Fed raises interest rate a quarter-point

"Janet Yellen’s decision Wednesday to raise interest rates highlights the major problem with the US economy. It isn’t simply that the economy is growing too slowly. The big problem is that the economy is broken.

Ever since the Great Recession of 2008, the economy hasn’t been functioning the way it ought to and hasn’t been reacting to stimuli as it should. And now it has left the Fed and elected officials few choices.

The economy is a truck with no wheels. A car without a transmission. A canoe that’s up a creeká, with no paddle.

Fed Chair Yellen had to deal with that Wednesday, when the Federal Reserve decided to raise interest rates despite that economic growth in the US this year has been mediocre — at best.

The Fed announced a quarter-point rate hike and promised/threatened another three hikes in 2017. (Don’t count on those. As has often happened in the past, the economy is likely to be growing too slowly to make good on the hikes.)

Don’t get me wrong — Yellen had to raise rates. For one thing, the Fed is merely catching up to the financial markets, where rates have already risen significantly.

A rate hike was also needed because the Fed’s near-zero rate policy for the past eight years is strangling savers and turning everyone into a stock market junkie, which is OK while equities continue to rise but awful when they ultimately fall.

Another reason for the rise: Without a rate hike now, the Fed will be powerless when the economy dips again. Hence, it was necessary so that borrowing costs — at least those influenced by the Fed — have room to be reduced.

If not for those reasons, the Fed wouldn’t even be thinking about boosting rates in the current environment..."

http://nypost.com/2016/12/15/janet-yellen-left-herself-no-choice-but-to-raise-interest-rates/

Fed and FDIC: five of the largest banks still too big to fail

"[F]ive of the nation's eight largest banks--including JPMorgan Chase and Bank of America--did not have "credible" plans for how they would wind themselves down in a crisis without sowing panic.

That suggests that if there were another crisis today, the government would need to prop up the largest banks if it wanted to avoid financial chaos.

...The regulators were responding to the so-called living wills that banks must submit to regulators on a regular basis to explain how the banks plan to enter bankruptcy in an orderly fashion in case of crisis...

...In recent weeks, [former congressman Barney] Frank has criticized the financial overhaul proposals by Mr. Sanders. Mr. Frank contends that some of the plans to break up the banks are simplistic because they take a one-size-fits-all approach. In contrast, he said, measures like the living wills allow regulators to press for banks to shrink based on specific conditions at those firms.

The five banks that received rejections have until Oct. 1 to fix their plans.

After those adjustments, if the Fed and the F.D.I.C. are still dissatisfied with the living wills, they may impose restrictions on the banks' activities or require the banks to raise their capital levels, which in practice means using less borrowed money to finance their business.

And if, after two years, the regulators still find the plans deficient, they may require the banks to sell assets and businesses, with the aim of making them less complex and simpler to unwind in a bankruptcy."

http://www.nytimes.com/2016/04/14/business/dealbook/living-wills-of-5-banks-fail-to-pass-muster.html?_r=0

Inflation, how dangerous?

Ira Stoll at the Future of Capitalism blog critiques the argument by James Pethokoukis against Amity Shlaes over the danger of inflation:

"Nobel laureate Paul Krugman is attacking Amity Shlaes as a paranoid "crank" for her latest column about inflation,  which is pretty much what you'd expect from Professor Krugman, who, by the way works for a newspaper whose weekday single copy New York City cover price has increased to $2.50 from the 60 cents that it cost in 1999, or 417%.

The mystery is why the center-right American Enterprise Institute and its blogger James Pethokoukis is taking the same side as Professor Krugman in the fight...

...Let's consider Mr. Pethokoukis' argument [that Amity Shlaes is "dead wrong" about her inflation concerns]. He writes:

The Consumer Price Index, including food and energy, has risen by an annual average of just 1.6% since 2008, including 1.5% last year. Is Washington phonying up the numbers? Well, MIT's Billion Price Project, which "uses prices collected from hundreds of online retailers around the world on a daily basis" puts US inflation at just over 2% the past year. In other words, the CPI is roughly correct, though your personal mileage will vary a bit.

Mr. Pethokoukis describes a difference between "just over 2%" and "1.5%" as "roughly correct." But another way to look at it is that the government numbers are under-reporting inflation by 25%.

...Nor is it just talk radio "hawkers" who want to own some gold to protect against the erosion of the dollar. The president of the Federal Reserve Bank of Dallas, Richard W. Fisher, owned at least $1 million worth of gold, according to a report of his personal financial disclosure form. John Paulson's hedge fund reportedly owned $1.19 billion worth of shares in a gold exchange-traded fund. Maybe he's a paranoid crank, too?

...And as the French economist Thomas Piketty, one of Professor Krugman's favorites, no less, pointed out in his book, "inflation is hard to control: once it gets started, there is no guarantee that it can be stopped at 5 percent a year.""

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I do not know much about economics. How easy is it to spiral into hyperinflation in a tightly-regulated financial environment?