Contrarian views
1. The FT reports that we are edging ever closer to WWIII:
European intelligence agencies have warned their governments that Russia is plotting violent acts of sabotage across the continent as it commits to a course of permanent conflict with the west.
Russia has already begun to more actively prepare covert bombings, arson attacks and damage to infrastructure on European soil, directly and via proxies, with little apparent concern about causing civilian fatalities, intelligence officials believe.
And yet most of our foreign policy experts assure us that China is the real threat.
2. One option would be for Taiwan to build enough houses to match its population. Instead, Taiwan has chosen to fix its housing stock and reduce its population to match the available housing:
One way or another, Taiwan’s housing crisis will resolve itself. Currently each generation is half the size of the one before. Taiwan’s population has plateaued and is beginning to fall. In the absence of change, demand (i.e. the number of people wanting houses) will continue to fall to meet static supply, leaving another generation locked out, and with dramatic implications for Taiwan’s future.
Read the whole thing, and shake you head in disbelief.
3. Don’t beleive the hype. Biden has not decriminalized marijuana. Here’s Reason magazine:
In a campaign video directed at “young voters” that she posted on X (formerly Twitter) in February, Vice President Kamala Harris bragged that “we changed federal marijuana policy, because nobody should have to go to jail just for smoking weed.” During his State of the Union address in March, President Joe Biden said he was “expunging thousands of convictions for the mere possession [of marijuana], because no one should be jailed for simply using or have it on their record.” . . . Neither claim was accurate.
Even if Biden had the power to unilaterally decriminalize low-level marijuana possession, that step would not address today’s central cannabis issue: the conflict between federal law and the laws of the 38 states that have legalized marijuana for medical use, including two dozen, accounting for most of the U.S. population, that also allow recreational use. Resolving that conflict would require repealing the federal marijuana ban—a change that Biden has steadfastly refused to support.
4. Reason has another piece noting how the war on drugs is spreading to other areas:
And people need not know they’re involved with a minor to be guilty of child sex trafficking. A 17-year-old could post an ad online, pretend to be 19, and meet up with someone (perhaps barely over 18 himself) looking to pay another adult for sex. The person paying would be guilty of human trafficking in the first degree even if he had no reason to believe the person he paid was a minor. In fact, Alabama law specifically states that “it is not required that the defendant have knowledge of a minor victim’s age, nor is reasonable mistake of age a defense to liability under this section.” . . .
Whatever culpability should accrue to individuals in the above situations, I think most people would agree that life in prison would be too harsh. But under Alabama’s new Sound of Freedom law, a life sentence would be possible in all cases and mandatory in cases where the offender was at least 19 years old.
Here’s something to think about. Is the life sentence appropriate because a 19-year old had sex with a 17-year old? Or is the life sentence appropriate because money changed hands? And what sort of punishment would be appropriate for serial killers?
5. Over the past eight years, I’ve documented the gradual US slide toward banana republic status. But much of the evidence is highly subjective. Now The Economist has some much more specific evidence:
As far as stereotypes go, brash national self-confidence has long been a defining feature of how Americans are viewed abroad. In 2006, when Gallup first started asking Americans about their trust in key institutions, the country ranked at the top of the G7 league table, tied with Britain. In 2023, for the first time, America came last.
6. Also from The Economist:
The [Florida] state government, however, shields homeowners from the market through a state-owned insurer of last resort, which provides policies to homes that private insurers will not cover. Citizens Property Insurance Corporation has become Florida’s largest home insurer (see chart 2). Its exposure is now $423bn, much more than the state’s public debt—and all on houses that, by definition, other insurers deem too risky to cover. This suggests that Citizens has been providing a big subsidy to homeowners from taxpayers. Flood insurance underwritten by the federal government suffers from similar flaws. First Street Foundation, which aims to track the threats to American property from climate change, calculates that home values in West Palm Beach, a glitzy city up the coast from Miami, would fall by 40% if owners had to pay the true cost of insuring against hurricanes and floods. That would wipe out many homeowners’ equity and leave lots of mortgages without adequate collateral.
Will DeSantis put an end to this sort of insurance socialism? (Don’t hold your breath–he wants to ban factory meat.)
7. In the late 1950s, we were told of a “missile gap” with the Soviet Union. It turned out to be misinformation. The newest threat to US national security is a “clean Uruguayan bus gap”:
From the snazzy seats of the e14 bus in Montevideo, Uruguay’s capital, it is hard to tell that the smooth electric machine is Chinese. Only an eagle-eyed commuter would spot the tiny window sticker bearing the name of byd, a Chinese manufacturer. Enquiries as to passengers’ concerns about the bus’s Chinese origins elicit bafflement. They are a vast improvement on the deafening gas-guzzlers they replaced. The operator has just ordered 200 more. Thousands of similar buses glide through other Latin cities. But politicians in the United States fret that Latin America’s growing reliance on Chinese green technology, from electric buses to solar panels, is a problem and even a threat.
Love the phrase “elicit bafflement”. Why don’t Uruguayans see the threat?
8. A rare piece of good news:
Assisted dying, though still controversial, is no longer a fringe issue in Britain. Bills that would allow it are already moving forward in Jersey, the Isle of Man and Scotland. The leader of the Labour Party, Sir Keir Starmer, openly supports a change in the law. He has promised a free vote (in which mps are not pressed to follow a party line) on the issue in Parliament if, as expected, his party wins the next election. . . .
In recent years assisted-dying laws have been passed in countries such as Australia and New Zealand; similar bills are set to be introduced in Ireland and France. Medical opinion is shifting. Following a survey of its membership in 2021 the British Medical Association, the largest doctors’ union, changed its stance from opposition to neutrality.
BTW, it was never a “fringe issue” among the public (which has always been supportive), it was the political elites that refuse to allow people to end their suffering.
9. Just when you thought woke madness could not get any worse:
The U.S. Census Bureau wants to ask American residents about their sexual orientation and gender identity, a move seen by activists as a long-overdue form of formal recognition that happens to be coming during a time of mixed acceptance and hostility.
I’ve got a better idea. How about stop asking people about their race, ethnicity, gender, etc. Simply count the number of “persons”, both legal and illegal, and assign House seats on that basis.
10. The Reason Foundation reports that North America (mostly the US) is by far the least capitalist region when it comes to airport privatization, trailing even lowly Africa:
Tags:
10. May 2024 at 19:14
I’ve been traveling recently in Europe and I was wondering why the airports were all so bad compared to the US while a lot of other places worked much better (such as train stations). One obvious reason is that they invest more in trains so airports are not as crucial, but I guess this also plays a part. Privatization doesn’t make sense for natural monopolies like airports (or train lines, and I also noticed worse service in countries with privatized trains).
10. May 2024 at 20:11
gt, Most of the foreign airports I’ve been to are far better than US airports. (Although to be fair, some of our worst ones are now being remodeled.)
And privatized trains tend to be better than state run trains. Train ridership in the UK soared after (partial) privatization. Subways in Tokyo and Hong Kong are mostly privatized.
11. May 2024 at 00:45
European intelligence agencies have warned, therefore….
U.S intelligence agencies have warned, therefore….
Russian intelligence agencies have warned, therefore…
China intelligece agencies have warned, therefore…
And what is your point?
Intelligence agencies are in the business of deception…you moron.
It’s their entire model. It’s what they do.
A smart person would ask: “where is the evidence?”
Have you found evidence of the so-called “false flag operation” in Donbas? If so, please show us because the state department claims its “top secret” and that you should just “trust them”.
The USSR and Nazi Germany used to say the same thing. Just trust us because we would never lie.
And of course China is a threat. My gosh. I mean, I understand you are a bit of a radical who supports the Chinese model, but can we please stop living in a fantasy world.
The Philippines, Vietnam, Taiwan, India, South Korea, Japan, Indonesia, Malaysia, all fear China. Why? Because every day their boats are attacked. They’re fisherman are attacked. In india, the Chinese throw stones at them.
And that’s just in southeast and south Asia. The “wolf warrior” diplomats, have physically threatened France, Canada, the U.S., Australia, Germany, and the netherlands.
Domestically, they look identical to Nazi Germany.
But don’t worry. That’s all innocent Sumner says. The real problem is Russia, he tells us, because they intervened in a civil war in Ukraine, and because our intelligence tell us it’s all the fault of Russia. We didn’t do anything.
We’re lovely little angels. We didn’t instigate at all. Putin woke up one morning and attacked for no reason. He’s truly a madman. Ukraine was a princess, so pure and wonderful.
Who believes this crap? How stoned do you have to be?
11. May 2024 at 07:11
“And yet most of our foreign policy experts assure us that China is the real threat.”
Sumner, there is no Z War without the Middle Country.
“It turned out to be misinformation.”
Why don’t you suspect the anti-Russia agitation this time is also misinformation?
“Assisted” suicide is basically murder.
11. May 2024 at 07:12
Why should illegals be counted for the purpose of assigning house seats?
11. May 2024 at 07:48
As expected, the Putin apologists are the first to comment.
Arilando, Because the Constitution says so. Don’t like it? Amend the Constitution. I think it makes sense to include them, as people are people—why shouldn’t they count? Murderers serving life sentences count. Are immigrants less deserving?
11. May 2024 at 08:06
Sumner, I am not a Putin apologist -I think the Z War is stupid and evil and that Russia should withdraw from the post-2022 occupied territories if peace with Ukraine on current borders is not possible.
12. May 2024 at 08:53
“withdraw from the post-2022 occupied territories”
LOL, How about from all occupied Ukrainian territories?
12. May 2024 at 11:18
“How about from all occupied Ukrainian territories?”
That is less politically realistic than China withdrawing from annexed Vietnamese/Indian territories, will be no doubt opposed overwhelmingly by their resident populations and that of Russia, and is almost certainly not necessary to stop the war.
12. May 2024 at 15:20
I probably agree with 95% of this interesting post.
Not sure about China. I live in SE Asia and China is emerging as a regional bully. They do in fact claim the entire South China Sea, Taiwan and long ago seized Tibet (also the Hong Kong situation). Domestically, Beijing is increasingly oppressive. Ugly.
Putin is a madman, now responsible for hundreds of thousands dead. I hold out hope that when Putin dies Russia will regain its senses and want to rejoin Europe.
12. May 2024 at 17:05
Trump had nearly 50,000 people at his rally in New Jersey. Some say as high as 100,000.
That’s deep blue New Jersey.
And Pelosi was humilated at Oxford last week. Her speech was roundly booed, and a rebuttal from a bright student received a standing ovation when he said that elites like her, not populism, is the greatest threat to democracy in the western world.
It’s happening. We’re winning. And the elites are losing. I wish Sumner wasn’t a profoundly disturbed, Klaus Schwab style elitist, but he is what he is. He’s 70 years old, and he’s not going to change.
Every blog post he publishes reveals how out of touch he is. His ilk are on the way out.
12. May 2024 at 19:04
Harding, You are so delusional. There is no China-Vietnam border dispute, at least on land.
Ricardo, I agree that nationalists are winning, just as they were winning in the 1930s.
13. May 2024 at 05:38
Sumner, if you claim I am delusional, state why. Re: China-Vietnam border dispute on land, I was referring to this:
https://en.wikipedia.org/wiki/Sino-Vietnamese_conflicts_(1979%E2%80%931991)
13. May 2024 at 05:46
8.) For profit murder is the issue. There are uncomfortable sensations in my nature aroused seeing salesman bid on who can end the lives of suffering souls at the lowest cost. Perhaps that’s irrational… but I think it’s the issue.
9.) The census is as much a tool for science these days as it is a tool to assign congressional seats. If we want to study such things, we need the data. Perhaps we stop collecting this stuff in the decennial census but put it in the ACS. It is ridiculous that these things matter but many of them remain important predictors of various things. There is signal there.
13. May 2024 at 05:52
4.) Is insane. Ridiculousness at its finest. It will get worse though, as we adjust from sex being about having children and marriage an economic relationship centered on the mutual benefit of the family, to sex is really for pleasure (like playing kickball) and marriage a bond over warm and fuzzy feelings where the children come second to the psychological whims of the parents.
13. May 2024 at 06:13
Harding, There was a extremely tiny area where the border was unclear, and an amicable agreement in the 1990s split the difference. Yawn.
These attempts to compare strikingly no non-expansionist China with Russia are pathetic.
Student, You said:
“If we want to study such things”
Why would we want to do that?
“sex is really for pleasure (like playing kickball) and marriage a bond over warm and fuzzy feelings where the children come second to the psychological whims of the parents.”
Sounds good to me!! (My parents divorced when I was 11, and I was fine.)
13. May 2024 at 06:19
Because these variables contain signal and if you don’t control for them your residuals are correlated. Stupid example… but build a model explaining menthol cigarette sales without include race and build one that does and see which one more parsimoniously explains the data.
So your wife wouldn’t mind if you “played kickball” with the some woman as a Scott Alexander meet up? Why not? It’s just pleasure. It has no impact on her or your kids, right?
13. May 2024 at 06:21
*with some woman at…
13. May 2024 at 06:41
3) The war on drugs has failed. That does not prove that a policy of decriminalization will be a success. The war on non-criminal tobacco has been at least a partial success. IMHO a policy of decriminalization of drugs will fail if such policy treats drugs differently from tobacco or other products that pose serious health risks.
Consider: in Massachusetts you can’t advertise cigarettes on a billboard. No such prohibition exists for Marijuana. That seems to me to be another example of schizophrenic public policy.
https://archive.fo/WAWd2
13. May 2024 at 06:45
My apologies I posted an incorrect link. this is what I intended to post re Cannabis Policy: https://archive.fo/Endys
14. May 2024 at 07:28
Student, Gee, I never thought of that!
Jerry, Keep in mind that if we treated pot and tobacco the same, then pot prices would plummet. Current, pot is far more expensive due to tighter regulation.
14. May 2024 at 07:50
“How about stop asking people about their race”
Scott,
My understanding is that this has been France’s policy for decades and it is not delivered on it’s promises. I think it’s fair to argue that various policies have gone too far, but I think the US has a better track record of confronting racism than France or other countries that have pursued a “color-blind” approach. And I know you didn’t use the term color-blind. My experience is that America is the most racist country on earth except for all the other countries I’ve visited to include those that don’t keep census numbers.
I agree with almost everything else in the post.
14. May 2024 at 11:04
5. Regarding trust in institutions. The US seems like an outlier. I guess I wonder what caused the decline. The US is uniquely responsible for things like the Iraq War and the Great Recession. So if those are primary causes of the decline in trust of institutions in the US, it would seem that the US became a banana republic back when the conditions were created that lead to those disasters. And you also have to explain the causes of the things that happened in the past eight years beyond merely pointing to Trump himself. Why did people vote for him? Why did various actors and constituencies respond to him and his actions in the way they did? In a lot of ways, Trump was giving people what they wanted. Why did they want those things? Why did people in other G7 countries not want those things? Italy had Berlusconi, and even they did better than the US.
14. May 2024 at 15:48
BB, I don’t know how we compare with others on racism (there’s plenty in the comment section of this blog), but I will say that focusing on race makes the problem worse, not better. I feel like racism was declining for much of my life, but has dramatically increased over the past 10 years.
Lizard, You said:
“The US is uniquely responsible for things like the Iraq War and the Great Recession.”
That’s not true. The ECB was more responsible for the Great Recession than the Fed.
“And you also have to explain the causes of the things that happened in the past eight years beyond merely pointing to Trump himself.”
I’ve done many posts stating that Trump is not the problem—the problem is that the US has become a banana republic. He’s a symptom.
14. May 2024 at 17:46
8. I don’t know how one can look at the MAID experience in Canada and decide they still want to open that door. In that country, the doctor is now the 6th leading cause of death. 20somethings with anxiety and 60somethings who don’t want to be a burden on their families can sign their own death warrants with few guardrails. (And the rise more than offsets any drop in suicides.) They even encourage it on TV!
https://youtu.be/bssvubnVvgg
I think people are good and making it legal for other people to kill them is bad. While there are exceptions to every rule, and I do understand how much some suffer, the cost of the false positives on MAID is just too high.
15. May 2024 at 05:31
Lol. Touché. I love your bluntness.
But the point stands tho. It’s not just playing kickball… and attempting to create rules around it as if it were is never going to go all that well. We need a thousand odd and/or conflicting rules to replace one simple encompassing rule. A 19 year guy old that devotes himself to the betterment of a 17 year old girl and seeks to marry and have children with her one day in an exclusive loving (defined as willing the good of another for their sake rather than your own) relationship is ok. A 19 year old seeking to use the body of a 17 year old for their own personal pleasure leads to shady. A 40 year old seeking this same with a subordinate… also ok. A 40 year old using his position of authority to use a subordinate for his pleasure… not so much. See the problem.
But to err on the side of liberty is the best second option in an imperfect existence.
15. May 2024 at 09:24
Clerk, I vastly prefer the Canadian approach. I’m curious as to how many articles you’ve read by supporters of the Canadian system who rebut some of the sensationalist charges made by opponents? Can you link to a few?
Student, I envy your confidence that you know how people you’ve never met should live their lives. I have enough trouble figuring out how to live my own life.
15. May 2024 at 09:56
“I’ve done many posts stating that Trump is not the problem—the problem is that the US has become a banana republic. He’s a symptom.”
Completely correct, Sumner.
“The ECB was more responsible for the Great Recession than the Fed.”
How so, Sumner?
15. May 2024 at 10:29
They can live however they want to live. I simply pointing out that jamming square pegs into round holes is not a great solution to the problem. If people want to make it illegal for a 17 year old to mate with a 19 year old in place of… age not being the issue, rather than the expectation of commitment when one engages in the act of reproduction… I can laugh about that being dumb IMO
15. May 2024 at 10:35
I can also laugh about how a woman can legally end the live of a child but a man can’t even abandon it (if he was a slime and so chose to). That’s pretty hilarious to me. The man has no say over whether the child lives or dies not whether he wants to support it or not. That’s kinda funny to me.
15. May 2024 at 11:31
Scott, you’re right that I should try to read affirmative cases for issues where I take the negative. I’ve searched around and had trouble finding them, so would be happy to read anything you or others could point me toward. (E.g. Perplexity.ai search starts – “The provided search results do not present a strong defense or arguments heavily in favor of Canada’s medical assistance in dying (MAID) system.”)
So, on the advocacy side, Dying with Dignity Canada has an interesting myths and facts page:
https://www.dyingwithdignity.ca/advocacy/myths-and-facts/
I’ll excerpt one of their facts (affirmative arguments) that was concerning to me:
“There is no provision in the law that prohibits health care professionals from initiating a discussion or responding to questions about MAID. All health care providers have a professional obligation to respond to questions about MAID, but only nurse practitioners and physicians involved in care planning and consent processes have a professional obligation to initiate a discussion about MAID if a patient might be eligible – together with the option of palliative care.”
I don’t believe doctors and NPs should have a professional obligation to initiate discussions about MAID with patients who might be eligible. That seems to directly interfere with their freedom of conscience.
https://www.reddit.com/r/AskACanadian/comments/19dbdo8/do_you_support_mental_health_maid/
I found this discussion to be interesting as well. Many commenters who say they work in the system indicate safeguards are in place. Many also say that other mental health resources are scarce/expensive and see this as a more affordable option (for some, that’s even an affirmative argument for MAID -https://www.reddit.com/r/AskACanadian/comments/19dbdo8/comment/kj5983x/)
While Dying with Dignity Canada cites a report the cost savings to provinces are negligible (0.08%), it would seem that with mental health treatments not covered by the health care system, the cost savings to individuals who choose MAID could be quite high. On the margin, many will inevitably choose the cheaper option. Maybe you say, good for them it’s their choice. I disagree.
15. May 2024 at 14:10
1. Does there have to be only one ‘real threat’? Living in Europe, I’m certainly much more afraid of Russia! But is it really fair to say China is non-expansionist? Their maritime actions seem rather expansionist to me!
4. That’s absolutely insane. ‘Sound of Freedom’ indeed. A reasonable mistake of age is not a defense! So one could literally ask to see ID and it could be a fake ID and one could receive a mandatory life sentence.
6. Also insane. Can’t wait until Florida goes bankrupt from a major hurricane… I’m surprised their bonds don’t have more of a premium. Seems like a major mispricing of risk, though I’m not a municipal bond expert by any means.
9. Is this woke? I’d love to have some good data on these subjects and it seems like the census is the best positioned to gather them.
X. Regarding Trump as problem or symptom, isn’t this just a variation on the Great Man of History question? Do individuals shape the world or are they consequences of the circumstances of their own times?
Student: I don’t think there is anywhere in the world where a woman can legally end the life of a child? Also, I’m pretty sure the man has a very big say in whether the child exists or not.
15. May 2024 at 15:51
Harding, The Great Recession was caused by tight money. ECB monetary policy was tighter than Fed policy, and their recession was worse. I wrote a whole book making this argument.
Tacticus, Yes, China’s policy in the South China Sea is unjustified. But there is a big difference between trying to conquer an internationally recognized independent nation of 40 million people and trying to conquer a few tiny (and completely uninhabited) atolls in the South China Sea. BTW, the largest of them is controlled by Taiwan, so if this is evidence of China being evil then . . .
Of course Taiwan is a much more serious issue, and I’m worried about what might happen there.
15. May 2024 at 16:19
Clerk, Thanks for those links. I am traveling now so I don’t have time to research the issue. I recall that Richard Hanania had a long (pro-euthanasia) post that at least touched on the Canadian system.
https://www.richardhanania.com/p/canadian-euthanasia-as-moral-progress
Based on what I know, the damage done by our system (per capita) is at least an order of magnitude greater than the damage done by the Canadian system, but it’s obviously a judgment call.
16. May 2024 at 03:15
“The presidents of China and Russia, Xi Jinping and Vladimir Putin, respectively, signed on Thursday a joint statement on strengthening the cooperation and strategic relations between their countries.
At the press conference that the two held, Xi insisted on the importance of the ties between Russia and China and reiterated Beijing’s support for finding a peaceful solution to the conflict in Ukraine.”
—30—
Not a good look. Peas in a pod?
16. May 2024 at 11:48
1. The talk of WWIII with respect to Russia as an instigating factor is Pravda-level propaganda. Russia is too weak to enforce its will against Ukraine, the idea that it would launch an unprovoked attack the entire NATO alliance is beyond ludicrous.
If there is any truth to the reports (and we should take that with a grain of salt, this could be like the stories that Russia was paying bounties for killing US soldiers), it is Russia that is fearful of attacks from NATO and working to set up whatever asymmetric strategies it can in that event.
China is far more powerful than Russia and it is gaining power each year. Even today, is entirely conceivable that it would be able to defeat the United States in a conventional war in the Pacific theater. The U.S. has two advantages: aircraft carriers and many allies. However, in a fight near China, China doesn’t need carriers as it has airbases and America’s allies are weak. More importantly, China’s industrial base dwarfs America’s, and so any prolonged war would likely end in a Chinese victory.
5. Given the survey topics, I suspect most of that change is coming from Republicans, which isn’t surprising given how far national institutions have gone to alienate conservatives.
6. “Will DeSantis put an end to this sort of insurance socialism?”
Will any governor do something that would cause home values to fall 40% and wipe out homeowners equity?
It seems like the only thing that might be possible is to set actuarily fair premiums, provide a direct subsidy initially to replace the underpriced premium subsidy, and have that new direct subsidy phase out over a long period (e.g. 30+ years). Even this would be wildly unpopular with homeowners.
7. Uruguayans aren’t in a great power competition with China Their biggest risk in doing a lot of business with China would probably be losing access to Chinese trade in the event of a Sino-American war due to a U.S. Navy Pacific blockade.
9. Why should representation be based on people who aren’t legally in the country?
16. May 2024 at 13:25
Justin, you said, “The talk of WWIII with respect to Russia as an instigating factor is Pravda-level propaganda”
I agree that it’s not Putin’s goal to attack NATO, but it is his goal to reconstitute the Soviet Union. The easiest way for Putin to attain that goal would be for the US and China to get into a war.
What is Xi Jinping’s greatest geo-political goal? To take back Taiwan and having done that, cow Japan and South Korea and push America out of Asia. The easiest way for Xi to attain that goal would be for the US to get overextended in wars in Europe and the Middle East and not be able to focus on Taiwan.
Each of our most powerful adversaries would be served by getting us entangled fighting the other one. There are, of course, other considerations. Xi would much prefer to get what he wants without a war and Putin may well be defeated in Ukraine. But I don’t think it’s foolish to consider the implications of their motives especially when you consider how much the alliance between them has deepened between them since Russia started the war in Ukraine. I don’t think it is any accident that Xi has been so enthusiastic in his support of Russia.
20. May 2024 at 13:52
@ssumner: Not sure where to put this, can you comment on this article from Brian Wesbury at FirstTrust?
Are Abundant Reserves Paying for the CFPB?
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 5/20/2024
Back in 2008, the Federal Reserve made important changes in the way it handles monetary policy. We’ve written about them several times, but few really understand. The press won’t ask questions about it and few economists discuss them. They seem nuanced and arcane, and they are, but they are also massively important, and potentially dangerous.
With Quantitative Easing, the Fed shifted from a scarce reserve model to an abundant reserve model. The flood of new money grew the Fed’s balance sheet from $870 billion in August 2008 to its current level of $7.4 trillion. That’s a 747% increase. The Fed was just 5% of the size of the economy in 2008, today it exceeds 25%.
In order to contain the potential inflation from all this money the Fed has raised banks’ capital requirements and increased liquidity demands. Despite being flush with reserves, banks are constrained in making loans, holding three to four times more reserves as a share of deposits than they did in 2007 before all these changes happened.
One result of this is that banks no longer trade federal funds. They don’t need to because they all have excess reserves, the system as a whole is flooded with them.
When banks had scarce reserves, interest rates were a signal about the demand for money because banks borrowed and lent reserves every day. With reserves now piled everywhere, there is no market for federal funds and the Fed sets rates wherever it wants them…with or without regard to the demand for money.
Because the Fed is a creature of Washington DC, political pressure plays a role. And, when it comes to politics, low rates are better than high rates. Not for savers, but for car loans or mortgages and also for a government running large deficits.
As a result, the Fed has held interest rates below inflation 80% of the time since 2008, and at roughly 0% for nine out of the past fifteen years. This policy is now creating real problems. Everyone got used to low interest rates; banks acted like they would last forever and made loans or bought bonds at artificially low interest rates. But QE and an abundant reserve policy were playing with fire. With all that money in the system, an inflationary mistake was inevitable.
And with higher inflation comes higher interest rates. So, to put this in historical perspective, a policy (QE) that was implemented in order to counteract less than $400 billion in losses from subprime loans has created unrealized losses on bank balance sheets of more than $680 billion as of Q3 2023 (and the Fed itself has seen unrealized losses on their own balance sheet approach $1 trillion). When rates rise, the value of loans and bonds falls. It’s why we are seeing bank failures these days.
The key difference is that in 2008, the US was enforcing mark-to-market accounting. This caused a relatively small problem to become a massive problem, a panic. Today, banks don’t have to mark those losses to market and the system is much more stable. But please don’t ignore the fact that we have nearly double the losses on bank books today than we did in 2008.
Another problem with this new policy is that the Fed bought the same bonds the banks did during the low-rate environment. And because the Fed decided to pay banks to hold reserves, it is now paying more in interest to banks than it is earning on the bonds in its portfolio.
We have asked many times before: if the Fed is losing $100 billion dollars a year, how does it pay its staff? Apparently, the answer is: by borrowing from the Treasury with a promise to repay when it makes profits in the future. In other words, the taxpayer is now footing the bill for this new method of managing monetary policy.
And that brings us to our final point. The Supreme Court ruled last week that the Consumer Finance Protection Bureau (CFPB), by a vote of 7-2, could remain an independent agency even though it wasn’t funded by Congress like other agencies, but instead by the Fed.
The problem with the Court’s logic is that the Federal Reserve is now losing money every day. The only way it can pay for the CFPB is to use taxpayer money by borrowing directly from the Treasury. So, the CFPB is deemed “independent” because it doesn’t rely directly on Congress for funding, but in reality it is spending taxpayer funds when the Fed runs losses.
But even if the Fed were making a profit, (as it was when it was paying banks 0% on reserves while earning money on its portfolio of bonds) and remitting that money to the Treasury, it would be holding back funds in order to pay for the CFPB. In other words, no matter how you cut it, the Fed ultimately gets all its resources from the taxpayer…either through the cost of inflation, by remitting less to the Treasury, or by borrowing from the Treasury when it is not running a profit.
If the Supreme Court understood the complications of monetary policy, especially after the changes implemented in 2008, we would have expected a different ruling.
20. May 2024 at 19:17
msgkings, I haven’t followed that issue closely, but it does seem odd to draw a distinction based on “taxpayer funding” in a world where money is fungible.
However, I don’t agree with his monetary analysis. Money was too tight for almost a decade after 2008.
21. May 2024 at 07:52
@ssumner: Thank you
22. May 2024 at 05:44
Wesbury that doesn’t seem to really understand how the Federal Reserve works. Or banks. Or monetary policy. He starts by comparing a balance sheet to GDP and then it just goes downhill from there.
23. May 2024 at 13:48
@Tacitus:
Do you also disregard any discussion of debt to GDP ratios?