Marc Cooper writes well, but I fear that he sees only half of what Chile is; the 2022 tightening cycle and Federal Reserve possible loss of transmission-mechanism control; Ryan Cooper, Matt Yglesia...
White. Stanford Libs let themselves be owned far too cheaply
The Fed can easily misinterpret market feedback. Examples:
1) The Fed raises short rates, then long market yields fall. The Fed thinks the market doesn't believe their policy, and dislikes financial condition easing. In reality, long yields fell because the market absolutely believes the Fed will get inflation down ... probably through a recession.
2) Bank stress causes a sell off in bank securities and a flight to safety, so bond yields fall and the gov't creates bank liquidity facilities. Lower bond yields and more liquidity cause bank security prices to rise. The Fed believes this is a signal that the banks are stable, and so raises rates again.
3) The Fed believes its solved bank stress, but most financial firms also borrow short and lend long. So what ails banks also stresses non-bank financials. The problem of falling bond prices and negative NIM will be uncovered someday in a non-bank financial sector, and it will be much harder for the government to manage.
4) Banks will bid up the price of deposits (shrinking NIM) and lend less as they hoard T-bills for liquidity. Bank lending and money supply will now shrink regardless of near-term Fed policy. Rising rates are contractionary, but there was a particularly long lag this time because the banking system had been flooded with deposits and liquidity from QE.
I would be extremely cautious about increasing QT as a liquidity test, perhaps the Fed's traders concentrate some moves within existing QT.
My concern is that the news of increasing QT will cause Treasuries and MBS to sell off, undoing the rally caused (perversely) by bank failures, and which should recover some bank capital. Secondly, there are reports that primary dealers have been warning the Fed that bond security would be low enough by Fall to necessitate ending QT. And finally, QT decreases aggregate bank deposits, which will be deleterious to the many banks who recently found themselves short of deposits as the money flowed to the too big to fail.
RE: 2022 Tightening Cycle - Me no know, however I've been watching thus agree, Ms Market doesn't seem to be paying attention to Fed actions. However, short term yields, on less than 2yr maturities seem to have stayed ahead of Fed Funds rates (or risen with Fed Funds rate increases) ... at least until March(?) - when short term rates fell below Fed Funds rate<sorry not charts to back up these remarks)... Thanks Professor, for keeping rates apart of the discussion. I'd like to capture a few intermediate-term (5-7yr) bonds with a decent coupon yield (+4% at par value) as/for income... no joy
the reliability of narrators is hard to quantify so instead let me answer the negative and use a liftime's experience to explain what is happening there in non-tldr fashion...
1. Most foreign journalists arrive in Latin America hoping their reporting will enable the continent to rise up and prosper and they love nothing more than a left wing firebrand promising a bullet train to Utopia. Mea culpa - I heard Hugo Chavez speak in Mexico City in the nineties and said to myself "finally, someone who will bring change to the country a lived in as a young boy (Venezuela)." Oops.
2. They are all looking for the same story: Corruption and right-wing nasties are to blame for the continent's woes. Why else would lands so plentifully resourced remain so poor. And there they stop looking and stop thinking - partly because the New York Times readers love the narrative, congratulating themselves on living such a different reality in their comforable condos with views of Central Park. And perhaps even a Latin doorman.
3. As an aside, journalists/activists love to complain about the state's use of violence to tackle crime, often leading to pressure to "look for different ways". Translated into American, they usually propose the equivalent of abolishing state police forces and the FBI and devoting the savings to social spending to prevent crime. This cycle of enforcement and non-enforcement means even slouching is not an option.
3. My family was chased out of Chile (Allende), Argentina (Peron), Brazil (Dictatorship), Mexico (current president. I won't even bring Colombia, the country of my birth, into this. I now live in boring Canada. What they all had in common was a desire to eradicate poverty and inequality with nothing but good intentions to guide them.
3. And for them, to oppose or criticize them was to act against the people. So not much debate. But plenty more prisoners in jail.
4. Au fond there is history that is rarely acknowledged in the public discourse in North, South or Central America - Latin America has been seen since time colonial as a place to take from, not build in. Indigenous peoples were slaughtered and in most countries, people of European descent control the wealth and power.
5. The political systems evolved to share the wealth in an orderly way and provide just enough to the dark-skinned poor to keep them from revolting. This has not been a successful strategy either. Corruption and the price volatility of the commodities being extracted have led to boom and bust ad nauseam.
6. The Chilean constitution was a bust because the assembly that wrote was comprised almost entirely of people on the left of the political spectrum. When Chileans saw what was in it, many realized that its (laudable) political and social aims were contrary to many people's personal beliefs while the economic proposals promised economic disaster. And so we're back where we started in 1970 with Salvador Allende. Que Dios nos ayude (God Help Us).
I'm of two minds about the Fed being everybody's bank. I'm nervous because the Fed has a balance sheet, like any other bank. What would be on its asset side? The loans that banks don't make because they've lost the deposits to back them up? (The Fed knows enough about political economy to be terrified of that option. And it probably won't be very good at CRE, even if it could keep the politicians' mitts off.) Govvies? If so, credit becomes more expensive, because it will not be funded by cheap deposits.
Maybe it would work if the Fed offered very low to negative interest rates on its deposits, so only the most risk-averse would leave the banks.
The Fed might have lost it already, Brad. We all should hope it hasn't. Please read Bloomberg News article: (BN) Banks Rush to Backstop Liquidity, Borrow $164.8 Billion From Fed. This is off the charts. We are about to be tested on how many uninsured deposits can be backstopped. Plus, Lagarde and Co. didn't do themselves a favor today, a likely policy mistake of the kind the ECB made under Trichet, blithely walking into the jaws of the sovereign debt crisis while touting the magical expansionary powers of fiscal austerity. They had the option of delaying just one month to see where the chips fall or of doing an inter-meeting hike in the policy rates after discovering that the ongoing problems had turned out to be a mere storm in a teacup. Nope. They opted for making a potential mistake first, yet again, before shamefully correcting course. It fails me why such policy behavior passes off as "owning the narrative." An argument has been made that if the ECB didn't hike policy rates, then it may look like it has found something terrible that others don't know. That will really spook the markets. Well, wouldn't the ECB look more reckless if it had hiked the policy rates knowing something terrible was underway? Or, if it is discovered later that something terrible was underway and yet the ECB had hiked? I just don't get it.
Regarding the 2018 bang regulation bill didn’t regulators learn way bask in the S&L crisis that deposit taking institutions should not expose themselves to much interest rate risk? Did the bill really prevent thom from acting on this chestnut
I shudder to think what Cooper would do for a hagiography of Colombia’s Petro
Matt Iglesias in LaLa land again. Is he ever worth quoting in this estimable blog?
ChagGPT which I totally ignore as messy fan fiction is still more cogent.
While the America's Quarterly (https://www.americasquarterly.org/article/reaction-chiles-new-constitutional-roadmap/) doesn't qualify as a "narrator", it certainly presents the points of view of a relatively broad selection of sources. Unfortunately, the left in Chile has championed the narrative that absolves them from any responsibility in the elaboration of an appallingly deficient draft Constitution. It is their opinion that the proposed Constitution was rejected due to the right wing's incredibly expensive and disruptive "fake news" campaign.