A busy May -- Congressional testimony, RMA webinar, two US banking industry conferences
My apologies to M-FAB Substack readers — May proved to be quite the busy month for public speaking after Texas A&M university classes ended. I just returned to Texas yesterday from my last speaking gig — a lot of travel, whew!
I am grateful for all of these opportunities to continue learning and also offer perspective on the economy and financial policy issues, but I particularly want to thank my family, friends, students and colleagues for the encouragement in the run up to offering testimony on May 15 at the House Financial Services Committee regarding Treasury market stability and its intersection with US financial regulation.
If you are a person of faith, testifying conjurs up speaking from a place of truth, even truth to power. I endeavored to do that. While I enjoyed the discussion with the other witnesses at the hearing, I disagreed with proposed changes on banking regulation as a bandaid solution to Treasury market resilience in the absence of meaningful US fiscal reform to put the US budget deficit on a glide path down. I also worry that these proposals, if enacted, lower US banking system resilience at a time of significant macroeconomic uncertainty/ stagflation risk - or the wrong time. As I explained in my testimony, what worked in the 1950s (use of financial repression via the banking system to bring US government debt to GDP down) will not work again.
A link to the video of the May 15 Congressional hearing is available here — https://lnkd.in/g-mUMcYy
A link to my written Congressional testimony is available here — written testimony
My three big picture points in testifying were:
First, bank deregulation generally is an ineffective solution to Treasury market fragility. Indeed, reducing the amount of capital that banks hold against US Treasuries when Treasury market volatility is rising and stagflation is on the horizon is inconsistent with sound risk management and robust economic growth, instead increasing risks of a costly US financial stability event.
Second, the Federal Reserve’s use of unconventional monetary policy both has contributed to unsound fiscal policy and been destabilizing to the US banking sector. The Federal Reserve, the Administration and Congress should recognize that the overuse of unconventional monetary policy unintentionally has contributed to a worsening of the nation’s finances.
Finally, we urgently need to run a more responsible fiscal policy – attempting to strengthen “Treasury market resilience” through bank deregulation and/or reliance on unconventional monetary policy are the wrong tools for the job. In light of deglobalization, aging demographics, and reduced immigration which put upward pressure on inflation and real interest rates, it is time to stop using inappropriate tools like bank SLR/G-SIB surcharge deregulation, unconventional monetary policy or even US Treasury debt buybacks to “stabilize the Treasury market,” but do nothing to address the important issue of sound fiscal policy.
A high government debt burden is not a uniquely US problem -- but US fiscal policy has become particularly accustomed to almost anything goes for the last two decades due both to the dollar's reserve currency status and, since 2008, successive rounds of QE. The dollar's reserve currency status is fraying and QE is sidelined with supply shocks and associated inflation risks again in view.
The May 15th testimony honestly felt a bit cosmic. At this time, the proposed tax cut bill to expand the deficit was moving through the House but not yet passed — and I knew my comments were unlikely to change events on the Hill… but, yes, I went ahead and said it anyway. One of my favorite moments in the hearing was when one member of Congress asked about Japan’s fiscal situation being worse — so may be super large US government budget deficits aren’t such a worry. I had an answer for this … then the cosmos also had an answer… because the next day Moody’s downgraded the US sovereign rating in light of the US fiscal path and the Treasury curve bear steepened.
I also was grateful for the opportunities this month to share perspectives through several venues with the US banking industry. If you can’t change the behavior of Congress, try to at least help US banks manage these risks better!
The Risk Management Association/Prosights hosted several of us for a webinar (behind a paywall) around this time to discuss the outlook and then blogged about it here. Among other things, they talk a bit about the concerns I flagged about the US bank/sovereign stress nexus in the webinar.
I also had the opportunity to speak at two great US banking industry conferences in May — the Moody’s Banking Summit (May 5-7) and the Empyrean bank annual user conference (May 28-30) — about 300 bankers each and both of which were in Miami.
The slides from my talk this week at the Empyrean conference can be accessed here. Among other things, I encouraged banks to remember that
1) regulation is not risk management;
2) stagflation is my base case and to build capital, funding and liquidity resilience;
3) structural bear steepener and no Fed rate cuts in 2025 seems quite plausible (starting to think about Fed rate hikes actually — more on that to come); and
4) get some term funding and build liquidity before the tax bill passes and Treasury debt limit ends at which point financial conditions may be expected to become less hospitable.
