Central Banks ‘Risking A Bear Stearns’ Moment

Central Banks ‘Risking A Bear Stearns’ Moment

There was plenty of "Lehman moment" chatter early this week, when an overblown social media frenzy centered on Credit Suisse prompted mainstream outlets to devote blanket coverage to the bank's fraught overhaul. The bigger story, though, remains the UK's "near miss," and the Bank of England's rescue mission to prevent a collapse in the nation's pension complex. I've warned the UK isn't out of the woods. BofA underscored the point in a new note called "Risking a Bear Stearns moment" which, in a
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6 thoughts on “Central Banks ‘Risking A Bear Stearns’ Moment

  1. [blockquote] The problem in 2022 is that inflation constrains central banks in their capacity to backstop markets, given that functioning as a dealer of last resort would invariably be seen by many as a pivot to easing — a “bend the knee” moment that risks exacerbating inflation.[/blockquote]

    Can you explain the psychology/power dynamics/politics behind some of this?

    I mean, inflation was precipitated by a situation in which people were paid to stay home — so demand stayed high while production tanked. The equity rally started with all the backstopping of corporate paper by the Fed, and then hit the top of the roller coaster with the cash gusher of PPP and various bailout programs.

    So, why are central bankers unwilling to comment on this sort of dynamic when they’re taken to task for not managing the vagaries of the currency more deftly? i.e., “the best way to fight this inflation might be with fiscal levers, like higher taxes or less spending, than with monetary levers like higher rates.”

    I guess i just don’t understand why fiscal authority is “political” but monetary authority is “bureaucratic” or administrative in nature (Erdogan aside, i guess).

    What would be the problem with a Fed that said “listen, we’re probably going to have systemic inflation until the excess cash spent into the economy by the fiscal authority gets sucked out again through higher taxes or lower spending.” After all, even higher rates just sort of keeps the cash “out there” in the sense that the buffer is with the Fed (in the form of higher rates) instead of with the fiscal authority (in the form of freedom to spend more than it takes in from taxes).

    In a way it’s sort of like there’s been a power shift — with the Fed now having much higher rates as neutral due to having to soak up all this excess cash/demand, and the fiscal authority being diminished as a result (or at least until a politico comes along with ‘belt tightening’ rhetoric sufficient to slow the economy to the point where the Fed begins lowering rates to compensate).

    I guess i’m wondering why there isn’t, or can’t be, more explicit dialogue and cooperation. Is this a governance problem? A political problem? A human nature problem? I don’t really know what to think.

    1. That.

      Even in their desire to fight the impact of energy and food inflation, governments could at least try to be more disciplined rather than simply providing subsidies (with their inflationary impact).

      Use quotas/rations. I guess energy sources and consumption follow more complex patterns than during WWII. OTOH, state capabilities have increased too.

      It’s just willful blindness and/or political cowardice.

  2. Unless by “pivot” we mean any outcome that isn’t a 75bs hike in Nov. followed by 50 in Dec. and continued balance sheet runoff to the tune of $95b/month, I don’t understand the binary nature of this debate. The FOMC could go 50 + 25 and pause while continuing with runoff at current levels; 50 and pause with a continuation of runoff and additional hikes in 2023 dependent on the data; 50/75 and signal it’ll be slowing QT in 1Q23; etc. The point is that it remain committed to reining in too-high levels of inflation; how it gets there is a secondary concern. The concern about systemic risk is problematic, given the opaque nature of levered, speculative finance. But we’re in a different place than we were in 2008-09 (see stress tests), and the orderly unwind of a single chronically mismanaged SIFI or a couple of over-levered hedge funds should not ring the bell on CBs efforts to drain excess liquidity from the system. Finally, is it really the Fed’s job to backstop the policy errors of other CBs (BoE, BoJ) or policymakers in other countries (Tories)? And if that’s where we are, is it fair to ask who the beneficiaries of that expanded mandate are?

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