| | | It's The Fed That's A Risk To Financial Stability
Central bankers whistle ‘Dixie’ as mark-to-market losses dramatically shrink the banking system’s economic capital...
Mr. Barr reported that banking “capital ratios increased throughout 2023.” He failed, though, to discuss the mark-to-market losses that have dramatically shrunk the banking system’s economic capital and capital ratios.
A recent study of American banks, including analyses of both their securities and fixed rate loans, estimates that the banking system has at least a $1 trillion mark-to-market loss resulting from the move to normalized interest rates.
Since that loss is equal to half of the banks’ approximately $2 trillion in book value of tangible equity, their aggregate real capital has dropped by about 50 percent. This is just in time for them to be confronted with large potential losses from that classic source of banking busts, commercial real estate, as the prices of many buildings are falling vertiginously.
Given his current position, Mr. Barr could not be expected to mention another particularly large and inescapable threat to financial stability, that from the Federal Reserve itself. As central bank not only to the United States, but to the dollar-using world, the Fed combines great power with an inevitable lack of knowledge, and its actions are a fundamental source of financial instability.
When the Federal Reserve was created, the secretary of the treasury at the time, William Gibbs McAdoo, proclaimed that the Fed would “give such stability to the banking business that extreme fluctuations in interest rates and available credits… will be destroyed permanently.” A remarkably bad prediction..... |
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