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The Pitch: Economic Update for March 23, 2023

Friends,

Last week, I wrote that the Federal Reserve was in a bit of a self-made bind. Fed Chair Jerome Powell has publicly stated that he will continue to raise interest rates in order to combat inflation, but the collapse of two medium-sized banks (with others in trouble) in the past two weeks has caused many in the banking industry and Wall Street to question whether raising rates any further would throw more banks into turmoil.

Yesterday, we learned that the Fed decided to continue its series of rate increases — this time by a quarter of a percentage point:

But before we can dig into what this might mean for the economy, I have to backtrack and debunk the two wrong assumptions that I mentioned in that first paragraph.

First, Powell believes that he can drive inflation down by raising interest rates to quell consumer demand — in other words, he wants to make money more expensive to put “slack” in the labor market to reduce demand — which is to say he believes that the way to tackle inflation is put a lot of people out of work. Here’s the thing: the labor market has stayed strong, while inflation has declined, which shows that the Fed’s elaborate inflation-fighting Rube Goldberg device isn’t working as intended.

Second, the banking industry and Wall Street are wrong to blame high interest rates for the collapse of Silicon Valley Bank and Signature Bank. If a bank can’t operate in a period of high interest rates, that bank is failing in its primary duty to its customers. As Senator Elizabeth Warren so aptly put it, banking should be boring. A bank should not gamble with its customers’ money, as it now appears that the executives of Signature and Silicon Valley banks were.

So the Fed has decided to continue with its program of rate increases — although this quarter-of-a-percent increase is toning down from last year’s spate of record-breaking high increases. And the statement that the Fed issued with yesterday’s increase is more than a little bit unsettling: “Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring and inflation. The extent of these effects is uncertain.”

That’s a shockingly ambiguous statement from an institution that has always prided itself on confidence and certainty, and it’s sure to kick off another wave of recession panic in the media. Powell recaptured some of his apparent lost confidence in the press conference announcing the rate increase, when he acknowledged that Silicon Valley Bank “failed badly,” but declared it an “outlier” in the banking system. Indeed, the Fed has repeatedly refused to accept that it bears any supervisory responsibility for SVB’s collapse, even going so far as to block a mention of the Fed in a government statement on regulatory failures.

Even though he declared SVB an aberration, Powell did confirm that “it is clear we [at the Fed] do need to strengthen supervision and regulation” of the banking industry. These two statements seem to be at odds — is SVB an outlier, or does the system need to be updated to ensure that more SVBs don’t happen?

Let’s recognize that there was probably no perfect way for Powell to navigate this storm. The Fed is facing rocky shoals in all directions these days, and fears of a banking collapse weren’t anywhere on the radar of public consciousness even three weeks ago. But right now, the Fed is flooded with contradictions: The Fed is raising interest rates to combat inflation even though experts are increasingly uncertain that this action will drive prices down. The Fed is committing itself to regulate a banking system that it swears is in excellent shape. And the Fed is warning of a potential recession even while Powell confirms he opted for the rate increase because the economic data he was seeing was strong and vibrant — perhaps, in his opinion, too strong and vibrant.

If this sounds like a mess to you, that’s because it is. It’s pretty clear at this point that Fed reform must be on the table, because too many people — including Senators Elizabeth Warren and Rick Scott, who have perhaps never agreed on anything before — are losing confidence in the institution. The two senators announced this week that they are seeking new oversight of the Federal Reserve, “by establishing a presidentially-appointed, Senate-confirmed inspector general at the Fed, like every other major government agency.” No doubt other leaders will offer additional suggestions for oversight in the next few weeks. This is the time to reimagine how we confront financial crises for the world economy as it is now — not as it was 110 years ago, when the Fed was founded.

The Latest Economic News and Updates

What Is Happening in the Banking System, and How Do We Respond?

James K. Galbraith at The Nation explains that Silicon Valley Bank was a warning that our financial system is sitting on a lot of debt. “The US banking system as a whole holds nearly $3 trillion in mortgage-backed securities, largely based on the vast flood of mortgages issued in recent years when interest rates were historically low,” he writes, adding that “Unrealized paper losses on all securities so far are estimated at $620 billion as of year-end 2022.”

“The Federal Reserve last week stepped in with an emergency program that allows banks to trade in devalued bonds for their original value in cash,” Abha Bhattarai explains at the Washington Post. This program received very little attention when it was announced — particularly troubling because “Fed officials declined to provide a specific figure for the size of that new loan program, but made clear it would be large enough to cover trillions of dollars in potential requests,” which is quite a statement — and deserves much closer scrutiny in the days and weeks ahead from financial reporters. At the same time, Treasury Secretary Janet Yellen suggested that the government could step in to protect deposits at other banks in case more bank runs happen.

So that’s what our institutions are doing right now to stop the bleeding that started when SVB imploded. But what are we doing to ensure that more SVBs don’t happen in the future? President Biden has called on Congress to give him the power to claw back exorbitant executive bonuses handed out at failing financial institutions, and to prevent those executives from taking new jobs elsewhere in the financial industry. He also wants new powers to fine executives who endanger the sustainability of their financial institutions. House Republicans took the opportunity to complain to the New York Times about the “onerous regulations” Biden was proposing, though it seems likely that these regulations would be pretty popular with the American public. Lawmakers are also discussing raising the cap on FDIC insurance of savings accounts beyond its current limit of $250,000.

Both Yellen and Fed Chair Powell agree that more regulations are needed, and are probably on the way. The New York Times Editorial Board favors some of Biden’s proposed powers, as well as a repeal of the 2018 law that expanded the amount of money medium-sized banks like SVB could hold from $50 billion to $250 billion. The Board also offered a solution that would tie the fortunes of shareholders more closely together with the banks they own:

Banks should be required to raise more money from shareholders, who have a strong incentive to keep an eye on the way that money is used, since they can lose all of it. Money raised from shareholders is called capital, and banks have far less of it than other kinds of companies. They are allowed to borrow most of the money they use from lenders and depositors. If, for example, banks were required to raise 20 percent of funding from shareholders, that would still be well below the norm for other kinds of companies but enough that it might have covered Silicon Valley Bank’s losses and saved the bank.

Whatever solutions lawmakers pull together to stop the next SVB collapse from happening, none of them will have anything to do with “wokeness.” Republican politicians and commentators, including presumptive presidential candidate Ron DeSantis spent the last week trying to claim, in coded racist language, that “woke” policies like diversity and inclusion led to SVB’s demise. I don’t want to spend too much time on this ridiculous talking point, except to say that it’s clearly not true.

In the meantime, the world watches as the Swiss government tries to clean up the $17 billion Credit Suisse collapse, and First Republic Bank seemed all week to teeter over the same cliff that claimed SVB. While a few Republican showboats try to turn banking regulations into the latest identity politics outrage, the American people just want to know that the adults in the room are ensuring that a corrupt banking system doesn’t bring down the global economy for the second time in less than two decades.

What the Banking Crisis Means for Ordinary Americans

As we noted above, the turbulence in the banking sector may not be over just yet. The biggest and most important question, of course, is what impacts this banking crisis will have on the average American. Consumers are already reeling from the Fed’s campaign to raise interest rates:

And the banking crisis could make everything else worse. “Unrest in the banking sector could make it more difficult for some consumers to obtain loans to buy homes, cars and other big-ticket items,” writes Gabriel T. Rubin at the Wall Street Journal, adding that “Spending at retailers declined in February, according to Commerce Department data, before a handful of banks failed. Consumer sentiment fell in March for the first time in four months, according to a University of Michigan survey.”

It’s not just retail and grocery store price increases that are hurting consumers. A Bank of America study found that some 380,000 prime-age American workers had fallen out of the workforce since the pandemic began because child-care prices are too high. This has been a persistent problem since the pandemic began:

And Aaron Gregg at the Washington Post writes that home prices dropped for the first time since 2012, causing home sales to spike 14.5% last month. It remains to be seen whether those home sales will continue in a market rattled by a banking collapse and persistently increasing interest rates.

Unions Keep Making Headlines

Public school employees in Los Angeles took to the streets this morning for the last day in a 3-day walkout. The strike is highlighting the extreme income inequality of the Los Angeles metro area. Local 99 of the Service Employees International Union reports that these bus drivers, custodians, and cafeteria workers earn an average of $25,000 per year, which puts them well below California’s $36,900 poverty line for a family of four.

This high-profile strike is just the latest step in a growing drumbeat for unions. The White House announced that 80,000 federal employees joined unions from September 2021 to September of 2022. That eye-catching number is the direct result of President Biden’s many policies making it easier for federal employees to unionize, and it’s indisputable proof that a large number of American workers are excited to join unions. If our leaders remove the barriers to unionization that have been put in place over the last forty years, Americans would likely respond with an unprecedented wave of union drives.

For more than a century, the abolition of child labor stood as one of the most conclusive victories that the labor movement delivered to the American people. Now even that victory is at risk. The Economic Policy Institute warns that child labor laws are under attack, listing 10 states that have tried (and in some cases succeeded) to roll back child labor protections. As lawmakers on the state level try to make it easier to put children to work, EPI notes that more and more businesses are violating child labor laws:

In order to end this disturbing trend, EPI’s policy suggestions for leaders at the state and federal level include “raising the minimum wage (and eliminating subminimum wages for youth), ending the two-tiered system of standards for agricultural and nonagricultural work, enforcing wage and hour laws, passing key immigration reforms, and supporting workers’ right to organize and form unions.”

In more humane labor news, curiosity seems to be growing around the idea of a four-day workweek. The Washington Post made a very fun interactive calculator demonstrating how many hours and days of free time you would get back if you switched from a 5-day to a 4-day work schedule.

For example, when I put my own demographic information into the form, I find that I’d get an extra 80 hours of sleep per year if I worked four days a week, and I’d spend more than 60 extra hours socializing and pursuing leisure activities — many of which would probably involve spending money in my community and creating jobs with my increased consumer demand. There’s an economic prosperity case to be made for the 32-hour workweek, and it will be interesting to see if the leaders of this burgeoning movement can transform this blue-sky idea into a true middle-out policy.

Real-Time Economic Analysis

Civic Ventures provides regular commentary on our content channels, including analysis of the trickle-down policies that have dramatically expanded inequality over the last 40 years, and explanations of policies that will build a stronger and more inclusive economy. Every week I provide a roundup of some of our work here, but you can also subscribe to our podcast, Pitchfork Economics; sign up for the email list of our political action allies at Civic Action; subscribe to our Medium publication, Civic Skunk Works; and follow us on Twitter and Facebook.

• On the Pitchfork Economics podcast this week, Nick and Goldy talk with economist Brad DeLong about his book Slouching Towards Utopia, which explains how economic prosperity skyrocketed across the globe from 1870 to 2010, and which also tries to understand how those economic gains weren’t evenly distributed. This is a delightfully wonky and wide-ranging conversation about the economics of how wealth is created and shared — or not shared, as the case may be.

Closing Thoughts

Frequent readers of The Pitch know that we’ve long been critics of former Treasury Secretary Larry Summers. For the past year, Summers has been cheerleading the Fed’s record-breaking series of interest-rate hikes, and openly calling for ten million Americans to lose their jobs in order to bring inflation down. When he’s not rooting for mass layoffs, Summers also loves to argue against student loan debt cancellation, arguing that it will increase inflation.

In fact, Summers has long been the High Priest of the Cult of Neoliberalism. He has never met an investment in working Americans that he didn’t hate, or an investment in the wealthiest people and corporations that he didn’t love. Summers will happily appear on any cable news show or any newspaper editorial page to explain, in grandly complicated terms, why prosperity always trickles down from the wealthy few to everyone else.

He’s wrong, of course. His understanding of the economy is entirely backwards, and more and more people are finally catching on to his racket.

Last Friday, Summers was revealed in no uncertain terms as the chief defender of the captured wealth of the top 1% in an interview with Jon Stewart for his Apple TV show, The Problem with Jon Stewart. This clip in particular spread across social media like wildfire:

This is a master class in economic interviewing. By giving Summers the space to make his own case in plain English, Stewart demonstrates what an incredible weasel Summers is. (Actually, Summers makes weasels seem foxy in comparison.) Here, Summers compares himself to a highly trained doctor while explaining why millions of workers need to lose their jobs to fight inflation:

There are certain sicknesses you can have where there’s a drug and it has side effects. And everybody hates the side effects, and no doctor wants their patient to suffer the side effects. But if you don’t address the sickness, you can have a bigger problem down the road.

Stewart goes in with a scalpel, flipping the script on Summers’ trickle-downism: “But the stock market’s assets have gone up 150%. CEO pay has gone up 1500%. Workers’ wages haven’t gone up at all. I think you’re misdiagnosing the sickness.”

If Stewart left it at that, it would simply be a sharp riposte that Summers could have shrugged off. Instead, Stewart hits Summers with the historical record that proves this misdiagnosis:

If you look at the recovery in the pandemic versus the recovery from 2008, when you stimulated the economy at the demand level, jobs had plunged in the pandemic and then they shot back up. The recovery in 2009 was painstaking, but the stock market did great. So our fiscal policy and our monetary policy has always been on the side of corporate easing.

It’s almost shocking to hear a nationally known figure acknowledge the truth. Stewart pointed out that prioritizing the wealthy caused our economic recovery from the Great Recession to drag out painfully over the span of a decade, and that prioritizing the American worker is what rocketed the American economy out of the pandemic collapse.

In the latter part of this interview, Summers is reeling. He tries to attack Stewart’s employer, Apple. (Stewart excitedly welcomes the idea that Apple should pay more in taxes.) He plays the culture-war card by repeatedly pointing out that Stewart is part of the one percent. But by the end of the conversation, it’s pretty clear that Summers knows he’s been walloped.

I share this interview not to take pleasure in watching the humiliation of one of neoliberalism’s greatest defenders — though I do that, too. I’m actually sharing this interview in the hopes that you’ll share it with your friends, because it’s a brilliant example of how to argue with trickle-downers. First, let them explain how they believe the economy really works — by favoring the wealthy few over everyone else. Then, lay out the truth of how the economy works by explaining how broad investments in Americans are economically better for everyone. Finally, let them stagger into the traps that they themselves laid at the beginning.

Summers doesn’t really seem to feel shame, so he’ll no doubt continue his neoliberal crusade on every news channel that will have him. But there’s no question that this interview diminished him, and weakened him for future arguments. Stewart gave us a clear demonstration of how rhetorically weak trickle-down is when it’s confronted with someone who understands how prosperity really grows — from the bottom up and the middle out.

Be kind. Be brave. Take good care of yourself and your loved ones.

Zach