YouSaid · the spoken record

Nathan Tankus

lines on the record: 88
first: 2023-04-25
most recent: 2023-04-25
sittings or episodes: 1
sources: podcast

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“You call it that? It's about the Federal Reserve. It's about the myth that the Federal Reserve can avoid picking winners and losers, whether it's with interest rate policy or with its crisis facilities. And the reality that it's been picking winners and losers from the moment the Treasury Accord happened and to move forward, we need to face the myths, face the reality, and make decisions based on that reality of picking winners and losers and always doing it.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“Cut through the noise, simplify it. Rather than takes 20 minutes explanation, everyone goes, oh, of course, that's how it works. And, you know, I'm trying to, you know, reform how things work to reform myself out of a job.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“Right, and the Federal Reserve when it does quantitative easing, it buys it from primary dealers and then primary dealers buy it from the Treasury. So there's a layer of intermediation. You're just trying to cut through the BS and say, hey, let's cut through the noise”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“And the treasury, whether it's minting the coin, issuing its own digital currency, or simply just, you know, having the power to directly create settlement balances itself that are its own liability, that it have direct money finance. So everyone's on the same page about government monetary finance and have the Fed, if it thinks for monetary policy purposes, it wants securities out there, it wants a certain kind of duration of government liabilities, it can do that themselves. And the Fed can take responsibility for that part itself.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“Now, in excess settlement balances regime, what happens is that the Fed pre-primed the banking system, filled up the banking system with settlement balances. So the Fed issues. And funded well, first with the emergency programs and then with quantitative easing, their banking system was filled with settlement balances. But in a broader perspective, they filled up the banking system first and then some were drawn out. There's always that money financing of spending going on. There's just securities issuance on the back end. And as you know, I've made a proposal to kind of clarify this. I clarify what I think already works at the federal government the Fed and the Treasury at this lower level to make everyone understand this federal government point, which is to have the Treasury directly money finance itself rather than indirectly or covertly have money finance through the Fed creating liquidity in treasury markets and have just the Federal Reserve Board issue security.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“The Fed sold a bond to get settlement balances into the banking system to make sure that the treasury auction would succeed, then the Treasury auction happens and payment starts flowing out and the Fed resells a bond or engages in reverse reprover to drain settlement balances out of the banking system. And so from a consolidated perspective, Stab is what operationally happens. The spending flows out and taxes and borrowing come in and taxes and securities issuance come in at the back end. And that's what happens when you have the fully consolidated perspective. You know, it's kind of difficult to think about because we're not used to thinking about the federal government, including the Fed, being consolidated altogether and what that balance sheet looks like. But that's the core argument.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“But yes, ultimately, you know, it regularly relies on issuing securities in order to fill up the Treasury General account. But from the consolidated point of view, every time that a payment goes out, it's marked down for the Treasury General account, what's happening in the broader perspective is that the money supply is increasing, payment runs comes out from the federal government, goes into a account with a bank, which then in turn potentially runs into the account of a non-bank of your proverbial grandmother on Social Security, and that that is increasing the money supply. That is money spinancing of government spending. And then after the fact, a bond is sold, a bond is sold from the Fed. So, you know, what was happening originally is the”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“Especially with the arrangements that happened at the time, you know, yes, the treasury itself has financing tools. We can say, you know, we can mention just a small print since 1996. It's had the power to mint a platinum coin. But putting that aside, you can fill up the Treasury General account, you need taxes or issuing bonds, or you need the FDIC to borrow, to have one of its banks borrow at the discount window, $150 billion, and that will fill up the TGA as well. So it's important to remember that there's a difference between restrictions on the Treasury directly borrowing from the Fed and the rest of the federal government.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“So I wrote this piece in 2020. I think it's called something like the federal government always money finances its spending, a restatement. I'm sure you can put a link to that piece. And so for me, what the critical issue is that the Fed argument, the MMT argument, as Stephanie Kelton both put it in her book, as you're referencing, stab versus tabs. And also in the original papers that she wrote way back when, or in the late 90s already almost 25 years ago now, which I think really held up despite all the criticisms, all everything thrown at it, is it's focused on the federal government, not one specific agency, whether it's the Fed or the Treasury or another. And the key to understanding that is”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“Big price increases when we need to mobilize resources to deal with a big problem, or at least not have the degree of price increases that we ended up having.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“Which would have created shortages regardless and not having as big a deficit was just creating hardships. And I think there's a, we can all debate different sides of sort of that concrete empirical question. MMT people themselves can debate among themselves of those concrete empirical questions, simply having the shared framework doesn't mean that you agree on every specific empirical point. I would say from my perspective, I would say Given that we didn't have the public apparatus that we needed to in terms of proactively managing supply chains, the big deficits we were on were the second best policy and not running big deficits would have been worse. But we definitely should build up a proactive system that can manage supply chains and govern markets in a way that we don't have big price increases.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I definitely think it's a deficit, a public deficit or public surplus, a federal deficit or federal surplus, is a tool like any other, and it's whether that tool is serving its purpose. So you can have a deficit of 3%, but if unemployment is at 10%, then probably your deficit's too small. On the other hand, you can have a surplus at 2%, but you can also have unemployment at 2%. maybe you need to tighten on the fiscal side on the other hand, you might tighten on the direct credit regulation side. So you can use different tools for different purposes. Larger conversation can be how much of what's going on is because of shortages that are related to demand versus whether there are price increases happening without shortages. So they're happening out for different reasons besides demand conditions. On the other hand, whether we're having supply chain disruptions,”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“That borrows more than it spends or spends more than it borrows a surplus, that in itself is kind of like an amoral, inert quality. What matters is inflation, which is a public scourge. So if you have, the theory goes, oh my God, can you believe what this political party is doing, the deficit, they're turning the government credit rating into toilet paper. I can't believe this. The reality is if the program causes inflation, then it's bad. If it doesn't, it's not bad. So if you have a government surplus and inflation is at 15%, you have a problem. Whereas if you have government on the other side, if you have a government deficit and there's 1% inflation, you don't have a problem. Is that fair?”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“Yes, and it's a framework that highlights that the public sector and looking back in the 1800s, there were banks, not a central bank, but the first bank, second bank in the United States that had a monopoly on national banking charter. And, you know, if you were the bank in New Hampshire, you could only have one in New Hampshire. And it would be against the law. So banks can do what the government allows. That being said, in the broader financial history, there are times where the government, aka a prince, would have to pay a much higher interest rate than merchants. But now we live in a society where the lowest form of credit risk, the most risk-free asset is government paper. And that's just, you know, the reality we live in now. Nathan, another principle of modern monetary theory that I frequently associate with is that government deficits, the amount of how much a government, you know,”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“Yes, and so, you know, in the MMT frame then, bank deposits have value because banks have been issued a bank charter and a bank charter essentially grants the franchises out the public ability to create.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“Right. So there's a claim that governments don't print money, central banks don't print money, it's commercial banks that print money, MMT is a challenge to that claim. And it's a claim that money has value because it can be used to pay obligations to the government. So, you know, going back, very traditional argument, just to give it a little flair, is that if the king is demanding payment in corn, corn's going to have value because it's the only thing that can, you know, money is that which cancels debts. And if, you know, whether you paid in tobacco or gold, whatever the government demands as a sort of honorary tribute, you know, now known as taxes, that is going to what's going to have value.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“How the money monetary system can be used to physically resource some sort of public project and some sort of collective endeavor and focusing on in that context, what are the tools that we can use to manage demand and whether they're kind of much broader than, say, interest rates and raising taxes or spending cuts. But that's the core of it, I would say. thinking through of all the knock-on implications of the central claim that money has value because it's accepted back in payment by the legal system both taxes and government proper and court ordered monetary payments”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“Some obligation that you have to the legal system that money fulfills, then what can we do with money? What are the limits to what it can do? What are the limits to the way it can reorganize property? What are the ways it can reorganize capital assets in the economy, you know, the physical assets that we use to produce things? And what are the limits to how much the money the monetary system can be used to mobilize resources for some public purpose? You know, obviously, you know, we do with the military, we do it by buying tanks and buying all sorts of things that are contracted. You can also do MMT is kind of focused on other things that you can do besides the military, focusing on building, potentially building a public health system. You can all depend on what your values are, but can be focused on kind of”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“An What a thing to end on. So I'll do mine kind of quickly. Can't be comprehensive because I think NOT is a whole kind of school of thought interdisciplinary intellectual project that, you know, is kind of growing all the time. But what I would say the core idea, and especially the core idea for your audience to understand, is that MMT is focused on why do any of these kind of money monetary instruments have value in the first place. And MMT's answer is that they're acceptable in payment to the legal system, whether it's taxes, whether it's child support, whether it's fines and fees, whether it's any sort of court-ordered monetary payment, the legal system says you got to pay up. It tells you some specific ways that you have to pay up, and that gives money value. And then it asks the question, okay, if money gets value this way, if this is how money gets value, it's through.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, yeah. So when I'm specifically getting at is, so if you had it like the old credit ceilings, it could be interpreted that you sell a loan and you get basically credit against your credit ceiling when you sell a loan. What I'm saying is credit origination ceiling, regardless of whether you sell a loan, that's how much credit that you can issue in a year. And I kind of think both sides, I think both that any loan a bank makes should be pledged at the discount window and that the second piece of that is It should be capped in origination ceiling so that you can't kind of get away by selling assets or off balance sheets.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“Well, so I specifically don't think you should rely on reserve requirements at all. I think it's a huge misstep of that system. Credit ceilings work directly on how much credit you can originate, regardless of the level of settlement balances in the banking system. I don't think you should use liquidity requirements at all for chartered banks. I think that you should do it all on the asset side. And if you want to tax the banking system directly tax it, don't indirectly tax it through liquidity regulations. So yeah, I think credit ceilings operate directly on the asset side. And I only think that it should be asset side regulations, not quasi-taxes or liquidity regulations. And I also, I've been saying the term credit origination ceilings rather than credit ceilings because in a modern world, you have to be careful with that because”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“The inspiration is definitely some. There's a good book called Controlling Credit by Eric Monet, who used to be at the Central Bank of France and is now, I think, a professor at some department in France. And he illustrates not only how the French direct credit regulation system worked, but how most countries that weren't the US to the UK had direct credit regulation systems in the 50s and 60s. And they in a lot of ways worked better. And that's a whole kind of other story that can be talked about. Eric would be, I think, a great guest to have on, by the way. But yeah, the short answer is to your question is yes.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“Untenable, and is a big part of the reason why they abandoned it. That's a larger story. I'm going to have to write a lot more about that. That idea takes some of the same inspiration from that period, except not make it conditional. If you have a bank charter, you're subject to these kind of credit regulations, not just if you're at the discount window. And other countries had forms of direct credit regulation. I wouldn't necessarily have to update them, and this is part of my report last year was doing, and we're going to do more work on that, on how to update it. You have to update it for the modern financial system. You have to update it for how you're going to have this whole system interact with the shadow banking system, which is a complicated question, which I think might be over the scope of this interview. Maybe I could come back and talk about it sometime.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“Banks don't want to be squeezed to the discount window. And when you do it on a conditional basis, you're giving them scope to avoid market-based forms of funding, start growing out. And the more and more they try to seek out market-based funding rather than go to the discount window, there's a spread opens up between the discount rate and whether it's the federal funds rate or some other market interest rate. And that spread creates a lot of financial distress. And this is how the 1966 credit crisis happens, which Minsky calls the first episode of financial instability in the post-World War II period. It's precisely around these kind of issues. A mini version of it happens again in 1970. And ultimately, it's these kind of dynamics which make what the Fed was trying to do with Volcker become completely.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“It's somewhat similar to window guidance that the problem with window guidance is that window guidance is conditional. You have to be borrowing from the discount window in order to be under window guidance. I'm going to be writing about this a lot more in the future, and I might even be writing some of it in my book, but definitely going to be writing it in the newsletter that in my argumentation in the 50s and 60s in the US, we had a system of conditional direct credit regulation. So precisely as you're saying window guidance, when you use monetary policy to try to squeeze banks to the discount window, and then at the discount window, they are under sort of pressure rules around direct rules around how what kind of credit they're extending and how much. But there were all sorts of difficulties around that.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“Caps on how much credit that the banking system can originate in a given year. And you count credit lines against that. I'm actually going to be writing more about this quite soon. You move those things around. If you want to loosen financial conditions, you can raise the credit ceiling cap, the credit origination ceiling cap. How much credit the banking system create? And if you want to tighten it, you can lower that cap. And that is something that the FOMC can have control of just like it can have control of the federal funds rate. And that is an alternative tool for tightening and loosing financial conditions. And that's a way where you can tighten and loosen financial conditions without changing interest rates. And yeah”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“Conditions that are an alternative to changing interest rates. I think even Powell said in the FOMC meeting that the tightening of financial conditions was like quote unquote equivalent to a 25 basis point hike. Then we can debate, we can argue over how what equivalent interest rate hike there is, but even that whole idea that something can happen with financial conditions separately from the operational target that is the equivalent of an interest rate hike illustrates that we can be doing something different. And so the idea of direct credit regulation is you set certain minimum qualitative standards and also you have very potential. You don't necessarily have to do it this way, but I think it probably is important to do outright quantity.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“You get to is we're financial conditions. We're back to the financial conditions of the Martin era, except we know a lot better. We are much better at process. We have these regular FOMC meetings where we announce. But ultimately, and now we have these indices, we have financial conditions indices, which you can point to everyone in their mother has a financial conditions index that you can go look at. If we look under the hood, those are kind of like a mishmash of all sorts of different things and kind of even conflicting concepts in them. But nonetheless, we manage financial conditions. So we're back to sort of that idea of you operationally move interest rates around in order to affect financial conditions, in order to affect the broader economy. And this is sort of where you get back to direct credit regulation is, you know, as Silicon Valley Bank illustrates, you can have things that move that tighten financial.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“For anything, just like, what were you doing with interest rates so you knew you're announcing interest rates? You're announcing you're moving interest rates around. But what are you trying to affect that is supposed to affect demand in the economy? You know, obviously there's all sorts of things you could come up with. It could be broader interest rates in the economy. It could be the money supply still somehow, which there's still ongoing debates about in the Fed. But you kind of have to come up with something. Instead, the greenspan era didn't really come up with anything. It came up with what I call what I, you know, the phrase I pulled from that time, constructive ambiguity, where we're giving you more information than Vulker was, but we're still kind of vague because we're not actually sure ourselves how this interest rate management thing is supposed to be working, how it's supposed to be managing the economy. And fast forward through that, what essentially”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“And he might have been right about that, but it wasn't controlling the money supply. We get out of that era, the unions are crushed, inflation is lower for various reasons, but Falker places role. And Greenspan feels comfortable. Okay, we can safely announce interest rates targets, but doesn't really know what to do in intermediate targets. And no one really does. It's kind of like amazing, but there's not really kind of a strong idea of what the intermediate target is throughout the 90s and the mid-term targets.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“When you look at the FOMC minutes behind closed doors, they were admitting that they weren't doing that. They might have been still trying to use the money supply as an intermediate target, but they were still controlling interest rates. They were just setting an interest rate banned. You know, it was just a larger band than the interest rate ban that we have now, which is just a 25 basis point ban. Then they had a 4% ban, which is a huge ban to have for overnight interest rates. And that led to a ton of interest rate volatility over on. They didn't do any Ford dinance. You know, the Volcker era was not an era that believed in forward guidance. The Volcker motto about financial market participants was, you feed them shit and you leave them in the dark. That was Volker's approach. And because he thought that the uncertainty of it was a boon to killing demand in the country.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“Financial conditions, what is any of this stuff? What's feel of the market? And so there were a whole bunch of academic criticisms, including monetarist criticisms because financial conditions focus isn't the money supply focus. And they were like, you got to change this. So over the years, there was different experimentations. There was still using interest rates, the operational target. Then the money supply is an intermediate target and all sorts of problems happen with that, different changes that happened with the financial system that moved the money supply around. Interest rates aren't actually a great way to manage the money supply in general or to try to manage it. Then there's also questions about whether the money supply actually is a relevant measure to demand employment.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“In the early 60s, and under Bill Martin's Federal Reserve, whose Federal Serve Chairman for nineteen years, and from the Fed Treasury Accord, which gave the Fed discretion over interest rates through the Nixon administration, we use that kind of framework. Now, it was different. people knew a lot less than that was more kind of touch and go based on sort of qualitative financial system knowledge. Bill Martin used to was head of the New York Stock Exchange in the late 30s. That's one of his big things he did in his career that eventually led him to be Fed chairman. And so from the academic point of view, from the outside point of view, from the congressional point of view, this whole thing seemed like a black box.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“It would be a huge change. I'm not shying away from that. So, you know, first, I want to kind of emphasize something about the Fed's monetary policy operating framework, which I wrote a huge piece out, is there's kind of, there's the operational target, there's the intermediate target, and then there's your longer-term goals. In our current system, we have the operational target is short-term interest rates. The intermediate target is financial conditions. You know, you raise interest rates to try to tighten financial conditions. And then that is supposed to affect spending in the economy. And affecting spending is supposed to affect employment and inflation and so on. And what I kind of got into in this piece a few weeks ago is what's kind of funny about this structure is that's exactly the structure that we were using in the late 50s.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“So, yeah, what does that look like? How, you know, if you keep interest rates at zero, how are you going to make sure that you don't lend money in ways that are inflationary because lending creates inflation or supply-side factors as well? But when you print money or lend money, which are pretty similar things actually, too much money chasing too few goods, that's an inflationary. If you were to keep interest rates at zero in 2022, how would you curb lending and then how would it be affected? Right now, there are, needless to say, your framework, Nathan, what you just elaborated, goes against a lot of mainstream economic thinking about private markets as private markets being the best allocator of credits. So if all these commercial credit card companies, they're used to making loans and they do follow a certain formula, commercial real estate lending, mortgage lending, auto lending. It's all in the private market. How would you sort of”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“Direct credit regulation to do that. And we can talk about, I think actually the history of the Fed's monetary policy framework, which I wrote a piece on, kind of illustrates why this is potentially a very effective thing to do.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“Is that you raise interest rates, you know, you have this projection of 6%, 7% money interest rates, and you can build some sort of forecast where debt, government debt to GDP is growing to the moon and saying, oh, we're going to inherently have a government crisis. And I don't think that's how it turns out in general, but political economy-wise, being able to project, oh, we're going to have a thousand trillion dollars of interest payments over the next seven years is a huge barrier to using fiscal policy the way that I think it should be used. And so an alternative to that is low interest rates for government, for specifically for government on government liabilities through, but it's not, oh, we just have loose monetary policy forever, you know, who cares about what's going on with monetary policy. It's using this alternative tool.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“Issues with the shadow banking system, and we're getting rid of the myth of that we can do things through liability side management and also dealing with the inequalities that come with greatly growing the financial system relative to the rest of the economy. But on the flip side, it gives us a powerful tool to restrict demand in the economy. And you can tighten direct credit regulation rather than raising interest rates. And that serves two goals. One is, I think it's just a better tool for managing demand. It's both more effective and can be more targeted to particular sectors and particular areas. And it also keeps clear what we need to be managing, that what we need to be managing is inflation, that it isn't like we're worried about some government crises. And, you know, the thing about interest.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“Yeah. Yeah. So there are two angles to this. One is there are potentially better tools to be doing to manage demand in more equitable ways, in ways that affects that harm the most vulnerable less. And there's still demand management, but their demand management differently. One is, as I wrote a report on last year called The New Monetary Policy or put out last year was working on it for years beforehand, came out in January 2022. That report is focusing on let's not use interest rates. Let's instead use direct credit regulation. And that's sort of like, you know, for me, there's kind of two birds, one stone with full deposit insurance and then direct credit regulation. It's on one hand you're dealing with these financial”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“On what the other plan of a government is going to do in terms of the losses that they're going to take. And you kind of look on each side. One is, well, it's insider trading if they do that. On the other hand, it's like, well, we're going to take losses just to take losses just to keep up these walls between different parts of the administrative state. It's like both ends of that are kind of silly and ridiculous situation.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“But actual losses was interest rate risk and interest rates being far above their acquisition interest rate and thus evaporating the actual value of the bonds, both their collateral value and their selling value. And the bank term funding program dealt with raising the collateral price. They essentially wiped away any losses on the collateral price so that they wouldn't have any problem funding themselves and they could fund themselves directly at the Fed if they needed to. But there's still the question of their actual price. And some of those losses have been reversed since the crisis because of the crisis, which is a kind of irony of it, but potentially could go even further. And it's kind of funny to have one amateur of the government that has to make bets.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“I mean, that's the other piece, which I didn't really emphasize in that piece, but I was really laughing to myself about is the FDAC was in charge of those banks at that time. And if they're going to hike, then sell out now, selling out position then, and you thought interest rates were going to keep on going up unprecedentedly, then you sell out now to lock in your losses and not take more. But if you think that they're going to cut and you think insurance rates are going to like hold steady for a while and you're going to get a reversal on long maturity interest rates, then you hold to get a gain and maybe, you know, maybe there's no losses involved in these banks at all once, because, you know, as I'm sure it's been covered in other places and solicitors will definitely know, but just to reemphasize, everything that was going on in Silicon Valley Bank in terms of losses rather than liquidity.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“Right, so four guys is hinting to the market, telling market what you're going to do. You had all this volatility in the treasury market that could have hurt some players if you had a bet on, oh, the spread between the three month Treasury and the one month Treasury historical, you know, 95% of the time, it's never within this limit. And then it goes out, spreads out 20 times that limit. I think now the one-month treasury is trading like 80 basis points below the equivalent sort of interest rate, whether it's Fed funds or the security overnight financing rate so far. Even though the Treasury yields going down and the rally has helped bank equity position via the held to maturity. If Silicon Valley Bell was still around, those losses would have been a lot better. Yeah. I mean,”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“Are in and causes broader financial treasury market stress on top of everything else. This is one way you can look at that and say, you know, see 13.3, they should have done it because there were all this financial market stress that happened. But my point is, if they had done proper for guidance, they could have avoided those treasury market stresses altogether. And it's, you know, it also is just kind of highlights another sort of plumbing issue that's going on in the treasury market, which hasn't been kind of fully resolved. But in this case, could have really been managed with proper Ford diamonds. And so I was, you know, hit a huge problem on that. And, you know, obviously we can talk about like, well, then there's actually talking about its interest rate decisions, which we can take on next.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“Actual trajectory of Fed funds predicts the interest rates that we get in treasury markets, but it's their expectations. And the expectations were just all over the place. It was a very uncertain moment. And as a result, spreads blew out. And we had a lot of stresses in the treasury market like we did in March 2020. And as a lot of the discussion in March 2020 is talked about, there's a whole bunch of entities that have leverage that have leveraged bets in Treasury futures markets, which rely on spreads in the Treasury market staying within certain limits. And so as those spreads blow out, there's huge pressure on the leverage positions that a whole bunch of hedge funds and other financial sector actors.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“On, they're going to raise 50 basis points. There was no Ford guidance about what that was going to be, and the interest rate decision was the Tuesday after next. It was nine days later, 10 days later, the official announcement coming Wednesday. And that itself was a huge problem, which caused its own round of financial instability because Treasury Securities dealers, people operating in the Treasury market had no way to go to think about interest rates. You know, the Fed policy, both its current interest rate policy and expectations about its policy in the future, especially its near future, is what structures interest rates across the yield curve and it's what it's, you know, it's the primary determination. It's they're not great at guessing, so it's not like, you know,”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so I mean, first thing we can touch on it a little bit is, you know, the name of the show is Ford Guidance. So I feel like important to comment on Ford Guidance. The strangest thing about that Sunday announcement is that the Fed provided no Ford guidance about what this meant for monetary policy, for interest rate policy. You could argue all sides of that, and many people did. Well, they're doing this intervention. They're worried about the banking system, financial conditions have already tightened because we had this situation. They're clearly going to cut interest rates. You have the same worries, but they're not going to quite cut because they're worried about inflation. So they're going to have a pause. You know, they're still worried about inflation. So even with everything going on, they're going to raise a quarter. They're actually very worried about inflation, you know, that we've had a hot print the last print was a hot print. And so actually with everything going on,”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“In the meantime, we've had huge growth in the financial system to go along with our recurrent failures around liability side regulation and then the Fed stepping in at a crisis. So that is, and now we're back to where we started 39 years ago with Continental Illinois. And what I'm saying is it's time to face up to reality and make the different choice. Go full deposit insurance admit to ourselves that this system isn't working and that we have to do something else to bring stability to the financial system. And it means having a difficult fight over asset side regulation, which of course no illusions about that being incredibly controversial and difficult thing to politically get through, but it's the only game in town from my point of view.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“Liability side regulation is working. It's not working. We just had a huge crisis and a whole bunch of people took a whole bunch of losses and then got the shadow banking system growing even more. That's a classic example where liability side regulation didn't work. And of course, in 2007, 2008, the largest banks didn't officially have the two big fail cover. And there were a lot of people beyond uninsured depositors who were investing those banks. Those banks had huge equity valuations, many of them which hadn't recovered, even though they had a bailout. They had bondholders who could have potentially been made to eat it if regulators had made a little bit of a different decision. So recurrently, liability side regulation comes to have a lot of difficulties, a lot of troubles, and is not worked out.”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT
“It's related to the franchise value of the bank, but ultimately you try to avoid having the FDIC have to shell out any money. And if it push comes to shove having big write-downs of uninsured deposits. And that happened. People took 50, 60% losses. Now, mostly small banks, as I said, this whole starting started off with Cotz, Illinois getting covered. And, you know, the big banks again were having difficulties in the late 80s, early 90s. They didn't fail. They again, like 2007, 2008, they were supposed to grow their way out of it rather than failing. But the mythology of uninsured deposits of, well, having some little guys eat it from little banks kind of papers over for the whole system. Hey,”
2023-04-25 · Forward Guidance · Nathan Tankus on The "Pozsar Moment" In Shadow Banking · IDENTIFIED FROM THE TRANSCRIPT