Monday, March 20, 2023

The collapse of SVB shows why monetary policy is the wrong tool to fight inflation — Yeva Nersisyan and L. Randall Wray

What is missing from the debates over monetary policy today is the understanding that the Fed was not established to control inflation. It was created to prevent financial crises by acting as a lender of last resort in times of distress. Indeed, that’s exactly what the Fed is doing now — opening up its lending facilities to banks in need. But rather than focus on maintaining financial stability, the Fed has become obsessed with controlling inflation, something it cannot really do without causing either a recession or a financial crisis (or both).

What the Fed needs to do is abandon misguided economic theories that have subverted its primary goal of financial stability to inflation targeting. Rather than change interest rates to control inflation it should pivot to a policy of stable interest rates with the goal of maintaining financial stability. The current experience is yet another stark example that unstable interest rates are inconsistent with financial stability. This approach is counterproductive and unnecessary since we have more effective tools for macroeconomic stabilization, such as fiscal policy..…
Simple and understandable explanation of what went wrong. The authors admit it not the whole story but it is the essence of it. Rate hikes, which are useless in controlling inflation anyway unless they create a crisis.

Yeva Nersisyan, Associate Professor of Economics at Franklin and Marshall College, and L. Randall Wray, Professor of Economics and senior scholar at the Levy Economics Institute of Bard College — Opinion Contributors 

15 comments:

mike norman said...

Ya think?

Matt Franko said...

Trump told the Fed to stop in 2018 before they caused something like we are experiencing now…

Yellen and Powell were thinking inflation was transitory from Covid and were not going to increase rates during pandemic recovery of supply side…

Larry Summers has private meeting with Brandon then Brandon has Yellen and Powell come in and directs them to use monetary policy to try to reverse what had become politically unpopular inflation so Fed embarks on unprecedented rate increases in desperate political effort to reduce inflation in election year right out of the monetarist playbook.

So the problem isn’t the Fed the problem is Brandon…


Matt Franko said...

Tom he says here:

“Rather than change interest rates to control inflation it should pivot to a policy of stable interest rates with the goal of maintaining financial stability.”

But Minsky says “stability creates instability”…

So why would he want stability? This is just going to lead to more instability…

So if you gun the policy rate up and down and all over the place (destabilize) this should prevent any resultant instability…

Fed is following the Minsky Thesis..,

🤔

Matt Franko said...

“ This approach is counterproductive and unnecessary since we have more effective tools for macroeconomic stabilization, such as fiscal policy..…”

If this is true then it follows that the Democrats 1.9T fiscal program with continued shutdowns they passed in Feb 21 caused the inflation…

Democrats don’t want to admit that so they rely on monetary policy of an “independent Fed”…

How is that going to work politically? It won’t..,

This is all devoid of political reality..,

Matt Franko said...

And again no mention of the Fed regulatory modification of lowering the RRR from 10% to 0% which allowed the bank to put 100% of its HQLA into term Govt bonds..

If SVB had 180B deposits then under old regulatory settings they would have had 18B in reserves minimum…

So if a large unexpected withdrawal was made they wouldn’t have to sell any term securities at a loss to get the reserves to settle the withdrawal…

Ofc only up to the 18b at least..,

Matt Franko said...

And this is BS: “ But unlike what happened during the Global Financial Crisis, the bank didn’t go on a reckless lending spree. ”

2008 was same thing Fed added reserve assets which banks didn’t have capital to support and collapsed SLR…

This time Fed raised rates reducing PV of regulatory assets and collapsed the SLR..

It’s (A-L)/A

The problem is always the Fed collapsing the SLR…

It’s 8th grade algebra…

Footsoldier said...

Trump, Trump, Trump, Trump.


It's quite extraordinary behaviour to think he is your saviour.


Nobody is you simply can't change. They own you and your elections won't change a thing. Trump just means you will be run by the Heritage foundation and different arm of your elite, political class. When push comes to shove the same class of people.

Footsoldier said...

The arm that hates China more than Russia.

Peter Pan said...

The problem is always the Fed collapsing the SLR…

The problem is nobody being held accountable.

Matt Franko said...

It’s not that they be held accountable… it’s that they have to admit their mistakes…

I think this is where the Catholic Church came upon confession…

If you are in STEM and you have a trial and it doesn’t work everyone knows it…

Elon Musk Falcon Heavy blew up upon landing 2 times everyone knew it it was on YouTube,,,

Arnold Schwarzenegger says “EXPOSE your weak points”… it’s the same thing…

Until they publicly admit what they’ve done wrong it’s just going to keep happening…

They will never make the proper adjustments and correction in response to the failure…

Matt Franko said...

“ It's quite extraordinary behaviour to think he is your saviour.”

lol he’s not a savior he just someone who wouldn’t let the monetarists at the Fed fuck up his economy like in this case…

You have to give credit where it’s due or you’re just a biased political operative..,

NeilW said...

"So if a large unexpected withdrawal was made they wouldn’t have to sell any term securities at a loss to get the reserves to settle the withdrawal…"

They shouldn't have had to do that anyway - if the Lender of Last Resort was doing their job properly and covering the duration they induced by their interest rate rises.

We've never had required reserves in the UK. We just have a central bank that has had 200 years more practice. Hence why the BoE fully neutralised the LDI issue before the fires got started.

Would SVB be bankrupt if the Bank Term Funding Program was available at the beginning of March?

CounterEconomist said...

We should be thankful that such an extremely poor managed bank has failed now and is out of business. Otherwise, it would happen anyway, but maybe 10 years from now, when SVB would be probably even bigger and would cause more damage to the system.

I don't believe that it's the role of the central bank or the government to support bad managed businesses.

CounterEconomist said...
This comment has been removed by the author.
Peter Pan said...

It’s not that they be held accountable… it’s that they have to admit their mistakes…

If the justice system worked that way, the prisons would be empty.