The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Right Hand/Left Hand

06/26/2020

If I had to say something nice about the current economic collapse, I would say — at least, it is NOT also a financial collapse.  Our banking system has remained relatively strong, thank goodness.  If not, this “flash-depression” would easily turn into another Great Depression.  Keeping our financial system solid is desperately important.  After the Global Financial Crisis of 2008, our Congress acted responsibly to strengthen the system.  One smart move was the “Volcker Rule” which limits the investment latitude of banks — preventing them from behaving like hedge funds.

Not content to leave well-enough alone yesterday, the Trump Administration loosened some of the restrictions in the Volcker Rule, allowing banks to invest in venture capital projects, which caused the stock market to bounce nicely.  The theory is that every restriction or regulation is bad for the economy.   Not in this case!  This is a bad idea . . .

Later the same day, the Federal Reserve tightened regulation on banks, including more frequent stress tests and capital calls.  Of course, there is no immediate way of knowing the net impact of loosening some regulations while tightening other regulations.  My question is whether the Fed knew in advance what the Administration was doing and felt the need to offset it?  Or, was it another case of the left-hand and the right-hand . . . ?

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