Can you believe it has been nearly a year since financial institutions received emergency loans to prevent a banking collapse? How time flies when the Federal Reserve gives bailouts like candy on Halloween. With the first anniversary of Silicon Valley Bank and Signature Bank's failure on the horizon, more details are being learned about the Eccles Building's eternal bailouts, including the latest goodie: forcing the industry to accept money from the central bank.
The Fed and Emergency Loans
What should have been headline news everywhere, Bloomberg reported on a government proposal to mandate that banks borrow from the Fed's discount window at least once a year, whether they need to or not. The idea aims to mitigate any stigma and ensure that these companies are prepared for economic and market turbulence.
In partnership with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency, the Fed is drafting a proposal to force lenders to take out emergency loans, even if they have sufficient resources to deal with a situation whereby depositors demand their cash en masse. Michael Hsu, the acting comptroller of the currency, told Bloomberg:
"We want to make sure that banks have enough resources to meet any kind of outflows within five days — especially those related to uninsured deposits. It’s almost like doing a fire drill. If it’s required, when a real liquidity fire comes, then the banks can do it in real life. Operationally, banks would have to go borrow $1, $100 million, whatever it might be, just to ensure that the procedures, the systems, the people, everything is there and in place to access the discount window.”
The discount window is a central bank lending facility that allows banks to access funding if they face liquidity risks. So, even if a JPMorgan Chase or Bank of America does not have any challenges, it will be forced to borrow to make sure nobody's feelings are hurt. Unless the Fed reduces costs, however, banks will end up losing money in the scheme, as today's Fed interest rate is more than 5%, higher than the market rate. That's because the discount window was supposed to be a last resort option – though now it will likely become the first port of call.
The banking sector is no longer a free-market system. But if the Fed and the rest of the US government are already prepared to bail out institutions, was the industry ever? If the marketplace is supposed to send signals to everyone about a prospering or failing firm, this policy proposal might be another glove to cover the invisible hand. Now that everyone is treated equally, from the strong to the weak, nobody will ever know anything.
The Coming Q4 Data
The fourth-quarter GDP data are coming! The fourth-quarter GDP data are coming! The Bureau of Economic Analysis (BEA) will publish the October-December gross domestic product numbers on Jan. 25. Economists anticipate that the report will show a growth rate of at least 2%, and the Atlanta Fed Bank’s GDPNow model estimate points to a 2.4% reading.
Once again, the economy will have averted a recession, thanks to debt-laden consumers and politicians ready to exploit taxpayer dollars. Remember, in the third quarter, government spending fueled about one-third of the expansion. The public can expect comparable numbers from the BEA.
As always, the business media, political pundits, and public officials will concentrate on the headline figures while ignoring the stuff underneath the hood. Still, the White House will laugh at all the naysayers who anticipated a downturn in an environment of high inflation, soaring borrowing costs, and a marketplace drowning in red ink. Who can blame anyone for dismissing the economic observers calling for a recession beginning in the first quarter?
Don’t worry, though. Perhaps if consumption slows down, the federal government, like the central bank, can force consumers to take out emergency loans to stimulate the economy.
Trudeau's Basic Income Scheme
Cynics have warned that Canadian Prime Minister Justin Trudeau will unveil a basic income scheme ahead of next year's election. Since Trudeaumania 2.0 is fading into the sunset and losing support, political pessimists believe the incumbent will attempt to resurrect his brand by handing out free money to all of Canada.
Legislatively, it is already in the making. The country's Senate is examining Ontario Sen. Kim Pate's Bill S-233, which aims to establish a national framework to offer everyone over 17 access to a "guaranteed livable basic income." This would include permanent residents, refugee claimants, and temporary workers. Contrary to social media, the legislation does not install a basic income program but would require Finance Minister Chrystia Freeland to partner with the provinces and territories to outline a path to implementing the public policy.
So far, nobody has taken a clear position, with Liberals, Conservatives, and New Democrats providing a wide range of opinions. But for the Tories, it was concerning that Conservative Deputy Leader Melissa Lantsman said last year that a universal basic income is coming and is a conservative concept. Yikes. But it is not all land of burnt Double-Doubles and subzero temperatures as Kevin Milligan, an economics professor at the University of British Columbia, told the National Post: "No government could afford it. Any government who was wise would see that this is not a good way to work on the important issues of poverty."
Indeed, the national debt in the Great White North is around $1.5 trillion, Ottawa is running an annual budget deficit of approximately $40 billion, and the federal and provincial governments will spend about $69 billion a year on interest payments. Not to mention, the country is experiencing a cost-of-living crisis – from out-of-control housing prices to rocketing food inflation.
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