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Seven Possible Causes of the Next Financial Crisis
The great financial historian, Charles Kindleberger, pointed out in the 1970s that over several centuries, history showed there was a financial crisis about once every ten years. His observation still holds. In every decade since his classic Manias, Panics and Crashes of 1978, such crises have indeed continued to erupt in their turn, in the 1980s, 1990s, 2000s, 2010s, and again in 2020. What could cause the next crisis in this long, recurring series? I suggest seven possibilities:
The Next Housing Bust
The Supreme Court has determined that the Federal Housing Finance Agency (FHFA)—the regulator and conservator of the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac—was unconstitutionally structured because its director could only be removed from office for cause. The Court held in its June 23, 2021 decision that the constitutional issue could be resolved by striking the “for cause” language—leaving the FHFA in place, but headed by a director who could be removed from office at any time by the President.
The Rise (and Fall) of the Modern Bank of England
The notion of “an essentially contestable concept” means an issue which by its very nature can never be definitively settled, no matter how much brilliance is expended on it, and about which no logic or evidence can ever force disputing parties to agree. Thus, they are, in the words of Stuart Hampshire, “permanently and essentially subject to revision and question.” In short, the debate never ends. How many such essentially contestable propositions have we seen! Macroeconomics, like politics and philosophy, is full of them.
The Price of Inflation, Now and in the Future
Your excellent editorial “Biden Has an Inflation Problem” (Aug. 12) points out that average real wages have fallen for seven months in a row. In other words, the Biden inflation has reduced the real wages of workers in every month that he has been in office. This confirms yet again that high inflation is a way of cutting wages by sneaky central-bank means.
Fifty Years Without Gold
Fifty years ago, on Sunday evening, August 15, 1971, after crisis meetings with close advisers at Camp David, President Richard Nixon announced an historic decision in his “Address to the Nation Outlining a New Economic Policy.” It was by then clear that the United States might not have enough gold to meet its international commitment to redeem dollars. It was experiencing “the start of a run on the dollar.” Paul Volcker, then with the Treasury Department, reported to the President on gold losses. “Dollar dumping accelerated. France sent a battleship to take home French gold from the New York Fed’s vaults.” The French not unreasonably believed that the special status of the dollar gave it an “exorbitant privilege,” making it “monumentally over-privileged.” Already in the 1960s, French President Charles de Gaulle had ordered the Bank of France to increase the amount of payments in gold from the United States.
Podcast: A Webinar on Central Bank Digital Currencies
With expressions ranging from enthusiasm to serious interest, central banks from China to Europe have been actively exploring the potential for Central Bank Digital Currencies (CBDCs). On June 28, Federal Reserve Board Vice Chairman for Supervision Randal Quarles offered comments that, far from equivocal, expressed great doubt about the feasibility and desirability for the Federal Reserve sponsoring such a currency.
‘Biden Inflation’ made simple: Borrow from the Fed, take away from the rest of us
“What is the difference between banking and politics?” a pointed old witticism goes. “Banking is borrowing money from the public and lending it to your friends. Politics is taking money from the public and giving it to your friends.”
Why a Fed Digital Dollar is a Bad Idea
On July 19, the top-level President’s Working Group on Financial Markets met to address “the need to act quickly to ensure there is an appropriate U.S. regulatory framework in place” for stablecoins, a form of cryptocurrency backed by assets, often denominated in dollars. The meeting cited “the risks to end-users, the financial system and national security.” This is a pretty clear message from a group composed of the Secretary of the Treasury, the Chairs of the Federal Reserve, SEC, CFTC, and FDIC and the Comptroller of the Currency.
Event: What might cause the next financial crisis?
Panelists:
Rebel A. Cole, Lynn Eminent Scholar Chaired Professor of Finance, Florida Atlantic University
Gerald P. Dwyer, BB&T Scholar, Clemson University
Edward Kane, Professor, Boston College
Alex J. Pollock, Distinguished Senior Fellow, R Street Institute
Ehud I. Ronn, Professor, University of Texas at Austin
Richard Christopher Whalen, Chairman, Whalen Global Advisors LLC
Expect Lower Credit Standards, More Risk From Biden Housing Authority
Fannie and Freddie will take orders from a ‘housing czar’ with an agenda for politicized lending.
Your editorial “A Conservative Court Awakening” (June 26) rightly says a new Biden administration Federal Housing Finance Agency (FHFA) director will “ease underwriting standards again to boost home-ownership.” But let us restate this more clearly: This director will reduce credit standards and increase risk once again to promote temporary home-ownership through low-credit-quality loans. This will revivify the notorious “originate and sell” model for such loans, so the lenders can stick the taxpayers with the credit risk. Systemic financial risk will rise.
At AEI, a Monetary Panel Expressed Pessimism About Inflation
“While their conjectures are as speculative as any vulnerability identified in an official financial stability report, unlike official financial stability reports, they have the freedom to identify government policies and regulatory shortcomings as vulnerabilities,” Kupiec said.
Two house price inflations, two central banks
In 2021, North America is the home of runaway house price inflation. In both the U.S. and Canada, house prices are far over their Bubble peaks of the first decade of the 2000s and they continue to rise rapidly. In both countries, they are increasing at double-digit annual rates: over 15% in the U.S., according to the AEI Housing Center’s current estimate, and 11.9% in Canada, according to Teranet. They are journalistically described by terms like “surging,” “soaring,” and “red-hot.”