Making “Responsible Innovation” a Reality: Big Tech, Small Money, and U.S. Economic Equality

By Federal Financial Analytics

FedFin has just released a new policy paper laying out how emerging risks in unregulated tech-based financial products may threaten U.S. economic inequality.  It’s not that regulated institutions have always done that much better, but rather that the power of big data, predictive modeling, and far-flung commercial interests combines with tech-firm culture in still more dangerous ways far outside the reach of effective controls or meaningful enforcement.  Continue reading “Making “Responsible Innovation” a Reality: Big Tech, Small Money, and U.S. Economic Equality”

SIFIs and Sisyphus: The Latest Bank-Regulation Rewrite

By Karen Petrou

Starting in 2010, U.S. regulators erected a pyramid of complex, costly, and stringent safety-and-soundness, resolution-planning, and conduct regulations for the largest U.S. banking organizations that have come to be called SIFIs (i.e., systemically-important financial institutions).  Starting in 2018, the agencies began to demolish the still-incomplete SIFI pyramid, issuing on October 31 two sweeping proposals (here and here) not only to implement new U.S. law, but also to go farther.  Bankers say this is nice, but not enough; critics lambast the proposals as forerunners of the next financial crisis.  Either could be right – the proposals repeat the most fundamental mistake of post-crisis financial regulation:  rules piled upon rules or, now, rules subtracted from rules without even an effort to anticipate how all of the revised rules work taken altogether in the financial marketplace as it exists in the real world, not in a set of academic papers or political edicts. Continue reading “SIFIs and Sisyphus: The Latest Bank-Regulation Rewrite”

Inequality Hits Fiscal Reality

By Karen Petrou

Readers of this blog know well that we think U.S. economic inequality is not only a profound social-welfare and political-consensus problem, but also a scourge to financial-market stability.  We have not generally wandered into fiscal-policy questions, preferring to focus on a far less well-known, but potent inequality force:  U.S. monetary and regulatory policy.  However, financial and fiscal policy are inextricably intertwined.  If inequality increases the risk of financial crises – which it does – and financial crises pose macroeconomic risk – which of course they do – then fiscal policy must ride to the rescue to prevent prolonged recession or even depression.  Could it, given how acute U.S. economic inequality has become?  A new report from Moody’s says that the rating agency may well have to downgrade U.S. debt – the AAA sine qua non of global finance – due to inequality.  Continue reading “Inequality Hits Fiscal Reality”

It Wasn’t the Butler

By Karen and Basil Petrou

Summary

In the raft of crisis retrospectives released during the ten-year anniversary of the Great Financial Crisis, general consensus continues the conventional wisdom that subprime mortgages were the spark of the subsequent conflagration.  A new study from the Federal Reserve Banks of Atlanta and New York mobilizes formidable data to show that hapless subprime purchase-money borrowers were victims, not perpetrators.  The borrowers who did the damage that precipitated the debacle were, they find, prime borrowers whipped into a speculative frenzy by the combination of low rates and flagrantly-unwise mortgage lending.  Theoretically, post-crisis reforms have solved for this.  Actually, maybe not given the exodus of mortgage securitization from regulated entities, sharp rise in cash-out refis, and investment-focused borrowing with house prices well above affordability thresholds in many major markets.  Continue reading “It Wasn’t the Butler”

Hard Work, Low Pay, High Costs: Life on the Ground in a “Well-Performing” Economy

By Matthew Shaw and Drake Palmer

Recent jobs data sparked excitement as news reports talked of how America is finally going back to work.  This is understandable optimism, based as it was on a concurrent rise in labor-force participation and a drop in the government’s preferred measure of unemploymentHere, we assess whether the Fed’s “solid” and “very well performing” economy has finally allowed low-and-moderate income (LMI) households to share the prosperity rapidly pooling at the very top of the income and wealth distribution.  In short, and sad to say, it isn’t – hourly pay for low-wage/low-skill workers has declined in real (i.e., inflation-adjusted) terms over the past four decades and is essentially flat since 2010.  As we noted in our last blog post, wealth concentration has soared since the financial crisis.  Even if a corner has now been turned for everyone else, it’s just a very tight one at the bottom of the equality canyon. Continue reading “Hard Work, Low Pay, High Costs: Life on the Ground in a “Well-Performing” Economy”