https://mises.org/wire/fed-pre...icans-economy-strong

Last Thursday, Bloomberg reported that federal regulators are preparing a proposal to force US banks to utilize the Federal Reserve’s discount window in preparation for future bank crises. The aim, notes Katanga Johnson, is to remove the stigma around tapping into this financial lifeline, part of the continuing fallout from the failures of several significant regional banks last year.

https://www.bloomberg.com/news...bedded-checkout=true

This new policy is reminiscent of the Fed’s actions during the 2007 financial crisis, where financial authorities encouraged large banks to tap into the discount window, taking loans directly from the Federal Reserve, to make it easier for distressed banks to do the same. The hesitancy from financial institutions to tap into this source of liquidity is justified. If the public believes a bank needs support from the Fed, it is rational for depositors to flee the bank. The Fed’s explicit aim is to provide cover from at-risk banks, trying to hold off bank runs that are an inherent risk in our modern fractional reserve banking system.

By strong-arming healthy banks to comply, the Fed is escalating moral hazard and leaving customers more vulnerable. They are deliberately trying to remove a signal of institutional risk.

The regulator’s concerns about bank fragility are justified. The Fed’s low-interest rate environment meant financial institutions seeking low-risk assets bought up US treasuries with very low yields. As inflationary pressures forced rates upward, the market value of these bonds decreased in favor of new, higher-yield bonds. It was this pressure that sparked the failure of Silicon Valley Bank last year.

Additionally, the state of commercial real estate is a further stress for regional banks, which are responsible for 80 percent of such mortgages. In the previous low-interest rate environment, investors viewed commercial real estate as “a haven for investors in need of reliable returns.” Unfortunately, this same period experienced major changes in consumer behavior. Online shopping, remote work, and shared office space increased at the expense of traditional brick-and-mortar locations. Covid lockdowns only further amplified these trends.

As a result, commercial real estate debt is viewed as one of the most dangerous financial assets out there today, sitting right on the balance sheets of regional banks across the country.

These stresses have had a major impact not only on this latest policy from federal regulators but the depth of their response to last year’s failures. Following the failure of SVB, the Fed created the Bank Term Funding Program, which allowed banks and credit unions to borrow using US Treasuries and other assets as collateral. This emergency measure reflected fears of other banks being at risk. The Fed has signaled its willingness to let this program expire in March, with the aim of transitioning banks to increasing their use of the discount window.

While the actions of the Fed and financial regulators illustrate real concerns about the health of US banks, these same institutions have projected bullish optimism about the state of the economy in public. Fed Chairman Jerome Powell and Treasury Secretary Janet Yellen have consistently described the US economy as “robust” over the last few months, a view not shared by the majority of Americans. Additionally, Powell proclaimed victory over inflation this past December, even while the Fed’s preferred measures remain well above their 2 percent target, in stark contrast to his previous statements about the necessity to aggressively tackle inflation at the risk of it becoming normalized.

The shadow of politics obviously can’t be decoupled from the rosy statements from government officials on the economy, particularly going into a presidential election year. Another motivation for projecting economic strength, however, is to re-arm the Federal Reserve’s policy arsenal. While the projections of Fed officials for rate cuts in 2024 have been packaged as reflecting the growing strength of the US economy, the reality is that the Fed desires the option to lower rates as a response to financial distress. The Fed has proven time and time again that if given the choice between forcing Americans to suffer from the consequences of inflation or bailing out the financial system, it will choose the latter.

With the 2024 election in full swing, Americans will be consistently bombarded with political lies and false promises, not just from politicians but from government agencies and the central bank. While we can expect another ten months of being told how strong the economy is, the actions being taken behind the scenes tell a very different story.

Author:

Contact Tho Bishop

Tho is Editorial and Content Manager for the Mises Institute, and can assist with questions from the press. Prior to working for the Mises Institute, he served as Deputy Communications Director for the House Financial Services Committee. His articles have been featured in The Federalist, the Daily Caller, Business Insider, The Washington Times, and The Rush Limbaugh Show.

The fact that so many banks seem almost desperate for infusions of "new cash" in that so many are offering interest rates up to 5% APR, and "bonuses" for opening new accounts should tell us something.

And, you only have to go to the grocery store to see that the Federal Govt. is lying to us about the rate of inflation. According to CNBC, "Consumer spending remains strong." They say it over and over again. Perhaps this is because those consumers are paying more for the same acquisitions?

Is it a concerted effort to conceal unwise and dangerous economic policies implemented by a particular administration so they will not harm their chances in an upcoming election?

quote:

Originally posted by architect:
The fact that so many banks seem almost desperate for infusions of "new cash" in that so many are offering interest rates up to 5% APR, and "bonuses" for opening new accounts should tell us something.

And, you only have to go to the grocery store to see that the Federal Govt. is lying to us about the rate of inflation. According to CNBC, "Consumer spending remains strong." They say it over and over again. Perhaps this is because those consumers are paying more for the same acquisitions?

Is it a concerted effort to conceal unwise and dangerous economic policies implemented by a particular administration so they will not harm their chances in an upcoming election?

5% is a NORMAL interest rate for long term cd's. 6-8% IS a normal interest rate for mortgages and actually on the lower end of normal, IF you look beyond the previous 4 years.

quote:

Originally posted by architect:
And, you only have to go to the grocery store to see that the Federal Govt. is lying to us about the rate of inflation.

Grabbed a bag of Lime Tostitos for a mexican themed lunch gathering today. The checkout lady rung it up and said, "$5.99? That's ridiculous."

Yep, six bucks for a bag of chips that used to be half that. Ridiculous indeed.

And that bag of chips was probly a few ounces more years ago for 2.99. I see the shrinkflation everywhere, increase price and decrease quantity.

quote:

Originally posted by Gustofer:
Grabbed a bag of Lime Tostitos for a mexican themed lunch gathering today. The checkout lady rung it up and said, "$5.99? That's ridiculous."

Yep, six bucks for a bag of chips that used to be half that. Ridiculous indeed.

As an employee of one of those regionals that failed and now an employee of a more stable bank yes. The drill is get deposits and investments. Same with my former colleagues who were spread to the wind that I’m still in touch with. Get deposits. It’s their only objective. Where I work now we can’t turn around without somebody saying the regulators this the regulators that. They practically live in our headquarters.

Never mind the stories of employee debauchery about the FDIC at at came out post collapse last year.

quote:

Originally posted by architect:
And, you only have to go to the grocery store to see that the Federal Govt. is lying to us about the rate of inflation. According to CNBC, "Consumer spending remains strong." They say it over and over again. Perhaps this is because those consumers are paying more for the same acquisitions?

Lies, Damn Lies and Statistics! They can say that the 'rate of inflation' is down, but that just means the prices are going up as fast. Prices for most everything have not come down at all. They claim progress while basically everything costs 30-50% more now! ANYONE that buys ANYTHING knows this!

Doublespeak and doublethink.
Don't pay any attention to the they/them behind the curtain.

I have noticed a huge uptick in credit card deals, offers and applications. It’s like 10 a week now.

Part of the government calculation of rate of inflation is substitution. If you used to buy steak once per week, as we did, at $9.95/lb to grill at home, but now the price has gone up to $16.99/lb so you buy chicken at $9.95/lb instead. That chicken used to be $5.99/lb

The real inflation rate is 70% in the above example for the steak, and 40% for the chicken, but the feds would say zero inflation because we substituted a cheaper option.

Don't think that your money is safe in the bank due to the FDIC insurance. FDIC can only cover less than 1% of deposits.

I find banks offering higher interest rates and other incentives being a sign of impending doom hard to swallow. I'm not complaining about the 4.35% (quadruple that of my credit union) American Express savings account that I have.

quote:

Originally posted by VANQUISH:
Don't think that your money is safe in the bank due to the FDIC insurance. FDIC can only cover less than 1% of deposits.

Yes and Dodd Frank changed the law. There will not be bailouts for banks only bail ins.



https://www.investopedia.com/a...-be-new-bailouts.asp

The world experienced economic turmoil during the 2007-2008 financial crisis. Low-interest rates boosted borrowing, a boon to existing and prospective homeowners, but created a bubble that would impact consumers and the world's banks.

The Great Recession that followed ushered in the term too big to fail, the rationale for rescuing some of the largest financial institutions with taxpayer-funded bailouts. In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Act, which eliminated the option of bank bailouts but opened the door for bank bail-ins.

KEY TAKEAWAYS

Big banks were deemed too big to fail following the financial crisis of 2007-2008, resulting in government bailouts at the expense of taxpayers.

Financial reforms under the Dodd-Frank Act eliminated bailouts and opened the door for bail-ins.

Bail-ins allow banks to convert debt into equity to increase their capital requirements.

Bank Bail-In vs. Bank Bailout
Bail-ins and bailouts are designed to prevent the complete collapse of a failing bank. The difference between the two lies primarily in who bears the financial burden of rescuing the bank.

In a bailout, the government injects capital into banks, enabling them to continue their operations. During the financial crisis of 2007-2008, the government injected $700 billion into companies like Bank of America (BAC), Citigroup (C), and American International Group (AIG) using taxpayer dollars.

U.S. Department of the Treasury. "Troubled Assets Relief Program."


Bail-ins provide immediate relief when banks use money from their unsecured creditors, including depositors and bondholders, to restructure their capital. Banks can convert their debt into equity to increase their capital requirements. Banks can only use deposits over the $250,000 protection provided by the Federal Deposit Insurance Corporation (FDIC).


Investor Assets
In a bail-in, banks use the money from depositors and unsecured creditors to help them avoid failure. This also includes depositors whose account balances are more than the FDIC-insured limit.
1
Banks have the authority to take control of any capital that fits the criteria per the law. Investors with accounts that exceed the $250,000 insured limit may be affected and should:

Monitor the performance of the financial markets and financial sector
Ensure that chosen financial institutions are financially secure and stable
Spread the risk by diversifying money and assets
Keep balances at or below the $250,000 limit
Avoid banking with any institution that has large derivative and mortgage books, which can be risky in times of crisis

What Are the Risks of a Bank Bail-In on Consumers?
Bail-ins allow banks to avoid bankruptcy by shifting some risks to their creditors rather than to taxpayers. This risk can be transferred to bank customers, too.

More at link

quote:

Originally posted by wcb6092:

quote:

Originally posted by VANQUISH:
Don't think that your money is safe in the bank due to the FDIC insurance. FDIC can only cover less than 1% of deposits.

Yes and Dodd Frank changed the law. There will not be bailouts for banks only bail ins.

Well, that is true to some extent about the bail outs. That is currently how the law reads but that is not what happened when Signature failed or any of the subsequent banks that have failed since.

Again it is a case of them picking favorites and only paying attention to the laws they want to when convenient.

quote:

Originally posted by nhracecraft:

quote:

Originally posted by architect:
And, you only have to go to the grocery store to see that the Federal Govt. is lying to us about the rate of inflation. According to CNBC, "Consumer spending remains strong." They say it over and over again. Perhaps this is because those consumers are paying more for the same acquisitions?

Lies, Damn Lies and Statistics! They can say that the 'rate of inflation' is down, but that just means the prices are going up as fast. Prices for most everything have not come down at all. They claim progress while basically everything costs 30-50% more now! ANYONE that buys ANYTHING knows this!

Years ago I worked with a very astute CFO who used to say "torture the numbers and they will confess to anything".

quote:

Originally posted by PASig:
I have noticed a huge uptick in credit card deals, offers and applications. It’s like 10 a week now.

I am noticing the same thing. Very reminiscent of the 2008 era of financial distress. This isn't giving me a warm fuzzy at all.