in some other capacity in the future, and that time cannot come soon enough! Until then, the various economic fallacies will be repeated in a public forum, so you can always return to his evergreen content and see him crush these mistaken beliefs like a Dixie cup.
So long, Mr. Norberg – wherever you are.