Recession, Banks, Debt Ceiling – You Must Believe Me Now

The question is, if it’s said loud enough will it be believed? Because this time it really is true (it is being said very loudly). Or is it?

The discussion about recession has been on-going for some time now. I started writing about recession possibilities over a year ago. The discussion has moved back and forth between how do we avoid one to how do we get a soft landing to what can we do to help those that will likely suffer if the landing isn’t so soft. We may see in the next several months various pronouncements by various talking heads. You notice I didn’t say anything about what phase this is. I don’t know and it doesn’t matter as much as most news personnel would like you to believe from their  strident and every increasing noise. Remember, it is important to keep the fans whipped up. We will be able to look back in several months when the National Bureau of Economic Research (NBER) will state that a recession started at such and such a point, or didn’t. Remember, only the Bureau is recognized as the official group that can declare such and they always include factors that are backward looking, meaning we don’t officially know until after the fact. This also means that we don’t officially know if we have had a soft landing, missed recession or face plant until after the fact either. There are other signs that may give us indications of various outcomes, however. We have been moving toward this point for months and months. It is dragging on longer than a normal news cycle so it gets recycled regularly. Expect to see it to continue. Again, the fans need to be whipped up to keep enthusiasm high. We are getting more comments like JPMorgan Chase CEO, Jamie Dimon (CNBC, Apr 14, 2023 Manie Dimon issues warning on rates: ‘It will undress problems in the economy’) that investors and business should plan on interest rates remaining higher for longer. The Fed still needs to “dry out” the economy, get the excess funds (easy money) out of the system. That hasn’t changed. We still have a recession we are trying to work around or work through depending on what you think may happen. Work around implies a soft landing or just a slowdown; The economy slows down, unemployment rises a bit. Banks tighten their lending policies. A few business and individuals suffer or go under. The Fed is able to get their balance sheet down without the stock and bond market tanking (it slows down, drops and recovers fairly quickly). We stumble a bit and slow down. No or mild recession and we carry on at a more measured pace. Work through implies a recession; we trip or worse, face plant and have to pick ourselves back up. We see bank failures, businesses and individuals declare bankruptcy. The Fed isn’t able to maintain a smooth decrease in its balance sheet or worse doesn’t reduce it. The stock and bond market react to all the uncertainty and failures by tanking. It takes a longer to climb out of the hole.

One of the consequences of the higher rates is the financial sector including banks will feel the pinch. They have to change from an easy money mentality to a more measured lending stance. Easy money implies less diligence in protecting deposits and in shoring up a banks balance sheet. There is little or no profit in protecting deposits (lending them out is where money is made) or doing more than the minimum required or skirting regulations. Most banks try to balance the profits with the safety, we have seen the banks that didn’t. The price for skirting the safety regs in good times is minimal and it is hard to see which banks may be skirting until too late when times turn bad. The best we can do is go with financial institutions with a long record of being conservative. Credit Unions tend to be more conservative by their nature and charter requirements. Still, it’s hard to tell. There is something to be said for spreading money around between institutions. We also have deposit insurance which is helpful but in the Silicon Valley Bank and First Republic Bank failures the Fed stepped in and guaranteed all deposits which stressed the insurance provider FDIC (it almost broke it such that another big hit would cause serious problems). So, things are complicated, of course. By guaranteeing all deposit they essentially gave a green light to the poor practices of the bank. They also prevented a bank run on several similar shaky banks across the country. Whether that was the right thing to do or not should be debated for a long time. The current mentality is that the government can fix everything which makes them responsible. Hence more regulation and laws and more places for shady people to find loopholes. Notice that the defense for many of these funny practices is that the entity did nothing wrong, they were following the rules. It was the rules fault. So, of course, more rules are needed. That is a very bad spiral and you can follow it down to the final conclusion. Watch the financial sector for more stress in general and how they seem to take care of it. Look for more rules and regulations. I am glad I am finishing up my career in finance and not starting it. It is a very different and much more difficult place to work then 30-35 years ago when I was first involved.

                Now the debt ceiling question. I am not going to quote any articles. There have been so many. It is the current hot, hot, hot topic button and the news media are mashing it with their biggest and most massive sledge hammers (gleefully I might add). Do you feel like you have been beat up no, pummeled for weeks on end. Everywhere you turn someone or some organization is talking dire straits, doom, gloom, death, destruction, mayhem, the very end of the world as we know it, the end of civilization, the death of all we hold near and dear, (pause for dramatic breath!!!!!!) AURRRGHHHHHHHH. Why can’t you people see how important this is!!!!!!!!!!!

Sorry…., I got just a little bit carried away.

It won’t happen again (at least until tomorrow anyway.)

                This is the news and financial media at its finest. This it the current news media model and the debt ceiling is the ultimate opportunity to exercise its model to the fullest. The underlying question is the government has set some limits on its spending capability, a good thing. It has come around again that the government can’t manage its input and output. The easy solution is raise the debt ceiling or remove the debt ceiling requirement or better yet get spending under control. Now, granted, the answer is never that easy and that is also part of the problem. The solution is pretty complex but workable. However, we have powerful political forces that are using this debt ceiling to push their various points and agendas.  

As background information. The following is from Wikepedia, United States debt Ceiling;

The U.S. has never reached the point of default where the Treasury was incapable of paying U.S. debt obligations, though it has been close on several occasions. The only exception was during the War of 1812 when parts of Washington D.C. including the Treasury were burned.

In 2011, the U.S. reached a crisis point of near default on public debt. The delay in raising the debt ceiling resulted in the first downgrade in the United States credit rating, a sharp drop in the stock market, and an increase in borrowing costs. Congress raised the debt limit with the Budget Control Act of 2011, which added to the fiscal cliff when the new ceiling was reached on December 31, 2012.

The last time things got too close, government set new rules and they immediately went about figuring out where the loopholes are. And it is continuing. Is it a problem. Yes. Is it the end of things as we know them (as the news is telling us). No. Are there solutions. Yes. Should you be upset. Yes. Should we be acting like Chicken Little. No. It will play out. It will get close. There will be much rejoicing in the media when the “solution” is reached. Then the media will begin the analysis phase which will allow for continued coverage for many months. So it continues. Should you follow all the stories. DEFINATELY NOT. When this crisis passes the media will need something else to keep us tied to them. Look for the recession to come back in vogue. Don’t be lead around. The various financial crisis will continue in the news. You can always find them if you want. I suggest you don’t want to. Keep your finances simple. Keep debt low. Save as you can. Debt is good for some things, housing, education, transportation. Live simply.

                Remember what is important. It isn’t news. It is family, friends, the things you love. It is the beauties around you. It is relationships, the good earth, the joy of interacting. It is game nights, movies together, playing with kids (big and little ones). It is in quite walks, talking in person to friends and family. Meeting new people, a meal together, building something, watching a sunrise and sunset. Tell someone you love them. Share precious things, a hug a kind word, hope.