Two career economists (not the ones minted last week on twitter) explain what happened at SVB, and what could be done.
Their books are delightful reads, but this post creates clarity in 5 minutes. Share and enjoy.
https://stephaniekelton.substack.com/p/magical-thinking-monetary-thinking?post_id=1091874
Once you read the post, if you want two great follow ups, their books are fresh, clear, and in my opinion, worth reading for every citizen:
- Making Money Work for Us: How MMT Can Save America https://a.co/d/9xs2GZ6
- Deficit Myth https://a.co/d/gEWEq6F
@Migueldeicaza Their take on taxes doesn't seem to be that radical though?
Weren't taxes invented to ensure that for war efforts in remote countries your soldiers are well-fed? You conquer the land and you extort taxes in *your currency* from the farmers which forces them to accept (bad) trades from soldiers buying food from them since that was the only way to get money of that currency?
@ljrk it is a key component of MMT: it both drives demand for your currency, and is the tool to reduce inflation - by removing it from circulation.
It is option 2. I did send her a message explaining that it took me forever to gloss over the expression “fiscal policy” and understand it meant expenses+taxes
@lrz I think it is possible, but will require the citizens to be informed about the spectrum of options, and elect/convince their representatives towards policy changes that could put them on a better path.
Even if we can do it here, generally, it is not embraced yet.
@natik so there are the banks assets and liabilities (their real estate, their own cash, their customer base, their ongoing income based on their operations) and the assets under management: third party assets they are trusted with and they invest.
Their valuation is a function of what the market believe they are worth based on the former, and to some extent on what they believe they are able to achieve with the latter.
@natik glad you liked it! What this crew has done (the mmt folks) is turn a bunch of disconnected and unrelated components into an explainable system. It really removes the aura of dark art from it.
I think citizens needs to learn these things to make better policy decisions.
@Migueldeicaza IMO it's a pretty bad article. It tries to blame the Fed for everything, ignoring what was happening in the economy overall.
Like, it blames the Fed for the 70s recession, ignoring years of double digit inflation. It also seems to want to blame the fed for the 2007/8 crash, ignoring the NINJA mortgages and credit default swaps.
The fed isn't blameless, but what mostly killed SVB: only 2.7% of deposits were covered by the FDIC. Chase and BoA are at about 30%.
@Migueldeicaza Perhaps you should re-read it?
The title is "Magical Thinking at the Fed Killed SVB". That's not what killed SVB.
As for blaming the Fed for the Great Recession:
"In 2004, the Fed began a series of rate hikes that eventually culminated in the Global Financial Crisis... The rate hikes rippled through the financial system, driving mortgages underwater and pushing the economy into the most protracted economic downturn since the Great Depression."
@Migueldeicaza I'm not saying the Fed had no role in causing the Great Recession, but the NINJA loans, credit default swaps, etc. were a much bigger issue.
Interest rate hikes can add fuel to the fire, but the fire existed because the bankers were pyromaniacs.
@merc yes the interest rate hike is what has precipitated these bank failures. And you claimed they blamed the 70s but glossed over the story there.
This is about the role the fed has had, and doesn’t need to explains again everything about the 2008 mortgage crisis. That is the subject of a book, which this is not it.
Now I appreciate you want to show off, but hardly anything you said is new or interesting, let alone eye opening. Godspeed!
@Migueldeicaza I don't know why you think I want to show off. I'm just saying that the narrow focus on the Fed is misplaced.
By pretending that the banks / investment banks played no role in these financial crises, the authors weaken their argument.
Miguel de Icaza ᯅ🍉
lj·rk
Tim Danner
shana
Andrew Jorgensen
Laurent Sansonetti
Natik Gadzhi
Bynkii
Merc