“This harmful cycle concentrated national wealth among those who already owned assets”: Bessent.
By Wolf Richter for WOLF STREET.
Secretary of the Treasury Scott Bessent came out today with an essay in the WSJ that blasted the Fed for its “extraordinary” and “nonstandard” monetary policies since 2008, such as QE; its “pursuit of the Wealth Effect”; its interventions that became a “de facto backstop for asset owners,” thereby concentrating “national wealth among those who already owned assets.” He blasted the Fed as bank regulator, citing the SVB collapse. He skewered the Fed for having caused home prices to soar, while “younger and less affluent households, shut out of ownership and hit hardest by inflation, missed out on appreciation.”
“By failing to deliver on its inflation mandate, the Fed allowed class and generational disparities to widen,” he wrote. And much more.
It is refreshing – and 17 years overdue – to see a Secretary of the Treasury, or any sitting government official, lambaste the Fed for its QE and asset-holder-bailout tools that kicked off in 2008, and it’s even more refreshing to see him list some of the horrendous effects the Fed’s tools and policies have had.
Here are some salient quotes from Bessent’s essay:
“The ‘extraordinary’ monetary-policy tools [QE and ZIRP] unleashed after the 2008 financial crisis have similarly transformed the Federal Reserve’s policy regime, with unpredictable consequences.”
“Successive interventions during and after the financial crisis of 2008 created what amounted to a de facto backstop for asset owners.
“This harmful cycle concentrated national wealth among those who already owned assets.”
OH, I so agree, and have said so many times. I have a special page for the Wealth Effect, citing among other notables, Yellen’s article on the benefits of the Wealth Effect, that she wrote in 2005 when she was still president of the San Francisco Fed, titled, “Housing Bubbles and Monetary Policy.”
And my page cites Fed Chair Bernanke’s 2010 editorial in the Washington Post, where he explained to the astonished American people that the Fed was using QE and ZIRP to create this wealth effect, whose explicit purpose was to make the wealthy even wealthier so that they feel more confident and spend a little more. The Wealth Effect was a central-bank horror story but it occurred in real life.
There is nothing more toxic on society, as far as central-bank policies is concerned, than the pursuit of the Wealth Effect. And it’s bipartisan: Yellen was appointed by a Democrat and Bernanke by a Republican.
And it is so refreshing to see a Secretary of the Treasury keelhauling the Fed for having made the Wealth Effect part of its policy.
And Bessent hammers on the effects of the Fed’s policies:
“Within the corporate sector, large firms thrived by locking in cheap debt, while smaller firms reliant on floating-rate loans were squeezed as rates rose.
“Homeowners saw their property values soar, largely insulated by fixed-rate mortgages. Meanwhile, younger and less affluent households, shut out of ownership and hit hardest by inflation, missed out on appreciation.”
“By failing to deliver on its inflation mandate, the Fed allowed class and generational disparities to widen. Its pursuit of a wealth effect to stimulate growth backfired.”
Oh, I so agree. Back in January 2022, I called this the Most Reckless Fed Ever, for having whipped inflation into a frenzy with ZIRP and mega-QE even as inflation had spiked to 7% and was heading higher.
So Bessent continues, quoting from a book: “‘Unprecedented inequality is clear proof that the wealth effect is all too effective for the wealthy, but an accelerant to economic hardship for everyone else,’ financial analyst Karen Petrou wrote in her book ‘Engine of Inequality’ (2021).”
“By extending its remit into areas traditionally reserved for fiscal authorities, the Fed has blurred the lines between monetary and fiscal policy.”
“The central bank’s balance-sheet policies directly influence which sectors receive capital, intervening in what should be the domain of markets and elected officials.”
“Entanglement with Treasury debt management creates the perception that monetary policy is being used to accommodate fiscal needs.”
“Expanded powers have fostered a culture in Washington that relies on the Fed to bail out the government after poor fiscal choices. Instead of accountability, presidents and Congress have expected intervention when their policies falter. This ‘only game in town’ dynamic has created perverse incentives for irresponsibility.”
Oh, I so agree. All-out interest rate repression through massive waves of QE have caused money to be essentially free, and when money is free, price no longer matters, and debt no longer matters either. And so now, the US is saddled with $37.4 trillion in federal government debt, up from $8.9 trillion in 2007, before QE and ZIRP started.
And Bessent continues:
“The 2023 failure of Silicon Valley Bank illustrates the dangers of combining supervision and monetary policy. The Fed now regulates, lends to and sets the profitability calculus for the banks it oversees, an unavoidable conflict that blurs accountability and jeopardizes independence.
“A more coherent framework would restore specialization: empowering the Federal Deposit Insurance Corp. [FDIC] and Office of the Comptroller of the Currency [OCC] to lead bank supervision, while leaving the Fed to macro surveillance, lender-of-last-resort liquidity and monetary policy.”
Oh, I so agree, and said so in an article at the time because it was painfully obvious even to me: The Fed Should Be Fired as Bank Regulator. Powell’s Discussion of Silicon Valley Bank & Regulatory Failure Shows Why. Bessent goes on:
“Heavy intervention has produced severe distributional outcomes [who gets rich, who pays for it], undermined credibility and threatened independence.”
“Looking ahead, the Fed must scale back the distortions it causes in the economy. Unconventional policies such as quantitative easing [QE] should be used only in true emergencies, in coordination with the rest of the federal government.”
This essay is an indictment of QE and of the Wealth Effect whose pursuit was powered by QE.
But somewhere along the line, after inflation had begun to rage and home prices were exploding, the Fed had a come-to-Jesus moment about QE, and then started unwinding it, and has continued to unwind it for over three years, by another $39 billion in August, having brought its balance sheet down by $2.36 trillion so far. I discussed the Fed’s latest balance sheet yesterday here.
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“There is nothing more toxic on society, as far as central-bank policies is concerned, than the pursuit of the Wealth Effect. ”
This is why Mandami is getting traction in NYC.
There are those who are trying to make ends meet…
next to those lighting 25$ cigars with lit hundred dollar bills
Loose money. Cantillion Effect.
Is the attitude not this….The Fed will make stocks go up.
They are down today? Don’t worry…..the fix is in. Tomorow will be up.
“next to those lighting 25$ cigars with lit hundred dollar bills”
Wait a minute ! I use a fine white swan wooden match stick to light My Hoyo De Monterrey #1 ! 😀
For the big US Open tennis match today good tickets are going for $20,000 and the cheapest nose bleeds are still over $1,000.
The wealth effect worked so well that the rich can’t find a way to spend all their money. Their stocks are parabolic, they own multiple mansions with 2% mortgage rates. They have so much money gushing out of their pockets they need to spend a new car’s worth of money to watch a tennis game just to slow down the flow of money into their bank accounts.
I don’t know what they are able to see way up in the upper deck.
They probably can’t see the tennis ball.
I watch it on my big screen TV, it’s better than being there.
When I was back in the corporate business world I was offered tickets to the U.S. Open. I politely declined, saying that I didn’t follow golf.
I used to go to US Open since 2004 and tickets at 20$ (at booking office) the first 2 rounds and 60-80$ for quarterfinals(I was lucky to get to courtsite after rain moving(first come ,first serve).But after covid, even cheapest tickets ,first rounds, more than 100$ and nothing to see and not possible to move down.Better watch on big screen TV.
Hey, but didn’t Bernanke get a Nobel prize?
Almost beginning to like Bessent. He must have been reading my comments on the Fed since 2008!
The greatest theft of real wealth in American history.
[:-)
Mario Draghi, Bernanke’s successor, is also about to receive it. In Europe, politicians idolize him instead of forever banning him from touching monetary policy and finance.
Free money is the best money. Everyone wants it and adores it. And then, after using it for 15 years, we find out it’s highly toxic and the economy/country has cancer.
100 % agree
Talf, tarp, qe, zirp, , etc etc. but but but they did all that to save us is what we were told then. Oh, and my favorite which still exist today, extend and pretend with all that cmbs bull cockiepoo.
For once I wish they would let cockiepoo be cockiepoo, that’s why we have bankruptcy courts. And just think true price discovery will prevail… oh lions and tigers and bears oh my.
Fiat money is always “free.”
The consequences come from what it gets used for.
And in the US decision making about what to use it for has been nothing short of catastrophic …
Yappy
“Talf, tarp, qe, zirp,”
Dont forget SPVs in which the Fed bought “certain” corporate bonds….even though they are obliged to deal in only federally backed paper.
File that with Yellen covering all deposits in the Silicon Valley Bank…….rules are there to be broken apparently.
Wolf, seriously now, that is why, after being in the SMs for many years until I understood how seriously manipulated it was ”IN 1980s” at least somewhat based on major ”profits” I gained because of what is now called insider trading.
Surely, after more than a century of the Federal Reserve Bank doing SO much damage to workers and savers to protect the rich and richer powerful, it’s about time to get rid of it and make every ”bankster” provide a completely PRIVITE reserve bank that has NO connection at all to GUVMINT…
And WE, in this case the PEONs WE, can only continue to hope that USA and every sovereign entity and municipality every where makes an effort to provide a local and regional and national and sovereign ”savings bank” for their citizens,
Thank you for all your clearly extensive work to provide us with at least some semblance of reality in the financial world.
In economics, opportunity cost matters. What was the cost of the next best alternative? Lukewarm money creation in crises of confidence is like lukewarm Christianity, it leads to hell. Assuming, however, that some middle ground was appropriate or possible, by what metric should monetary policy have been crafted to thread the needle?
Was the basic theme of this site back when I started. Bit before the mugs were designed. I learned a lot about the fed and ZIRP and “Wealth effect”. And was learning about net wealth/income inequality, but that’s gone now.
When was that mug thing….and the SF gathering before that? I never went because even then I knew I didn’t fit in…..Was making a bit under half median Sonoma county wage……CD up a bit now, but still even further below median…..economic loser….more or less by choice. Happy as hell in 500sq ft apt….really downsized simplified diet and numbers still blew doc away (have bad back) Said I was at the age to go on statins….but never heard any more about it after report. REALLY don’t fit in now. But I did my thing to help this site grow when it counted, so I still get to post once in a while, even though in moderation jail.
Wolf’s biz, not mine. Such is life.
And how does the Nobel prize pay its million dollar awards? Not by shrewdly investing the foundation, but by accepting new donation-for-influence as if it was the Wimbledon.
It stops being surprising when you stop assuming that their goals and yours are aligned.
I read in this forum YEARS ago (about this very same topic) that if the “side effects” of a policy were obvious/predictable, that was the reason for the policy. Still true.
Now we know what at Nobel prize in economics is really worth.
You mean the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel?
The name is the giveaway.
/pedantry
eg – that might be part of the difficulty the CE is having in obtaining a certain ‘prize’ for the trophy shelf, the applications keep going to the wrong agency…
may we all find a better day.
Speaking of dirty play, did you know 9 of those fake Nobels went to University of Chicago…..including Uncle Milty of Reagan fame?
Very interesting story about who set that award and the University Econ Dept all up if you like scumbag history.
Nobel family probably still has lawsuit against it, they hate it……a quote you often hear is “Nobody should have that power”…but they got it.
NO social sciences on Alfred’s will.
I hope the operative word remains “almost”. Read/listen to most of the rest of what he says. It’s not so likable.
“The changes Bessent is suggesting can’t be done without legislation. Katz said he thought it was very unlikely that Congress would act accordingly”
“very unlikely that Congress would act accordingly”
Just copy and paste that for almost everything about congress lol
In terms of monetary policies, nonsense. The Fed can focus on its classic monetary policies to achieve its mandate just fine. You don’t need Congress to not use QE and to not pursue the Wealth Effect.
In terms of bank regulation, moving regulatory oversight from the Fed back exclusively to the FDIC and the OCC, that would require Congress.
In the United Kingdom, the House of Lords endorsed the report: “Quantitative easing: a Dangerous Addiction?” A .pdf of this can be found on the web. A parallel of this report for our country looks like Congress would need to become involved, maybe the Congressional Budget Office. Currency manipulations have been the end of regimes and civilizations for thousands if years; even reaching biblical proportions in Jesus with the money changers working in a currency debasement environment.
FED has a dual mandate, inflation & employment. As I remember it, in the years just before COVID hit. The FED claimed that while both inflation and employment metrics were good, there was still relatively high unemployment among minority groups. These groups were catching up to “white” employment levels but still needed more time, so they kept interest rates low. This was the stated reason for holding down interest rates longer than many claimed necessary. I suspect that in the long run it will be determined that they did more harm than good.
The Fed’s legal mandate has three parts. They omit the part about moderate long term interest rates, but you can read it in the law itself (it’s very short).
Forgetting the need not moderate long term rates is how we got into this QE/ZIRP mess that Bessent dissected so effectively.
Bessent lists “moderate long-term rates” in his essay as one of the three. And he says those three are the only mandates the Fed has. And it needs to stay away from other stuff.
Bagehot
Indeed. Moderate long rates….moderate meaning per the dictionary as” not extreme”.
Well, the Fed drove long rates to ALL TIME LOWS, and that is extreme by any metric. But the powers that be loved it…..and nothing was said other than comments by posters on the internet.
We still feel the effects, especially in residential real estate in which people who bought and locked in ultra low rates can not afford to move and give up their cheap mortgages. This locks the market up and makes a most illiquid market more illiquid.
Of course you do.
🥱
Dismissive, yet nothing to add? Please elaborate on why someone shouldn’t agree so readers can assess the quality of your thinking.
Oh I so agree!!! Lol awesome 🐺
Wolf, possible typo? Billion in 2007?
“And so now, the US is saddled with $37.4 trillion in federal government debt, up from $8.9 billion in 2007…”
Thanks. Yes $8.9 billion was still a lot of money in 2007, but not that much!
Wolf,
Thank you for always keeping us very well informed.
I believe that is biggest issue we have now in Democracies.
Most of the times, if I don’t read news, I am uninformed and if I do then I am misinformed.
You keep it REAL.
Couldn’t have said it better. Wolf’s insight is spot on
Oh, I so agree with everything too. But does Scott bessent think his boss is Ron Paul or Donald Trump???
Physics has Rules.
Mathematics has Rules.
Money has Rules. Two of them. These Rules have been violated and abused. They seem to be being followed, somewhat, by the Fed these days. But a 50 basis-point drop in the Fed Funds rate, which may happen soon, will be pushing us down the slope of breaking them again.
As I bicycled past the Minneapolis Fed building at noon today, I wondered, what is about to happen? (No. No sighting of Neel.) And yes, the Mississippi River of debt was just to my east; running very deep as I rode north.
Rule Number 1) Money must have value. Capital can not be borrowed at no cost.
Rule Number 2) Future money must have more value than near-term money. Interest rates on a 20 year or 30 year Treasury Bond MUST be much higher than a 3 month or 6 month Treasury Bill. And yes, a Treasury Note should be in between these.
Market forces play a role in setting interest rates, of course. But The Fed needs to obey the Rules and maintain equilibrium.
Yes, there must be a time value of money.
If Bessent doesn’t flip flop on this I’ll be shocked.
For the government, emergency can mean anything.
Prairie Rider
I like the cut of your jib!
“My weekly Monday email of Farm News from Grand Forks had this item”……………”No. No sighting of Neel”………..”the Mississippi River of debt was just to my east; running very deep”
P.S. I’m a bit North of you up in Duluth.
“Rule Number 2) Future money must have more value than near-term money.”
————————————-
Is this true?
This hasn’t been true for the dollar in my lifetime.
The “value” here is “yield.” A debt that is due in 30 years should yield more than a debt that is due in 6 months. An inverted yield curve, for example, violates this rule.
The difference between should and is is action resulting from forecasting on the part of market participants. The forecasting isn’t always right, and the forces that push the yield curve up or down aren’t always just. But forecasters forecast, and then they act. So be it. I never thought “should” mattered in markets.
Prairie Rider
and the rules sometimes are applicable in more than one area
For instance, Newton’s Second Law…for every action there is an equal and opposite reaction. This certainly holds true for Monetary Policy….and the most often REACTION is a depreciation of the currency.
You’d be quoting his Third Law. Second law is f=ma. Third law is f=-f.
And I’m getting pedantic here, but an economy is not a classical system and doesn’t follow any of Newton’s laws. It’s a dissipative system and follows nonequilibrium laws.
I don’t understand your Rule Number 2.
Future money will always have LESS value than current money unless there is deflation. You need $120-$150 now to buy what $100 bought just five years ago. Some goods and services have increased much more than that.
I am replying to my own reply. I misunderstood the comment.
Wouldn’t this be clearer? “Future INVESTED money must have more value than near term INVESTED money.”
Think of money’s value as the price of money. Let’s say you are selling a house that you own free and clear on a contract for deed to a qualified buyer who puts down 20% cash up front.
Your house sells for $500,000 and carries a $400,000 note that you write. If the buyer is going to pay you back over 30 years versus over 3 years, what is the value — or price — of the $400k note? Do you offer the loan at 3% interest for 30 year contract, but charge 5% interest for a 3 year contract?
This is your money. Does your money’s value, the price of money, go up proportionally with time for a longer loan?
Rule Number 2 says yes. You should offer a 3 year contract at 3% and a 30 year contract at 5% instead of the other way around.
Your illustration simply shows that the party in the position of power (in your example, the lender) offers terms that are favorable to them. It doesn’t say anything “universal” beyond that. There is no law saying that a borrower can’t accept a negative interest rate (real or, for that matter, nominal) from a motivated lender.
Phimbleburg,
Yes, there are no laws about private borrower and lender contracts. The point that I was trying to make? Some things are self-evident when interest rates – the value, or price of money – and the duration of a loan are considered together.
A prime example of self-evident absurdity is/was NIRP. The most extreme level of this occurred in March 2016 when the ECB took the Deposit Facility Rate (DFR) to -0.40%
No, there is no law against absurdity. But I would certainly hope that the FED avoids engaging in absurdity – again. (“The Most Reckless Fed Ever.”) Think of The Two Rules of Money as guidelines to be followed, in order to avoid conducting policy that’s absurd.
FWIW: The FED policies Wolf writes about in this post did make my portfolio increase quite nicely. But it was still bad policy.
Basically it means the lender has to receive interest on a loan for this capitalist thing to work
Like I told Kitten years ago, I’m a redneck of the okie logger tribe…..just very overeducated, formally and work experiences…..and now a pain in your ass.
@Wolf so what’s his angle? Everything he said is true, but why now? What the political incentive in coming out and saying this?
Also he’s not saying this unless this a narrative that Trump also wants put out there. Maybe I watched too much House of Cards a few years ago, but it feels strategic…
At least two of the top three Fed Chair candidates — Waller and Warsh — have a history of having come out against QE (Warsh) and slowing QT (Waller). Both want to sell the MBS and run down the balance sheet further, and replace long-term securities with T-bills. The narrative is that QE just to drive up asset prices is dead.
They may cut short term rates and continue QT, and shift to short-term T-bills.
I think you had an article or two talking about that move from long term securities to T bills and the motivation was to lower government’s interest payments IIRC. How does that fit with Bessent’s thoughts above? Is it just to appease Trump?
The Fed’s big balance sheet of long-term debt is a huge problem, and a massive money-loser, and carries enormous risks. The Fed has to remit all its profits to the Treasury, but the huge long-term portfolio has been losing lots of money. The Fed lost over $100 billion in 2024. So no remittances to the Treasury for years to come, which turns the Fed into a government deficit problem.
That’s nice.
Is his next op Ed going to blast Congress for their profligate spending? Or their refusal to deal with entitlements and balance the budget?
I’ll wait.
The Fed encouraged and enabled Congress’s profligate spending — that’s what he said. Without free money, it wouldn’t have happened.
Amen to that.
Congress spends and the Fed “enables” that excessive spending to be financed.
This will not end well.
B
If Bessent is successful in moving Treasury funding to the short end and working with the FED to reduce rates on the short end making debt funding easier, doesnt that just continue to encourage government spending ? 1% money is nearly free as far as a congress creature is concerned and even 2% money is as good as free to a politician whose horizon is the 4 or 6 years election cycle.
There isn’t going to be 1% money. People need to get this out of their brain.
But it’s risky shifting more borrowing to the short end because when short-term rates rise, interest expense explodes.
Wolf, pretty sure these guys only care about the short term. Make this admin look as good as possible….
Not that it’s unique to this admin.
Gattopardo
How is that different from prior administrations???? why is that suddenly new????
How would monetary policy change if inflation were not only measured in terms of consumer prices or personal consumption expenditure, but was broadened to include increases in asset prices as well?
Enormously. And assets should be counted as consumption too in my opinion. You buy them and pay for them. So they are part of the normal market. But the impact depends on the asset and the timing.
Let’s do some cherry picking on an asset that is frowned upon by wallstreet
If you bought gold as an asset anytime in 2021 you would have doubled the dollar value by now.
If you bought between 2013 en 2018 you would be looking at a tripling. And anytime before the GFC you would have done even better.
Compare this to your wage increase and see how you kept up.
You could do this for stocks as well, but not all stocks are appreciated equally. You should then use an index like the S&P as a proxy. But even then not all indexes are equal.
They keep assets out because that way you can be taxed on the capital’ gains’. Which in essence is a tax for trying to evade the depreciation of the currency.
BTW i like to look at the increase of the cost of my insurances as a measure of inflation. Because insurers are confronted with consumer prices at one side and exposed to assets in which they participate to hedge their risks and make a profit on the other side. All the costs and risks are accounted for in the premiums they charge.
Amen. The prices of stocks and other assets should be explicitly included in inflation indices.
But this is contrary to economic dogma.
Had an argument about this with a hot-shot economist of close acquaintance. I hold that buying a stock to get some financial return is no different from buying a truck. If the prices of trucks are included in inflation indices, so should the prices of stocks.
Failure to consider asset price inflation in rate setting policy is one of many basic failures of the Fed.
Allowing home owners to lock in a 3% mortgage for 30 years is another.
So when asset prices drop, the Fed should CUT rates? That should be the official policy of the Fed? You people crack me up.
And every time the S&P plunges, we have DEFLATION of consumer prices??? 🤣 You people are hilarity embodied.
The S&P 500 plunged 50% during the dotcom bust (early 2000s), and by 50% during the Financial Crisis (2007-2009), and by over 30% in early 2020 and by 20% many times over those years, and each time it would have triggered a massive bout to deflation readings, with big negative CPI readings, according to your hilarious vision.
If you don’t understand the difference between a consumable item, designed to be used and consumed with an end value of zero by design, and an investment, then you should do some basic reading.
In terms of real estate: land is an investment. Buildings are consumables whose value will go to zero over the long run. But I hate to destroy your hilarity: one-third of CPI measures the costs of living in buildings. It’s included, LOL, you just didn’t know it. I cover it every month.
If the Fed were required to consider abnormal asset valuations as part of its policy, would they have been allowed to try successive rounds of QE and 7 years of ZIRP? Would they have been able to pursue a policy based on wealth effect? Could they have bought MBS after home prices rose 50% to 300% across the country in a short time frame?
No.
The Fed should not do QE and not be allowed to do QE. That simple. But to say that the Fed should regulate asset prices by cutting or raising interest rates is just bananas.
Jonno, I think the biggest asset items are either underweighted or not included in “consumer prices”. And why aren’t stock prices considered consumer prices (doing so would make our recent inflation seem much greater)?
Oh, wait! If stock prices were included in the CPI, that would make it look like we’ve had much higher inflation in the recent past & the not so recent past…
And every time the S&P plunges, we have DEFLATION of consumer prices??? 🤣 You people are hilarity embodied.
The S&P 500 plunged 50% during the dotcom bust (early 2000s), and by 50% during the Financial Crisis (2007-2009), and by over 30% in early 2020 and by 20% many times over those years, and each time it would have triggered a massive bout to deflation readings, with big negative CPI readings, according to your hilarious vision.
If you don’t understand the difference between a consumable item, designed to be used and consumed with an end value of zero by design, and an investment, then you should do some basic reading.
In terms of real estate: land is an investment. Buildings are consumables whose value will go to zero over the long run. But I hate to destroy your hilarity: one-third of CPI measures the costs of living in buildings. It’s included, LOL, you just didn’t know it. I cover it every month.
Does not appear to demand resumption of the $50B monthly Treasury debt held on the balance sheet though.
Debt rolloff…. I meant to say
1. QT was $39 billion in August.
2. He didn’t get into ANY dollar-type specifics.
Yeah, I do wonder what prompted this. Maybe Bessent is listening to outreach people working for the GOP who are finding that a lot of people who don’t have houses or other assets are unhappy?
It isn’t deep.
Trump is a real estate guy. He has, by selling the spoils of the office he holds, recapitalized his real estate empire to the tune of $5B. He is ready to utilize that new capital to expand into places he has had his eye on for years if not decades, but hasn’t been able to afford until now.
He can buy more house with lower rates, same as the peasant masses. Bessent is simply part of a multipronged pressure campaign to intimidate the Fed into dropping rates. Whether the Fed dropping short term rates will actually lead to lower mortgage rates is an open question. Last time it did not.
I’m not sure what Bessent is getting at, but this is not jawboning the Fed for lower rates at all, it’s decrying the Fed for interventions that resulted in lower rates and therefore, asset price inflation, from 2008 until 2023 when rates rose and QT accelerated. There is of course always a political purpose to statements from any cabinet secretary of any administration, but this statement on its face appears at cross purposes with the President’s desire for lower rates generally.
The entire message is “the Fed are a bunch of screw ups.” It doesn’t matter what the exact verbiage happens to be.
You are looking for consistency in messaging? From this administration? You will be disappointed.
The entirety of what this administration wants from the Fed is lower rates. Period. The only difference between individuals is what particular debt they are interested in lowering the cost of servicing.
Drg1234
You have not paid any attention. Yes, Bessent wants lower short-term rates. But that’s a classic tool of the Fed, and people might disagree where those policy rates should be, but agree that this is a classic function of the Fed.
But the entire editorial was about the OTHER tools of the Fed, particularly QE and bailouts.
Yeah I thought that too – I was wondering if it was trying to lay some ground work in terms of influencing public opinion for taking some power away from the fed which would align with Trump’s agenda.
It seemed counter to near term rate cuts depending on where the inflation print is next week.
Setting or influencing short-term policy rates is a classic Fed tool. People differ on where those short-term rates should be, but there is agreement that this is a tool that the Fed always has had and should use in a smart way.
The problem is QE and bailouts. Bessent is attacking the Fed for QE and bailouts — not short-term rates.
If there were a 1929 type event, monied elites could swoop in and buy “everything” in every country for pennies on the dollar.
I 100% disagree. Trump is a lot of things, but he’s not stupid. He’s able to see what happened when rates went down, and the 10 year went up by that amount. Even if he isn’t an economic scientist, he has enough people around him that understand that this could happen again, especially if the Fed reduces rates too rapidly.
What he’s doing here is setting up Powell to be the fall guy. He likely knew that a slowing of economic activity (we’re still a way’s away from a recession though) was going to happen regardless. Part of that is due to the lag effect from increased rates. Part of it is due to the hangover from the COVID excess (a lot of demand was pulled forward). And part of it is due to a reduction in illegal immigration and federal spending to support it.
This way, he gets someone to point the finger at for the economic slowing of activity that was going to happen anyway. He then can be the “savior” who fixes Biden and Powell’s mistakes.
Believe me, he doesn’t actually want 1% rates, because he knows exactly what that will do to inflation and the bond market.
Yeah I’ve thought about this a lot. Trump is an entertainer. He’s also not stupid. To be a hero, you both need a crisis and a fall guy. He wants to be a hero. The greatest president that ever was and then pass things off to Vance in 4 years. So he needs to be a hero. ALSO nothing gives a president more power than a crisis.
Anyways TBD, not a conspiracy theorist, just anything politicians say to the public is PR. It’s hard to know the real intentions. But Trump does also know the public hates inflation, he won an election because of that.
MM1, exactly. If things continued humming along as they were under Biden, with strong economic growth but out of control inflation, and absurd government deficits, people would vote to try something new. He needs to fix the problem, or at least be perceived as fixing the problem (or as you call it, to be the hero).
He won the election for two reasons, high inflation and the uncontrolled flow of migrants at the Southern border. The cultural issues like transgender stuff was a very distant third, in my opinion.
The immigration problem he’s attempting to fix. All of his PR is to fix inflation, or at least be seen as doing so.
“Trump is a real estate guy.”
LOL. Trump is a real estate SALES guy. Giant difference. I’ve heard him speak on the subject, and is definitely not a real estate guy.
Everything he says is true but I’m skeptical that he actually cares.
If he did care, he would lobby Congress and the President to make changes in the Fed charter that would take away the Fed’s ability to pursue QE and strip the Fed of all ancillary regulatory duties in an effort to focus it’s work on short term interest rates and how they relate to employment and inflation. The Fed has many of the same problems as the rest of the administrative state, in that it pushes the boundary of poorly written statutes to usurp power during time of crisis for it’s own power and benefit. There is a need to drastically curtail the administrative state and shrink the purview of regulatory agencies back to what existed before the New Deal.
I agree with that. The Democrats have gone berserk over Trump’s taking advantage of ambiguous statutes (for tariffs, immigration, law & order, and all sorts of other things). But the fact is, the Democrats have availed themselves of those ambiguous statutes when they’ve been in office. Many of Biden’s actions regarding eviction moratoriums, student loan “relief” and others were predicated on similar types of statutes.
Congress deserves the blame here. You delegate authority because you don’t want to deal with it yourself, you lose the right to complain when the person to whom it’s delegated (the White House, the Fed, etc.) does something with it that you don’t like.
The job of the opposition party is to oppose, and do so loudly so voters can see who’s to blame for things they don’t like. Republicans did this very effectively over the past four years, the script has currently flipped. Eventually, what you get is a uniparty deal with only scant differences between them, both teams protecting the wealthy and feathering their own nests.
Are you going to blame yourself or your surgeon if he cuts out the wrong organ?
Bobber, it’d be more like if I ask my wife to make dinner, she asks what I want, and I say “I’m open to anything, surprise me,” and then complain about what she makes.
Nobody would be on my side in that circumstance.
TSonder305 writes:
“Congress deserves the blame here. You delegate authority because you don’t want to deal with it yourself, you lose the right to complain when the person to whom it’s delegated (the White House, the Fed, etc.) does something with it that you don’t like.”
So much this. The entire central bank “independence” schtick is a charade to allow your elected representatives to dodge responsibility for the economic outcomes of their fiscal policy and thus avoid the mechanisms of democratic accountability your system of government was designed to afford its citizenry.
The Fed misled Congress. They said QE would be a temporary emergency measure.
Bobber, believe me, I am not fan of the Fed.
But Congress could have reined the Fed in the moment Bernanke lied about QE being temporary.
Congress also didn’t have to give the Fed that much power in the first place.
Happy1: “There is a need to drastically curtail the administrative state and shrink the purview of regulatory agencies back to what existed before the New Deal.”
So I only have to prove safety on my pharmaceuticals, not efficacy? I’m in, let’s do it! Those pesky regulations have been standing in the way of Marvin’s Magical Miracle Cure!
You are incredibly misinformed about the value of the FDA. It largely makes new medical treatments vastly more expensive than they would be otherwise, with very little benefit in patient protection. Europe does very well with a much lighter regulatory hand with regard to medical treatments.
Happy1:
I’m quite familiar with what the FDA does, and have my own opinions of the advantages and disadvantages of our current regulatory scheme. Based on your reply to me, we might agree quite a bit. Their attempt to further regulate LDTs (now rolled back by Trump), already being run by lab scientists under CLIA rules, was really quite ridiculous and I’m glad it was rolled back. Just for one example.
But, I was responding to your proposition that we roll back the regulatory state to what existed prior to the New Deal, which is a little different than what you are saying now. I could sell my Miracle Cure as long as it didn’t kill people. And it’d be easier for doctors to prescribe opium (no DEA). Fine by me, I’ve no desire to abuse that stuff, and caveat emptor, but I don’t know if the American people would go for that. Think of me as a libertarian at heart, but mature enough to realize that the American people are not libertarian, and haven’t been for a long time, if ever.
@ Marvin Gardens
I tend to agree with you. Send me your magical cure! There are a few of the regulatory agencies that are a net benefit, but 99% of Federal regs could be eliminated with no practical impact on anyone except less paper shuffling.
Congress critters are very obviously addicted to market gains. Absent a crash the critters will sit on their thumbs, guaranteed.
Let’s not forget the Yellen Put, Powell Put, and the (stock market) plunge protection team, which gave all the players in the casino free downside risk protection during QE. I think the Powell Put is still in place, if ever another severe downturn occurs.
Thank goodness for the wealth effect and rich people — they saved the economy after the 2008 financial crisis! /s
All that asset inflation is the least we could do to thank them! /s
We don’t even know if the Powell put is still in place. What matters is that investors, especially retail, believe that it is.
That’s enough to create a self-fulfilling prophecy.
Wolf,
I love the article.
36 trillion dollar question. What next? How we fix it and who is going to fix it?
Fixing it will take a long time, strong economic growth, moderate but higher than 2% inflation, a very edgy bond market that scares the bejesus out of Congress at least twice a week, and a pissed-off voting public.
All while the recipients enjoy their ill gotten gains, and the disaffected young spend their whole lives catching up.
I’m not sure if the inequity of that situation will play out over “a long time”
I know 1929 was a mess, but I assume it generated more equity in society?
Maybe that’s what the USA needs to give it growth for the decades ahead, everyone feeling they have a fairer stake in the economy?
Wolf
What do you think of the move from “stable prices” to the 2% target?
AND
What do you think “full employment” is? (unemployment percentage) Anything under 5% used to be considered “full” employment
Both have been “rearranged” over the years, and both IMO so as to promote lower interest rates. Good, bad, or indifferent?
Thanks
1. There were long periods (many decades) in the US with more (and often a lot more) inflation than now. And back then, there wasn’t a 2% target. So it’s irrelevant for actual inflation. It’s just a guidepost for the Fed. The Fed has never had a 0% target, and implying so is BS.
2. Pretty much everyone agrees that the US is at “full employment” right now, at 4.3%. What you don’t want is for the rate to suddenly shoot up to 4.6% 4.9% 5.5% 6.1% 7.8%…. And that’s exactly how it goes during a recession, check out the last chart in my jobs report article. So when the rate starts moving higher quickly, it means that the labor market can no longer absorb the increase in the labor force. And if that is combined with net job losses, the labor market is in trouble. But we haven’t seen neither one of them yet.
So impossible circumstances, in other words.
I don’t think Bessent can be fixed. He is a broken human. This ‘caring for the little guy’ act is quite funny.
I cannot believe the BS invective thrown against Bessent personally for criticizing the Fed harshly for all the right reasons. Everyone hates what he said: the Wall Street crybabies and the crybabies with portfolios dreaming of getting even richer through QE, YCC, and bailouts hate what he said because he moved QE, YCC, and bailouts off the table; and the people who hate QE, YCC, and bailouts, and constantly hate-monger about more QE, YCC, and bailouts hate what he said because they’re losing the object of their hatred. So both sides attack Bessent personally with all kinds of BS for having trampled on their dreams. I have deleted dozens of comments to this effect to block the efforts to “flood the zone.” I knew it was coming because the comment section under the original editorial was full of the same BS against Bessent personally from both sides.
It is pretty surprising how much hate he’s getting right now. Krugman is calling him names – “sleazy smearer” and such – while not engaging with his argument at all. The commenters over there are agreeing with each other so hard that I’m wondering how many of them are bots. It looks like he really hit a nerve with some people. That’s probably a good thing.
OK, no sarc. I’m puzzled. If I read it right, he’s saying the Fed recklessly fed inflation with over stimulus. But doesn’t his boss want the Fed to stimulate again with lower rates? Is Bessent calling for the Fed to tighten?
Re-read the article. You didn’t understand a thing. You missed everything. Willfully.
Setting or influencing short-term policy rates is a classic Fed tool. People differ on where those short-term rates should be, but there is agreement that this is a tool that the Fed always has had and should use in a smart way.
The problem is QE and bailouts. Bessent is attacking the Fed for QE and bailouts — not short-term rates.
FFR policy = short-term rate adjusts the price of money
QE = balance sheet expansion
I know what you wrote, but somehow I read “Housing Babbles and Monetary Policy.”
In 2008 the Fed legally raided (short selling) wealthy people’s bank accounts to save Citi, JP Morgan and other primary banks. Thereafter the Fed lifted the injured RE market. In 2020/21, when the economy was comatose, the Fed short wealthy people’s bank accounts for an IOU and transferred $3,000 to the poor and $10,000 to shingle mums, under Trump.
Another ancient WS institution! Hi! Still don’t understand you, but that’s my fault.
It’s not your fault. His bouts of lucidity are few and far between!
Gee, no trickle down from the wealth effect. As if the wealthy give a rat’s azs about the non-wealthy. Hint: they don’t. They just want us to buy the crap they make money on, work for the lowest wage possible, and not revolt. One of the unwritten mandates of the Fed (who are themselves a group of wealthy individuals) is to promote policies which siphon as much money as possible from the workers into the pockets of the wealthy. Marx was pretty much right about how capitalism works. Unfortunately his solution, communism and its bastard offspring socialism, turned out to be a lot worse than capitalism.
The Silicon Valley Bank fiasco was amusing, in that we were led to believe that there was a $250,000 limit on FDIC insurance. That limit was removed to accommodate the wealthy account holders (mainly tech bros.) at SVB, using “systemic risk concerns” as an excuse. A good example of moral hazard.
So we enjoyed Bessant’s critique of the Fed. What is he going to do about it? Will he push for lower rates as his master wishes, help fill the Fed with Trump lapdogs, and watch inflation soar?
Setting or influencing short-term policy rates is a classic Fed tool. People differ on where those short-term rates should be, but there is agreement that this is a tool that the Fed always has and should use in a smart way.
The problem is QE and bailouts. Bessent is attacking the Fed for QE and bailouts — not short-term rates.
Uhh, from your article ““The ‘extraordinary’ monetary-policy tools [QE and ZIRP] unleashed after the 2008 financial crisis have similarly transformed the Federal Reserve’s policy regime, with unpredictable consequences.”
I believe ZIRP stands for Zero Interest Rate Policy. But you are correct. Bessant wasn’t talking all that much about ZIRP.
What was “extraordinary” about ZIRP was:
1. the Fed had never done ZIRP before the financial crisis. The lowest it went was 1.0%, and only ONCE, and only for a few months (2004). And it was then heavily criticized for keeping rates too low too long, LOL
2. ZIRP lasted 8 years from 2008 to 2016 and then again for two years even as inflation was exploding.
The classic job of the Fed is cut short-term rates for a few quarters to boost the economy back to growth, and then hike rates again fairly rapidly to get rates back to a normal level.
I am the biggest opponent of bailouts that you’ll ever seen. And I don’t like how the $250,000 limit that was written into statute was ignored. That said, I don’t think there should be a limit at all, and Congress should remove it.
Ensuring that banks are solvent should be up to the regulators, not depositors. Individuals and companies should be able to stash cash in a bank and not have to worry about it.
This is what they are doing:
“The reduction in financial enforcement reflects the administration’s weakening supervision of financial institutions by rolling back parts of the 2010 Dodd-Frank Act and dismantling the Consumer Financial Protection Bureau”
If Bessent gets appointed as Chair, and the S hits the fan with the economy, it will be interesting to see if he acts contrary to this point of view. Reality is reality.
You people are nuts.
Blah blah blah
So we start counterfeiting again. When we’re already below 6% for 30 year mortgages.
Over the last 53 years …. US 30 year mortgages have averaged 7.71%.
Oh man massive inflation here we come. As if the rich don’t benefit most from it.
Has there ever been a good objective analysis/modeling published of where the dominos would have stopped falling without the inflation causing monetary moves? If so please reference. Was a two year inflationary period the better alternative to that?
Indeed. Without QE, how would the already distressed job market have performed? How would have falling or stagnant stock values have impacted private retirement savings decisions, especially in the context of a deepening recession? How would falling or stagnant asset values and higher interest rates have impacted investments in technology (and thus the foundation of our economic and military superiority)?
Regardless, we are where we are. And we are here because of human nature. Communism is unworkable because it does not take the reality of human nature into account. Idealized theoretical systems rarely do. Stampedes that kill people seem stupid and make no sense, yet they happen. What sorts of stampedes may have occurred without QE?
This line of argument is so disingenuous. Like the earth would stop circling the sun, and all oxygen would vanish, and human life would cease to exist if we don’t allow asset prices to fall to a point where people will buy them.
Fearmongering.
People absolutely would have figured it out. They always do. They have no choice.
So (sarcasm) we must lower interest rates and get cheap money going again?
Fed involvement before 2008 problems. (Cheap money?)
Per AI:
The Fed’s role in the lead-up to the 2008 financial crisis is debated, but most analysts agree that several of its policies (or lack thereof) made the crash more severe. Here are the big ones:
1. Prolonged Low Interest Rates (2001–2004)
After the dot-com bust and 9/11, the Fed slashed the federal funds rate to 1% and kept it there for a long time. That cheap credit encouraged a huge wave of borrowing—especially in housing—fueling the real estate bubble.
2. Lax Oversight of Mortgage Lending
The Fed was the main regulator for many mortgage lenders, but it didn’t crack down on risky practices like subprime lending, no-documentation loans, and teaser-rate mortgages. That allowed toxic loans to pile up in the system.
3. Limited Action on Derivatives and Shadow Banking
The Fed didn’t step in to regulate the ballooning market in mortgage-backed securities and credit default swaps. Investment banks and shadow banking institutions used these to take on massive leverage, spreading risk everywhere.
4. Slow Recognition of the Bubble
The Fed underestimated how dangerous the housing bubble and related financial products were. By the time it raised rates (2004–2006), risky loans had already been bundled and sold globally, so the damage was baked in.
5. Crisis Response Choices
Once things started collapsing, the Fed did act aggressively—bailing out Bear Stearns, AIG, and others, and launching emergency lending programs. But critics argue that its earlier permissiveness made such drastic measures necessary in the first place.
So, the Fed wasn’t the sole cause—the crisis was also about reckless lending, Wall Street greed, and weak regulation overall—but its combination of easy money, light supervision, and delayed reaction set the stage for the meltdown.
Some good points that illustrate well what Bessent was talking about.
But:
Your #1: 1. “Prolonged Low Interest Rates (2001–2004) After the dot-com bust and 9/11, the Fed slashed the federal funds rate to 1% and kept it there for a long time.”
The Fed cut to 1.0% in July 2003 and kept them at 1.0% for 11 months. Yes, too low too long. But it was NOT 0%, and it was NOT for 0% for 10 years (2008-2016 and 2020-2022).
Your #3 ” Limited Action on Derivatives and Shadow Banking”
Stock options, interest rate swaps by banks to limit their interest rate exposure (SVB canceled its hedges which was in part why it collapsed), currency hedging, hedging of crops by farmers, etc. they’re all derivatives. And the “notional values” are irrelevant though people like to sling that number around. But it’s meaning less, which is why it’s called “notional.” There are some derivatives that could be problematic, but most of them are not a problem.
Your #5 “bailing out Bear Stearns, AIG, and others,”
No, it didn’t bail out Bear Stearns, it was taken under at $2 a share. It didn’t bail out Lehman, which collapsed. It didn’t bail out many mortgage lenders, which collapsed and whose assets were then bought by banks. It did bail out the biggest banks and AIG.
I read Bessent‘s essay. And I agree with everything he said. But I seriously doubt the trump administration will do anything more than pay lip service to sound monetary policy. I believe that If a recession shows up, trump will be the loudest voice in the room commanding the fed to act immediately, including qe.
Yes, exactly. Agreed!
Howdy Folks. This is how Govern ment fools you. Bessent will support the Presidents policy on interest rate reductions. Govern ment parades a so called CONservative around to fool you. Greenspan was supposed to love a free market too. Reagan was supposed to be a fiscal CONservative also.
Bessant might be right on this issue but he has his own faults. Prior to the election he blasted Yellen for shifting to shorter duration treasury issuance. Then once he is appointed to Treasury secretary he doubles down on the same policy he just lambasted moments earlier :-/
Good lordy. The period for which he criticized Yellen was 2020 and 2021 and the 10-year yield was between 0.5% and 1.5% (did you already forget????), that’s when she should have shifted to selling more long-term debt to lock in the low cost. Now, long-term yields are 4-5%, so selling long-term debt now locks in the high costs. And he expects short-term yields come down through rate cuts, so it makes sense from an expense point of view to shift to T-bills now to take pressure off already high long-term yields, and as rates get cut, pay less in short-term interest rates even if long-term rates go higher.
Yes, if short term rates do decline the Treasury will use short term financing, however, long term rates will likely increase and we may actually get back to a classical interest rate curve that reflects the actual inflation in the economy.
PS:
good article, thanks for writing it.
Succinct summation of the last 17 years.
Well done.
I agree with him about the Fed, but wish he had pushed a little harder about the role of a screwed up fiscal policy and the responsibility of Congress to manage that. One might argue that the Fed went as far as it did as often as it did because Congress just sat on its ass. I’ve often wondered what things might have been like if, when Continental Illinois went belly up in the early 1980s, we had just let it go. A big mess- yes but perhaps a little moral hazard early on would have changed how actions by the Fed and Congress evolved.
I am pleased to see more people coming to the realization that the fecklessness of, and abdication of responsibility by, Congress has been at the root of much Fed misbehaviour over the years.
Great call-and-response song by Wolf. Reminds me of old folk songs about bad times, with long verses and repeated refrains.
Any bets on how many days before Trump fires Bessent?
Bessent is not more powerful than the American Bankers Association. Only widespread knowledge is more wielding.
Friedman mistook required reserves for a tax. Volcker thought the FED should pay interest to the banks on all reserve balances.
Monetary policy should limit all reserves to balances in the District Reserve banks (IBDDs), and have uniform reserve ratios, for all deposits, in all banks, irrespective of size (something Nobel Laureate Dr. Milton Friedman also advocated, December 16, 1959).
Bankruptcy is the proper way to deal with the over-indebted, not extend-and-pretend bailouts in a myriad of fancy (and corrupt) forms.
If Bessent was so concerned about perverse incentives and wealth effects he should not only critcize the FED alone, but also lobby Trump and congress for higher capital gains tax rates. The vast majority of capital gains (excluding investments in new business activity) should be taxed as ordinary income (or perhaps even higher). Most investments in stocks, real estate, crypto and the like do not create any value at all, so why should they be taxed at a lower rate than labor?
“Most investments in stocks, real estate, crypto and the like do not create any value at all, so why should they be taxed at a lower rate than labor?”
They shouldn’t. They should be taxed double or triple labor. Sitting on your ass “trading crypto” is something that should never even exist, much less be financially rewarding, yet this is the end result of the most vile period of rogue bankers and politicians in US history.
Depth….this raises a question.
If a business accepts crypto as payment…
and the payer is using a crypto that has, for example, doubled in value in his possession for that purchase…is that a taxable event?
Who’s watching?
Yes. It is a taxable event for the payer.
The IRS is definitely watching.
Look at the first page of Form 1040 and ypu will see a question specifically addressing Digital Assets right under Filing Status…
Endorsed. The long forgotten (hidden? the Marginalists and their offspring among the neoclassical orthodoxy have much to answer for) distinction between earned and unwarned income as understood by the Classical political economists needs to receive primacy of place once more in the public discourse and policymakers forced to act in spite of the interests of their donors.
Is there even a marginal (societal) benefit of this kind of speculation? They might claim it facilitates price discovery of the perceived real asset value – but I would argue this benefit is certainly less worthy of favorable taxation than labor itself.
Maybe Bessent is tired of the very political “Secretary of Treasury” role, and is stealth auditioning for the FOMC chair role?
He already turned that down.
Something like 75% of tax collections are automated (not talking about overdue bills) We don’t need a ton of agents for this.
Hi ,
I am not a financial expert when I looked at 2008 – I felt what was done was morally wrong. Bailing out bad business sent the wrong message to the world – get too big to fail as soon as you can.
Business A – was managing its debt, didn’t took too much of it and struggles in 2008-2009
Business B – Wah highly leverages, took massive debt, took massive risk and got big faster, and got bailed out.
This sent a clear message, for the next century, take debt, take risks, grew to be too big to fail. I felt this is morally wrong, but was the alternative better ?
Does not bailing out big companies in 2008-2009 was a better choice? it might be more moral but at what cost? 1929 type of hard times ?
So its easy to state bailouts were bad, but maybe the alternative was bad either. I don’t hold an answer, I just see this as a complex. I rather live in a more moral world but this is how it went.
There were the bailouts in 2008 and early 2009. And then with the economy recovering, the Fed just kept waves of QE going for another 5 years through 2014 and kept interest rates at near 0% until 2016, and then only barely raised them.
Some people, such as Bessent and Warsh (one of the top Fed chair candidates) have said that the first efforts to bail out the financial system was OK, given the alternatives. But what came afterwards was very wrong. Warsh quit the Fed’s Board of Governors in March 2011 in protest after Bernanke forced through QE-2.
How about Goldman Sachs….who received a $13 Billion bailout and was allowed to change their banking status in mid game…..
now buying back their stock.
Shouldnt those who took bailout money have to pay it back over time?
Instead it goes to stock buybacks and bonuses just a few years later.
How is that for a “moral” message?
Goldman Sachs paid back every dollar it received in 2008 plus interest plus a bonus return to the government in the form of warrants. Do your homework!
However, the bailout prevented someone from buying it for cents to the dollar. Why is the government in the business of bailing out companies is the question not whether it was a profitable exercise? Allow market to work it out instead of goverment picking winners and losers.
Goldman Sachs, Welfare Queens, should have been allowed to go broke …….
No. Goldman Sachs (along with many other healthy financial firms) was pressured by the government into taking money that it did not need on fairly harsh terms in order to disguise bailouts of companies that were in distress. Everyone took bailouts so that the market could not tell which ones were in trouble and would not stop doing business with troubled firms. The government made enough money from this scheme to cover the losses of insolvent firms abd keep a profit.
You do yours.
AIG funds went to Goldman (2.9 Billion) in a backdoor bailout according to Congress. (Huffinton Post) and it went right to their bottom line. Look it up.
I agree with your analysis. If the government doesn’t bail people out, prudent investors who maintain a reasonable cash reserve are rewarded long term by opportunities to invest during panics, and imprudent investors who over leverage and follow every bubble learn the necessary lesson that leverage kills in a downturn. Incentives matter, and Fed policy rewards risk takers pure and simple.
Business cycles are a part of Capitalism and free markets….
they cleanse the market, rid the poorly operated and over leveraged.
Excesses are flushed.
The Fed has taken on the job of preventing ANY business cycle or downturn. That is not free market activity.
I dont think anyone has recognized the magnitude of Yellen’s one person destruction of FDIC insurance limits with the Silicon Valley Bank action.
…possibly the emergent generational-tail of the scope of ‘do over’ practices in ‘murican child-rearing…
may we all find a better day.
After the second Great Awakening most felt business cycles were God’s punishment for over indulgences, and to be accepted as well deserved punishment. Wish I knew where my history professor “proof” was.
Anyway, Wolf must be overjoyed with these comments…..excluding mine.
Is Econ Rumblings his selection of best reads? Was always my guess.
Urgent warning ahead of Powerball’s $1.7 billion jackpot as lottery company’s bankruptcy abruptly ends payments
America’s once-iconic sweepstakes company is trudging through bankruptcy court. Former winners said they had to sell jet skis and trailers to get by.
He’s not wrong. But US elected representatives have also been very much complicit with the Fed’s “wealth effect” agenda.
And the pernicious effects of maldistribution in the US have been masked for decades by the economic aggregates that “our betters” use to convince hoi polloi that the economy is great and that any dissatisfaction is just “vibes.”
Scott Bessent, the U.S. Treasury Secretary, has used the phrase “up and to the right” to describe the long-term trajectory of the U.S. stock market, emphasizing its resilience and historical upward trend despite short-term volatility. In a May 2025 video statement, he stated: “US markets are antifragile. Indeed, the entirety of our economic history can be distilled in just five words: ‘Up and to the right.’ On a long-term horizon, it’s never a bad time to invest in America—but especially now.”
This reflects his view that, over time, American markets consistently advance due to the strength of capitalism and sound economic policies, even amid corrections or downturns like those triggered by tariff announcements earlier in 2025.
I don’t think Scott Bessent can be trusted in promoting deflation of housing prices.
1. Everything you quoted him saying shows that he is convinced that QE and the other Fed shenanigans are not needed and were never needed. That’s part of the equation. The other part is that they’re damaging in a variety of ways, which Bessent outlined for you.
2. Why do you attack Bessent personally about being untrustworthy? What kind of BS is this? He is speaking as a top government official, about government policy. What is wrong with you crybabies who are going to lose your dreams of more QE??? Take it like a man and cry into your pillow.
I very dearly wish Scott Bessent would ban and reverse every bit of QE enacted since 2008. What I am saying is that I don’t think Bessent will ban *future* QE, much less reverse the old QEl. I’m not sure why I am being so misunderstood here. I’m very much in favor of what Bessent said. I am also very sceptical that Bessent will do what he says. Bessent is a Wall St insider, and he will very likely cave in when the stock market drops. But how,I hope that he will NOT cave in.
I agree with everything Bessent has said. But his actions will define him.
Note: He was critical of Yellen switching to selling short term debt until he got the role and then said he’ll continue that approach.
David,
“Note: He was critical of Yellen switching to selling short term debt until he got the role and then said he’ll continue that approach.”
Why does this stupid BS keep getting repeated here???
The period for which he criticized Yellen was 2020 and 2021 and the 10-year yield was between 0.5% and 1.5% (did you already forget or were you asleep????), that’s when she should have shifted to selling more long-term debt to lock in the low rates for 10, 20, and 30 years.
Now, long-term yields are 4-5%, so selling long-term debt now locks in the high rates for 10, 20, and 30 years. And he expects short-term yields come down through rate cuts, so it makes sense from an expense point of view to shift to T-bills now to take pressure off already high long-term yields, and as rates get cut, pay less in short-term interest rates even if long-term rates go higher.
Is Bessent a secret wolf street reader? I feel like Wolf could have written that editorial himself!
I was wondering about that. But obviously, I’m not the only one that has been saying that for years.
I credit Wolf for bringing monetary policy issues to the mainstream, more than any other news outlet or blog I can think of. Zerohedge seemed to be a good second source many years ago, but the past several years it’s been a cesspool of political bias and misinformation. Wolf has been consistently focused on key monetary issues and he educates a broad audience, from monetary beginners to experts, in balanced fashion.
I had to the learn the hard way…but yup….on both points you make.
Zerohedge has become almost unreadable. I now understand why “state of nature” is no place any society should set as the ideal.
Wilshire 5000 index market cap value in 2020 was 40 trillion. It is now 64 Trillion. Just that increase comes to an average gain of around $300k per US family in just 5 years.
But we know the distribution of these gains are mostly to the top 1%.
The Wilshire 5000 Total Market Index, or more simply the Wilshire 5000, is a market-capitalization-weighted index of the market value of all American stocks actively traded in the United States.
He also blasted Janet Yellen when she was treasury secretary for issuing too many T bills and did exactly as she did when he became treasury secretary. When push comes to shove he will be begging for QE to keep the yield of US government debt from exploding higher. Talk is cheap action speak, pay attention to actions. I appreciate his talk too but I don’t believe him.
Good lordy. The period for which he criticized Yellen was 2020 and 2021 and the 10-year yield was between 0.5% and 1.5% (did you already forget or were you asleep????), that’s when she should have shifted to selling more long-term debt to lock in the low rates for 10, 20, and 30 years.
Now, long-term yields are 4-5%, so selling long-term debt now locks in the high rates for 10, 20, and 30 years. And he expects short-term yields come down through rate cuts, so it makes sense from an expense point of view to shift to T-bills now to take pressure off already high long-term yields, and as rates get cut, pay less in short-term interest rates even if long-term rates go higher.
That was constructive in 21, but in 2024 he also got trump attention by ripping Yellen claiming her policy was trying to get Biden reelected, by the way Yellen may be the Fed chair again under Trump. I actually like Bessent, I think he is the smartest person in the Trump administration! I am not fan of money printer Yellen. Once a liquidity printer always a liquidity printer!
“The former hedge fund manager, before he was picked by President Donald Trump as Yellen’s successor, was one of a number of Republicans who charged Yellen with having artificially held down sales of longer-maturity Treasuries — which affect things like mortgage rates — to boost the pre-election economy. He also in August criticized the advance notice in the refunding statement as “the first time ever” the Treasury had offered forward guidance.” ~ from Bloomberg
“And so now, the US is saddled with $37.4 trillion in federal government debt, up from $8.9 trillion in 2007”
10.6 Trillion dollars in tax cuts since 2001 didn’t help either. They have been saying that they wanted to “drown the baby in the bathtub”, but really they have had zero problems spending more money with less tax receipts.
Not what the curves show (tax revenues year to year since 2001 have vacillated up and down) and neglects other economic factors over the same time frame such as recessions.
MW: Bessent dismisses costs of tariffs, but says U.S. would have to give huge refunds if they’re overturned by the US Supreme Court
MW: ‘This is to gain control of the most powerful agency in government’: A look at Treasury Secretary Bessent’s essay against the Fed
When the Fed coordinated its massive bouts of QE during the pandemic with the US Treasury Dept. — the Fed printed $3 trillion in three months while the Treasury issued $3 trillion in new debt and the market didn’t have to absorb anything — no one complained about the loss of independence of the Fed because QE = free money, and free money = best money and everyone loved it. And then we find out it’s toxic.
Sorry Wolf –
but lots of people hated it ……….
I did.
So is Bessent in favor of ending government mortgage subsidies (Fannie and Freddy), which seem to be a perpetual motion machine of housing bubbles? Is he in favor of banning the sort of NIMBY regulations that have made housing scarce and wildly expensive in our fastest growing cities? Is he in favor of restoring progressive taxation, instead of the regressive taxation we have now?
Of course not.
This is mere populist bandwagoning by an administration of ultra-rich grifters that wants to use the Fed for its own political purposes, but has zero interest in fiscal discipline or reducing the wealth effect. Don’t expect libertarianism to come out of an authoritarian administration that is partially nationalizing key industries.
Yes, the fiscal authorities have been repeatedly bailed out of bad decisions by the monetary authorities – including Trump administration 1.0. The Fed is not responsible for the national debt – the politicians pointing fingers at the Fed are!
Further, both 2008 and 2020 were setting up to be Great Depression scenarios. These were downward spiral situations.
QE, bailouts, and the bipartisan welfare-for-all prevented these situations from becoming 20+% unemployment situations, and thus prevented a major generational setback for the poor and middle class. The Fed gets credit for these wins, and we need to remember how bad the 1930s were before we critique the helicopter money.
The problem is our politicians from both parties have been running up debt, subsidizing industries, passing more pork each year, distorting markets with regulations, and engaging in corruption. The Fed has been used BY THEM as an insurance policy, and now the kids playing with matches who burned down the house have the gall to point to the insurance company and blame them.
Now that the Fed is no longer independent, there is nothing to stop monetary policy from being used for political purposes. The Fed will continue to be the scapegoat, even as the blame-casting politicians pull the strings. Inflation will be 10% and they’ll mysteriously keep rates low through the next election, like in Turkyie’. Don’t fall for this stuff.
1. “So is Bessent in favor of ending government mortgage subsidies (Fannie and Freddy), which seem to be a perpetual motion machine of housing bubbles?”
Yes, in favor of it via privatization of those two entities. Planned privatization as been in the news, and I have a big article on it here. The devil will be in the details though.
2. Is he in favor of banning the sort of NIMBY regulations that have made housing scarce and wildly expensive in our fastest growing cities?
Yes, and he specifically said this a few days ago, that the government is looking into coming up with federal way to reduce state and local regulations, lower the cost of construction, speed up housing development, and reduce transaction fees, but it’s not easy because housing and housing construction is regulated at the state and local level. You’re really absolutely not paying attention.
That’s where I stopped reading. BS overload in the first two sentences blew the fuse.
“Further, both 2008 and 2020 were setting up to be Great Depression scenarios. These were downward spiral situations.”
You need to read Adam Smith. Corrections, after periods of unsustainable growth, are a natural part of the business cycle. Recessions are good.
Its an irrational fear of recessions that leads to depressions.
It’s time to bite the bullet.
There are millions of capital holders and hard working people willing and ready to support and grow the economy at lower price levels.
Let the wealth transfers from speculators to hard working prudent folk begin! Excessive risk taking should lead to excessive losses, not taxpayer bailouts and money printing!
Andrew Mellon, is that you?
Complete BS. The Fed has enabled bad behavior for far too long.
We have cleared bad debt before, we have sent bad actors to prison before. Your communist dribble does not pass the sniff test. If you really believe the bullshit you are selling then I have some mortgage backed securities to sell you.
Just tell everyone which bank you work for already.
I see it’s “communist” now to oppose the government subsidizing if not completely running industries. OK. Wonder what Reagan would think.
(Almost) totally agree with you, especially ” administration of ultra-rich grifters that wants to use the Fed for its own political purposes, but has zero interest in fiscal discipline or reducing the wealth effect”
In a throwback to his middle school days, Mr. Bessent told another member of the administration “ I’m gonna punch you in your f—ing face,” Yes, this really happened.
It sounds like he needs to be sent to the principal’s office.
And now Bessent’s boss wants the Fed to drop interest rates back down to 1%; Bessent is a poor messenger for this.
Yes, Bessent wants lower short-term rates. But that’s a classic tool of the Fed, and people might disagree where those policy rates should be, but agree that this is a classic function of the Fed.
But the entire editorial was about the OTHER tools that the Fed concocted since 2008, particularly QE and bailouts.
The stupidity goes all the way back to Greenspan, but yeah, I think Bernanke should be hung by his own petard.
Edward Chancellor has a great book about the problems with ZIRP. John Hussman has some excellent commentary about “deranged Fed policy” as well. I know not all of it is specifically QE-related but they’re both worth a read.
Excellent Bessent and Wolf!
All a lengthy way of underlining FINANCIALIZATION OF ASSETS!!!!
I was going to rebut Bessent and Wolf, but Krugman did it for me
I cannot believe anyone still reads this most debunked moron ever. He is one of the culprits.
I’m on the same page as Scott and Wolf!
It has always intrigued me that the Fed is described as ‘ignorant’ or ‘mistaken’ or ‘dumb’ or ‘misguided’. Their actions seems ripe with intent. There could/can be a bad talking head at the helm or their timing could be off such that the result is over-or-under-done where they have ‘a-ha’ moments, but they know that which they do. Why is there a crap ton of debt? The Fed wants there to be to enrich this guy or slight of hand for this other to happen or they support the Govt. spending for to fill their or their friends’ coffers. Why were tariffs low and/or China the manuf center of the world? All willful intent to enrich with the cause identified as high taxes and regulatory burden that the same beneficiaries helped define. How is the ‘Wealth Effect’ considered ‘good’ in the Fed’s eyes? Just ask whom purports the benefits of such. No intention to take away anything from the report. Just an observation
We expect too much from the Fed.
We get mad at them when government subsidies distort asset prices and cause bubbles that pop and lead to recessions. We blame them when the people we elect run up massive debts. ANY recession EVER is deemed to be the personal failing of the Federal Reserve chair.
Their job is to set interest rates and money supply. That’s it. They were never supposed to be a panacea.
Not at all a fan of QE/YCC and one punished (repeatedly! I’m not a smart man) by my attempts to fight the Fed when they undertake such programs.
Only time will tell, but I will be interested to see what Bessent says if we come to a time where inflation expectations in the long bond yields are a bigger threat to the economy than short-term fed controlled rates. Perhaps that’s why he mentioned the oft-forgotten third mandate, that will be the rationale for why it’s okay for the Fed to do YCC.
To be clear, if ‘Trump’s Fed’ and Bessent’s Treasury do what he suggests here, I’d welcome it. I just can’t believe it aligns with the economic agenda the President is hoping to realize.
You got this wrong, and you’re spreading toxic manipulative bullshit here.
YCC = QE = asset purchases.
You cannot do asset purchases (QE/YCC) during inflationary times because inflation will just blow out.
Even Japan had to give up on YCC when inflation started blowing out, and they’re now doing QT.
The Fed switched from QE to QT when inflation started blowing out. And the Fed is still doing QT.
The only difference is that YCC sets a specific target for a long-term rate and buys assets until that target is reached, while QE sets a specific target of monthly asset purchases and long-term rates plunge to very low levels because of it. The method is the same (asset purchases) and the results are the same (forced-down long-term interest rates, a broken bond market, and massive inflation). Bessent understands this better than anyone.