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Why are major banks suing the Federal Reserve? · The Financial Exchange Show

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Speaker 2: Clear, I don't think we actually have Chuck Zada or
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Speaker 2: Pauline on today's program, but it's Mike Armstrong, Mark Fandaddy.
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Speaker 2: Are you there today, Yes, Well, Merry Christmas to everybody
1:20
Speaker 2: yesterday and welcome back to the Financial Exchange.
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Speaker 3: Happy honka.
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Speaker 2: I think Kwanza kicks off today. And yeah, I had
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Speaker 2: a wonderful, uh maybe somewhat stressful Christmas and uh yeah,
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Speaker 2: I hope everyone had a nice little time off. Ben
1:38
Speaker 2: was what was your favorite gift of the of the
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Speaker 2: holiday season?
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Speaker 4: As always, I.
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Speaker 3: Got a new watch.
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Speaker 4: Can't complain about that.
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Speaker 2: Yeah, I forget that you are a collector of watches,
1:50
Speaker 2: so yeah, that's that's an exciting new gift for you.
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Speaker 2: I think you mentioned welcome, Welcome back here to the
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Speaker 2: Financial Exchange. As you would imagine, not a ton of big,
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Speaker 2: power hitting economic data coming out this week. We did
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Speaker 2: get one one read on jobless claims, but we'll be
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Speaker 2: talking a little bit about where markets have been over
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Speaker 2: the course of the year. And frankly a pretty interesting
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Speaker 2: last week or so with the big market selloff fall
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Speaker 2: in the Federal Reserve announcement and press conference, followed by
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Speaker 2: mainly a regaining of all those losses. But we want
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Speaker 2: to start off with I think a well timed piece
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Speaker 2: since I'm talking about holiday stress anyway, which is the
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Speaker 2: Federal Reserve's stress tests and biggest the biggest banks in
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Speaker 2: the country planning to sue the Federal Reserve over these.
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Speaker 2: So I guess if we could start off Mark and
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Speaker 2: you know, I know that you haven't worked directly in
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Speaker 2: banking regulation before, but these stress tests were created post
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Speaker 2: Great Financial Crisis in order to do what exactly and
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Speaker 2: prevent what in the future.
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Speaker 5: To prevent bank failures, to make them less likely. The
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Speaker 5: history of this, Mike goes back. A lot of us
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Speaker 5: were watching It's a One Life over the weekend. That's
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Speaker 5: a movie about a bank run, right, and the contagion
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Speaker 5: that sets in, the panic that sets in. So in
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Speaker 5: the nineteen thirties, we got the Federal Deposit Insurance Corporation,
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Speaker 5: We got what used to be called PHYSLIC, which covered
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Speaker 5: savings and loans, and incidentally Bailey savings and loan. I'm
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Speaker 5: probably one of the few people who watched the movie
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Speaker 5: and thought about this. I don't know what this says.
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Speaker 5: Would not have gone bankrupt at that time period because
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Speaker 5: we had PHYSLIC to protect savings and loans. It came
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Speaker 5: out of the New Deal. The price that banks had
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Speaker 5: to pay for this insurance, for this cushion that really
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Speaker 5: protects them from their own stupidity, protects them from making
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Speaker 5: bad loans. That right, it does and ruin the back.
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Speaker 5: And it's why some banks are too big defense. Really
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Speaker 5: every bank is too big to fail under under FDIC insurance.
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Speaker 5: That's because banks, again, when they fail, there's a domino effect,
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Speaker 5: contagion sets in. But if you watch this A Wonderful Life,
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Speaker 5: you saw a bank contagion unfold. The idea behind these
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Speaker 5: capitalization requirements, first the New Deal FDIC capitalization requirements and
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Speaker 5: by extension, those that we imposed after the Great Recession.
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Speaker 5: They're meant to protect ultimately depositors from bank failure. They
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Speaker 5: hate these because they yes, because of contagion. One bat
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Speaker 5: was We saw this with Silicon Valley Bank last year.
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Speaker 5: The reason the FED stepped in is because they felt
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Speaker 5: like they had to choke off any potential contagion effects.
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Speaker 5: Banks hate these requirements because they effectively capped their profits.
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Speaker 5: They love to make riskier loans, They love to loan
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Speaker 5: out all the capital they don't think depositors are going
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Speaker 5: to call on any given day. Can't do that. That's
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Speaker 5: the cost of insurance and the price we pay for stability.
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Speaker 2: And so the SVB example is a good one because
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Speaker 2: these specific stress tests that they are suing over were enacted,
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Speaker 2: I think as part of Dodd frank during the Great Recession,
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Speaker 2: and they specifically require testing of all banks with assets
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Speaker 2: over one hundred billion dollars and if you're over two
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Speaker 2: hundred and fifty billion dollars, these tests occur every single year.
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Speaker 2: If you're under that, if you're between one hundred and
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Speaker 2: two fifty, then it's a biannual testing that they do.
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Speaker 2: And I find the SVB example, you know, interesting because
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Speaker 2: SBB did have assets over one hundred billion dollars, meaning
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Speaker 2: they were subject to these tests, although they just crossed
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Speaker 2: the threshold in November twenty twenty one, so they actually
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Speaker 2: never underwent a stress test prior to them failing, which
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Speaker 2: just kind of interesting tidbit. Who knows, had you know,
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Speaker 2: would the stress test have actually tested for this? And
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Speaker 2: I think that's probably a lot of the criticism from
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Speaker 2: these banks is, look, these tests aren't relevant, they are opaque,
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Speaker 2: it's unclear what metrics, we're going to be judged on
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Speaker 2: which ones will be ignored, and so you know, some
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Speaker 2: many of the lawsuits have said, look, we're not opposed
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Speaker 2: to stress testing, we just want a clearer set of
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Speaker 2: rules and regulations as to how they're going to be
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Speaker 2: conducted and what they're going to be looking for. But I,
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Speaker 2: you know, I do find interesting and the pendulum always
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Speaker 2: does swig. Yeah, I think arguably after the Great Recession,
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Speaker 2: for good reason, we swung the pendulum very far in
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Speaker 2: the direction.
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Speaker 3: Of regulation and control. And look, we don't.
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Speaker 2: Want these banks to we can't prevent these banks from
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Speaker 2: getting too big. That was the decision we made post
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Speaker 2: you know, over the last several decades, is we're going
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Speaker 2: to allow banks to get enormous, but once they get
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Speaker 2: to a certain threshold, and one hundred billion dollars was
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Speaker 2: just sort of chosen here, we're going to regulate them
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Speaker 2: almost in the way that we might to utility, so
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Speaker 2: that if one of them fails, we don't have a
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Speaker 2: systemic failure of the entire financial system.
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Speaker 3: Which to be clear, we got really close to in.
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Speaker 2: Two thousand and nine, right like, we got very very
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Speaker 2: close to a complete failure of our entire financial system
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Speaker 2: of order, and so that's why these rules were put in.
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Speaker 2: Are they inefficient? Are they probably outdated and not very
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Speaker 2: clear for the banks.
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Speaker 3: Yeah, I'm certain it's tough for us to speak to that.
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Speaker 5: It's tough for us to speak to that. I think
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Speaker 5: the key point is the one. I'm sorry, Mike, I.
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Speaker 3: Interrupted, You're fine, keep going.
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Speaker 5: You made the point about the pendulum swing. I think
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Speaker 5: that's the big picture critical point to take away from this.
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Speaker 5: The environment is will we get a new regime on
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Speaker 5: January twentieth. They are committed to reducing regulation, including banking regulation.
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Speaker 5: I've heard a couple of perspective. I don't know if
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Speaker 5: they speak for the president elect or not, or if
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Speaker 5: he even has any well formed us on this, but
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Speaker 5: some have suggested eliminating or seriously hamstringing, for lack of
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Speaker 5: a better verb, the FDIC that would be consistent with
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Speaker 5: your pendulum swinging thesis.
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Speaker 1: Mike.
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Speaker 5: We're just moving in the direction of deregulation after a
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Speaker 5: period of more severe regulation. Unfortunately, as we learned when
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Speaker 5: we deregulated the savings and loan industry in the early
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Speaker 5: nineteen eighties, that can lead to excesses which can lead
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Speaker 5: two failures. A good chunk of the banking industry failed
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Speaker 5: in the late nineteen eighties, and in today's dollars, that
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Speaker 5: cost nearly a trillion bucks three quarters of a trillion
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Speaker 5: bucks to clean up. So the inevitable result of the
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Speaker 5: pendulum swinging is probably excesses, which of course is what
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Speaker 5: causes the pendulum to swing back.
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Speaker 3: Swing back in the other direction.
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Speaker 2: I guess, you know, I have a few main points
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Speaker 2: about this one from the you know, from the perspective
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Speaker 2: of the banks, and from the you know, lawmakers that
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Speaker 2: want fewer regulations on those banks. They have a pretty
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Speaker 2: good point, which is, look, we had these stress tests
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Speaker 2: and it didn't prevent a massive bank failure in twenty
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Speaker 2: twenty three, and so you know, what's the point of
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Speaker 2: all these regulations if they're not even going to prevent
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Speaker 2: a massive bank failure. On the other hand, if we're
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Speaker 2: going to wait, you know, move all of these regulations back,
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Speaker 2: and I'm sure there will still be stress tests, but
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Speaker 2: you know, maybe less burdens some ones that allow banks
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Speaker 2: to pay out more dividends and more profits to their
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Speaker 2: shareholders and maybe conduct business that was previously thought of
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Speaker 2: as too risky. Is okay, Well, how would you have
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Speaker 2: handled the SVB situation differently?
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Speaker 3: But I think I think that's an important question to answer.
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Speaker 2: Not that we're going to necessarily have another SVB, but
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Speaker 2: assume that doing this will result in another bank collapsing
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Speaker 2: in some way, shape or form.
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Speaker 3: Are we going to take the same dramatic, you know, drastic.
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Speaker 2: Measures and bail out every single depositor at that bank.
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Speaker 3: Yes we are, even if they're above the FDIC limits.
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Speaker 5: Yes we are. We're going to do exactly what we
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Speaker 5: did to stem contagion. And by the way, just because
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Speaker 5: the stress and I can't defend them, this is not
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Speaker 5: my area. Maybe they are too stringent, maybe they could
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Speaker 5: be streamlined. I don't really know. But the Silicon Valley
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Speaker 5: banks failure is not evidence that the stress tests failed.
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Speaker 5: The stress test may have prevented overreaching by banks in
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Speaker 5: other areas. We don't know what disasters the stress tests prevented.
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Speaker 5: You could say the with respect any government regulation. People
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Speaker 5: rail against it. People rail against TSA, for example, it's inconvenient.
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Speaker 5: They may have We will never know how many disasters
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Speaker 5: they prevented. May be a bad example. I don't really know.
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Speaker 5: It's a fair one, you can't see the prevented disasters.
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Speaker 3: Right, yeah, precisely. Let's take a quick break.
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Speaker 2: When we come back, I want to really reflect on
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Speaker 2: twenty twenty four, the Federal Reserve's actions, what they seemingly
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Speaker 2: did well based on the results.
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Speaker 3: We're seeing, and then the inconsistencies.
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Speaker 2: There's a piece out here in op ed piece about
10:34
Speaker 2: the Fed setting some new Year's resolutions.
10:37
Speaker 3: Let's talk the Federal Reserve. Next here on the Financial Exchange.
10:41
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11:27
Speaker 3: Piece this morning from Jason Furman.
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Speaker 2: He's an economist professor at Harvard University. He was a
11:32
Speaker 2: Barack Obama appointee to the Council of Economic Advisors. That
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Speaker 2: bring up his background because I feel like a lot
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Speaker 2: of the criticism of the Federal Reserve recently has been
11:40
Speaker 2: coming more from the right, and this is one that's
11:43
Speaker 2: maybe not direct criticism, but a bit of a reflection
11:47
Speaker 2: on how they work. And one piece that he brought
11:50
Speaker 2: up I thought was pretty compelling. Going into twenty twenty four,
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Speaker 2: the Federal Reserve anticipated economic growth of one point four percent,
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Speaker 2: inflation of two point four percent, and three rate cuts.
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Speaker 3: Instead, what they got was economic growth.
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Speaker 2: Of two and a half percent, inflation of two point
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Speaker 2: eight percent, and yet for rate cuts. And so I
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Speaker 2: think he kind of asked the question, what gives you right, Like,
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Speaker 2: if you use any sort of basic framework for how
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Speaker 2: you would implement Federal Reserve policy, you got more growth
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Speaker 2: and more inflation that you were anticipating, and yet you
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Speaker 2: cut rates more than you were anticipating at the beginning
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Speaker 2: of the year. And so he kind of puts together
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Speaker 2: an argument for more of a rules based approach to
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Speaker 2: inflation and unemployment. The FEDS dual mandates, and I'm interested
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Speaker 2: on your reflections on that mark.
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Speaker 3: To me, I don't know that the FEDS problems are.
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Speaker 2: More of a need for a rules based system, as
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Speaker 2: it is just a problem with interpreting and acting and
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Speaker 2: a pretty consistent.
12:57
Speaker 3: Push for lower interest rates.
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Speaker 5: Regardless of this, those two things that related. This is
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Speaker 5: a remarkable piece from Jason Furman because he's left of center.
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Speaker 5: He uses the same models that all economists do, but
13:10
Speaker 5: he served in Democrat administrations. All else equal, he would prefer,
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Speaker 5: for example, more quality to higher growth. I don't want
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Speaker 5: to speak for Furman, but my guess is so there
13:19
Speaker 5: are there is a certain say, set of beliefs that
13:23
Speaker 5: he and people who subscribe to the things he does hold.
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Speaker 5: So it is remarkable that a left of center slightly
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Speaker 5: left of center. He's level headed, he's objective, he's brilliant,
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Speaker 5: he's universally respected. But it is remarkable the equivalent of
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Speaker 5: Nixon going to China, that someone in the on this
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Speaker 5: end of the spectrum would advocate a rules based approach
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Speaker 5: to monetary policy. So this is not a Milton Friedman rule.
13:54
Speaker 5: Some of you will think of Milton Friedman, who said,
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Speaker 5: you just grow the money supply at two or three
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Speaker 5: percent a year. You don't need a FED. A computer
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Speaker 5: could do that. He's talking about a different type of rule.
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Speaker 5: Some of you have heard of the tailor rule. John Taylor,
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Speaker 5: guy out of Stanford. He's one economist who in the
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Speaker 5: early nineteen nineties did a lot of research on how
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Speaker 5: central banks behave Do they just follow their whims and instinct?
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Speaker 5: They used to do this Since Greenspan, though, it's been
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Speaker 5: widely thought that banks generally follow rules, which makes sense
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Speaker 5: when you're dealing with something as complicated as monetary policy.
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Speaker 5: The reason it's remarkable that this comes from Furman, and
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Speaker 5: it's the equivalent of again Nixon going to China, is
14:37
Speaker 5: that people who are somewhat left of center have generally
14:40
Speaker 5: favored discretion because they generally put more weight personally on
14:44
Speaker 5: keeping unemployment low than on keeping inflation low. You got
14:48
Speaker 5: to keep that trade off in mind. So a rule
14:51
Speaker 5: in Furman's mind would allow us to better understand what
14:54
Speaker 5: the Fed's thinking. Why did Powell cut last I'm saying Powell,
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Speaker 5: I mean the FOMC. Why did they cut last Growth
15:00
Speaker 5: is growing above potential, Unemployment is low in historical terms,
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Speaker 5: inflation is not yet at their goal. What are they thinking?
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Speaker 5: If they were following a rule, even a generally defined one,
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Speaker 5: it would give us a better window on their thinking.
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Speaker 5: To your latter point, Mike.
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Speaker 2: Yeah, and look, I hear all those arguments, and I
15:18
Speaker 2: think they are reasonable, especially given the mistakes that the
15:21
Speaker 2: Federal Reserve very clearly made in twenty twenty two, in
15:26
Speaker 2: twenty twenty one for that matter, on the way up
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Speaker 2: on inflation, they really missed. They missed the opportunity, They
15:33
Speaker 2: missed the ball, and we might not have dealt with
15:35
Speaker 2: as high inflation had they implemented proper policy. And I
15:39
Speaker 2: think that speaks to their bias for lower interest rates
15:42
Speaker 2: that we've seen pretty persistently over the last four years.
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Speaker 3: My problem with.
15:47
Speaker 2: The piece is it's tough to argue with results. And
15:51
Speaker 2: the results that you're getting today, even if they are
15:54
Speaker 2: just the result of good luck, are an economy that
15:58
Speaker 2: seems to be growing faster than what most economists would
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Speaker 2: assume is the long term potential, and inflation that is
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Speaker 2: getting into the category of let's just forget about it.
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Speaker 2: It's not that big a deal. Would you categorize it
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Speaker 2: any differently in terms of where we are.
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Speaker 5: We're in a good spot now, had they been following
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Speaker 5: some sort of coherent rule, even a very broadly defined one.
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Speaker 5: And all of these tailor type rules have one proviso
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Speaker 5: in common, one specification, one rule, one sub rule in common,
16:30
Speaker 5: which is, when underlying or core inflation goes up, you
16:33
Speaker 5: raise rates more than one for one. Otherwise real rates
16:38
Speaker 5: are coming down. If inflation is going up, you're not
16:40
Speaker 5: raising rates as quickly as inflation is going up. Real
16:44
Speaker 5: rates are coming down. Policies actually getting easier, not tighter.
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Speaker 5: That's what these rules avoid. And I think if Furman
16:53
Speaker 5: had had the time and felt the need to expand,
16:56
Speaker 5: he would have made that point, because it's central to
16:59
Speaker 5: rule based operation by a central bank. But yeah, Mike,
17:03
Speaker 5: we got to a good place. Could we have gotten
17:05
Speaker 5: to a good place quicker or avoided the most unpleasant
17:08
Speaker 5: parts of the bad place we were in in twenty
17:10
Speaker 5: twenty one twenty twenty two, if the FED were raising
17:13
Speaker 5: rates more than one for one with inflation, which is
17:15
Speaker 5: how I think about the most important part of the
17:19
Speaker 5: so called tailor type rules, maybe it would have been
17:21
Speaker 5: a smoother path Mike.
17:23
Speaker 3: Yeah.
17:23
Speaker 2: And to be clear too, it's not as though anyone
17:25
Speaker 2: is arguing that they have to create a series of
17:27
Speaker 2: rules and then plug it into an algorithm, like some
17:31
Speaker 2: sort of algorithm based trading model. I think, you know,
17:34
Speaker 2: Jason Furman most certainly is saying, no, you know, keep
17:36
Speaker 2: your discretion to diverge from these series of rules based
17:40
Speaker 2: on what's actually going on in the economy.
17:42
Speaker 3: But when you seemingly have no framework for when you're
17:46
Speaker 3: going to.
17:46
Speaker 2: Hike or raise rate, or hike or lower rates, you
17:49
Speaker 2: get things like this year where again I go back
17:52
Speaker 2: to that piece from the beginning of this year, where
17:54
Speaker 2: they were only anticipating lowering rates three times, and we
17:59
Speaker 2: got data that is better than they anticipated, higher growth,
18:03
Speaker 2: higher inflation, than what the Federal Reserve themselves were anticipating.
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Speaker 3: And yet they cut rates more aggressively than they thought
18:09
Speaker 3: that they were. And so that is pretty confounding.
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Speaker 2: And I do have to sit there and say, look,
18:14
Speaker 2: this is what you anticipated, you got stuff that was better,
18:17
Speaker 2: and yet you defaulted to lower rates instead, and we
18:21
Speaker 2: haven't got really much of a useful explanation on them.
18:26
Speaker 2: Has been well, we don't believe this data point because
18:28
Speaker 2: we think that the inflation that we're seeing there is
18:30
Speaker 2: just is just fake and it's going to disappear. Or
18:33
Speaker 2: you know, we're suspicious of these growth numbers. They seem
18:36
Speaker 2: temporary and we're worried about things collapsing. Right, that sort
18:39
Speaker 2: of explanation would be very reasonable to me, But we
18:43
Speaker 2: haven't gotten that. We've just had well, things have been
18:46
Speaker 2: better than expected, but we still think that rates need
18:48
Speaker 2: to go lower and we think that's going to be
18:50
Speaker 2: fine without much of any explanation as to how that
18:54
Speaker 2: affects the neutral rate or really anything else from the
18:57
Speaker 2: Federal Reserve. And those are the inconsistencies, then I think
19:00
Speaker 2: an incoming Trump administration cannon should rail on when they
19:05
Speaker 2: criticize the FED.
19:06
Speaker 3: Is this inconsistent thinking.
19:08
Speaker 2: The problem is that that would actually result in higher rates,
19:10
Speaker 2: which Donald Trump most certainly isn't going to want.
19:13
Speaker 5: Yeah, let's take Trump's the hardest thing from that.
19:16
Speaker 3: Let's take a quick break.
19:18
Speaker 2: When we come back, we will have a full market
19:20
Speaker 2: update with Wall Street. Watch had a few good sessions
19:23
Speaker 2: leading into the Christmas holiday. What are we seeing today?
19:26
Speaker 2: That's next here on the financial Exchange, Like.
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Speaker 1: show breaking business news is always first right here on
19:43
Speaker 1: the Financial Exchange Radio Network. Time now for Wall Street.
19:48
Speaker 1: Watch a complete look at what's moving market so far
19:51
Speaker 1: today right here on the Financial Exchange Radio Network.
19:55
Speaker 4: Well, a lot of red on the board for the
19:57
Speaker 4: major indices. That Dow Jones is down seventy two points,
20:00
Speaker 4: the S and P five hundred is down just under
20:02
Speaker 4: ten points for zero point one six percent, and the
20:05
Speaker 4: Nasdaq is down just under thirty points as we speak.
20:10
Speaker 4: Taking a look at some of the companies around the globe,
20:12
Speaker 4: game Stop shares are up four point three percent, extending
20:15
Speaker 4: their gains from Tuesday. The video game retailer has risen
20:19
Speaker 4: four straight days and has climbed more than seventy seven
20:22
Speaker 4: percent in twenty twenty four. US listed Honda shares are
20:27
Speaker 4: up about three point eight percent, bringing this week's advance
20:30
Speaker 4: to about fourteen percent, on the heels of merger talks
20:33
Speaker 4: announced at the start of the week with fellow Japanese
20:35
Speaker 4: automaker Nissan. The move also comes amid rally among Asia
20:40
Speaker 4: Pacific stocks following a report that Japan's government is reportedly
20:44
Speaker 4: set to propose a record seven hundred and thirty five
20:46
Speaker 4: billion dollar budget. Starbucks shares are up one point seven
20:51
Speaker 4: percent after the coffee chains workers expanded to strike earlier
20:54
Speaker 4: this week. The holiday work action now affects more than
20:57
Speaker 4: three hundred stores in forty five states. American Airlines SOCK
21:02
Speaker 4: is down point seventy two percent after the Fort Worth
21:05
Speaker 4: based carrier was forced to temporarily halt flights on Tuesday
21:08
Speaker 4: morning due to a computer glitch that caused a system
21:11
Speaker 4: wide groundstop. American ended Tuesday point six percent higher. I
21:17
Speaker 4: am ben Kitchen and that was Wall Street watch Mark.
21:21
Speaker 2: Peace here about deficits and something that we have focused
21:26
Speaker 2: on a fair bit that maybe has not gotten as
21:30
Speaker 2: much attention politically as some would hope, but to provide
21:34
Speaker 2: some context here, in twenty twenty three, the US government
21:39
Speaker 2: deficit ran just over six percent of GDP, and I
21:45
Speaker 2: think that's a regular, a reasonable way to express it,
21:50
Speaker 2: rather than talking about the trillions of dollars. I find
21:53
Speaker 2: that to be tough to understand and navigate, But if
21:56
Speaker 2: you think about it as a percentage of GDP, that's
22:00
Speaker 2: rounds you a little bit. And estimates for twenty twenty four,
22:02
Speaker 2: I don't know what you've seen, Mark, but I think
22:04
Speaker 2: it's supposed to be around the same.
22:06
Speaker 3: Six to six and a half.
22:07
Speaker 2: Percent of GDP is where the government's deficit will land
22:10
Speaker 2: for some context in kind of normal periods of economic growth.
22:17
Speaker 2: So think late twenty tens, from twenty fifteen, twenty fourteen
22:21
Speaker 2: through right through twenty nineteen, we had deficits running anywhere
22:26
Speaker 2: in the two and three quarters to.
22:28
Speaker 3: Four percent range.
22:30
Speaker 2: Throughout the nineties, for an example, early nineties you were
22:35
Speaker 2: in that same two and a half to three percent
22:37
Speaker 2: range before having finally some surpluses under Clinton in the
22:40
Speaker 2: late nineties during big drawdowns in economic activity for example,
22:46
Speaker 2: like you know, two thousand and nine you saw deficit
22:49
Speaker 2: to GDP rates close to ten percent, and even more
22:52
Speaker 2: during COVID you saw that more like fifteen percent. And
22:56
Speaker 2: I guess, just grounding folks here, I think the problem
23:00
Speaker 2: that anyone that is looking at things from a fiscal
23:05
Speaker 2: responsibility standpoint would be Wow, six and a half percent
23:09
Speaker 2: is a pretty large deficit to be running when the
23:11
Speaker 2: economy is as good as everyone is telling me.
23:15
Speaker 5: Yeah, it doesn't give you any room for error. Deficits,
23:18
Speaker 5: whether measured in an absolute sense, or as a percentage
23:22
Speaker 5: of GDP. They always go up when the economy contracts
23:24
Speaker 5: because government spending goes up. Think increased unemployment benefits and
23:27
Speaker 5: other transfers and stimulus checks and all that which are
23:31
Speaker 5: now routine. If we have an economic blip, they're going
23:33
Speaker 5: to start mailing out stimulus checks as fast as they can.
23:35
Speaker 5: It's just the way things are done now. So we're
23:38
Speaker 5: starting at six and a half percent, as you pointed out,
23:40
Speaker 5: my good economy, reasonably strong expansion in historic in in
23:46
Speaker 5: historical terms. What's going to happen if we have a
23:48
Speaker 5: recession next year, It's going to go to eight percent
23:50
Speaker 5: of GDP ten percent of GDP. Again, that's almost a guarantee.
23:55
Speaker 5: So there's that. Then there's the overall amount of debt.
23:58
Speaker 5: And I'll stick with your rule of not throwing out
24:01
Speaker 5: numbers with nine or twelve zeros after them today, And
24:05
Speaker 5: I'll just say that at some point the cumulative deficits,
24:10
Speaker 5: which we call the debt, is going to be so
24:13
Speaker 5: high that markets don't want to buy our bonds anymore.
24:16
Speaker 5: I don't know when we reach that point, but it
24:19
Speaker 5: will come. And when that comes, interest rates go way up,
24:23
Speaker 5: and it then tough choices get imposed on you, you
24:27
Speaker 5: have very little room to maneuver. I don't know when
24:30
Speaker 5: that tipping point is reached, but we seem we seem
24:35
Speaker 5: willing to roll the dice on that.
24:37
Speaker 3: Yeah.
24:38
Speaker 2: Look, I tend to agree that this is a massive problem,
24:40
Speaker 2: but I also tend to think that the very clear
24:43
Speaker 2: evidence over the last two decades is that voters don't
24:46
Speaker 2: care about it.
24:47
Speaker 5: No, they don't.
24:48
Speaker 2: That seems abundantly clear to me is that voters are
24:52
Speaker 2: not voting for fiscal responsibility. Those few that you ran
24:59
Speaker 2: on that didn't last very long. Paul Ryan is the
25:02
Speaker 2: last person I could think of that was fundamentally serious
25:05
Speaker 2: about this issue. I'm sure there are still other lawmakers
25:08
Speaker 2: still in Congress today that claim to be, and maybe
25:10
Speaker 2: they are, but none that are truly in power.
25:12
Speaker 3: Of things today.
25:14
Speaker 2: And I don't really know what can shift that, because
25:16
Speaker 2: people have been warning about def since deficits, well since
25:20
Speaker 2: we've ever had one. And the problem with that argument
25:24
Speaker 2: is it's a bit of a boy who cried wolf.
25:26
Speaker 2: It hasn't become a problem, even though we've blown through
25:29
Speaker 2: barriers that anyone would have thought possible in the nineteen
25:33
Speaker 2: seventies and nineteen eighties and the nineteen nineties, and so
25:37
Speaker 2: it just does not seem to be something that voters
25:39
Speaker 2: care about.
25:40
Speaker 3: And I kind of put it in the same category
25:43
Speaker 3: as housing affordability.
25:44
Speaker 2: Like, people recognize that deficits are a problem, they realize
25:49
Speaker 2: that it's probably fundamentally an issue someday, but they're not
25:53
Speaker 2: willing to really deal with the fixes to the problem, because,
25:58
Speaker 2: as the author of this piece points out, it's not
26:00
Speaker 2: as those solving deficit problems are immensely complicated. It's not
26:04
Speaker 2: quantum physics. It's you have to spend less than you
26:08
Speaker 2: are taking in or you know, a more reasonable approach
26:11
Speaker 2: might just be, Hey, even if you choose not to
26:14
Speaker 2: reduce the total level of federal debts, just reduce the
26:17
Speaker 2: pace which it grows. That's a pretty easy formula as
26:20
Speaker 2: far as I'm concerned. Right, raise taxes, cut spending. Is
26:25
Speaker 2: it more complicated than that?
26:28
Speaker 5: No, But unlike right right, it's more political. Clearly, somebody's
26:33
Speaker 5: ox is going to get goreed, and nobody's willing to
26:37
Speaker 5: step up and make the sacrifice until until the cost
26:43
Speaker 5: of this recklessness, and it has been reckless under both
26:47
Speaker 5: Democrats and Republicans until that cost is evident in the
26:50
Speaker 5: form of higher interest rates, and maybe we're moving into
26:52
Speaker 5: such a regime now with rates creeping up. I don't
26:55
Speaker 5: really know. Until people feel the pain though, no, they're
26:58
Speaker 5: not going to act. But that's always been the case
27:00
Speaker 5: with US Americans. We don't respond to foreign threats until
27:03
Speaker 5: they're on our doorstep. We stay isolationists until we can't
27:06
Speaker 5: afford to anymore. We don't respond to climate threats until
27:09
Speaker 5: our until the oceans at our doorstep. Literally, it's it's
27:14
Speaker 5: just the way we are, and maybe people are more generally, Mike,
27:17
Speaker 5: I've sort of resigned to the fact that we're gonna
27:19
Speaker 5: have a fiscal crisis. It's gonna threat that that that
27:23
Speaker 5: will threaten that we'll drag down our standard of living,
27:27
Speaker 5: and then we'll do something about this. And at that point,
27:29
Speaker 5: of course, it's too late. It's all pain. Think think Greece.
27:34
Speaker 2: Does seem like it's the type of issue that will
27:37
Speaker 2: just slowly and steadily become a problem. No, if that
27:41
Speaker 2: were the case, it seemingly would have happened already. It
27:44
Speaker 2: seems more like a situation that will rise, like you described,
27:48
Speaker 2: rive on your doorstep and the defined figure.
27:50
Speaker 5: Out I think so, very sure, I think so, I
27:52
Speaker 5: think so. I don't know when that point is. Economists
27:55
Speaker 5: don't know.
27:55
Speaker 3: Right, Let's say a quick break.
27:57
Speaker 2: When we come back, we want to talk a little
27:58
Speaker 2: bit more about Trump tariffs and specifically the automobile industry
28:03
Speaker 2: and how it seems to be preparing for what might come,
28:06
Speaker 2: specifically with Mexico and Canada. Brick break, a little bit
28:09
Speaker 2: of tariff talk when it comes to car prices. Next
28:11
Speaker 2: on the Financial Exchange.
28:13
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28:46
Speaker 3: You'd have to ticket mark.
28:49
Speaker 2: Let's get back to tariff talk here on the Financial Exchange,
28:52
Speaker 2: and I want to step away from the likely China
28:55
Speaker 2: tariffs and focus for a moment on our neighbors here.
28:58
Speaker 2: So today, one third of all vehicles that are sold
29:04
Speaker 2: in the US for under thirty thousand dollars are built
29:07
Speaker 2: in Mexico. A decade ago that was only one fifth.
29:11
Speaker 2: So what seems to be happening there is those very
29:15
Speaker 2: low margin vehicles, which is, you know, that's what they are,
29:18
Speaker 2: the Nissan CenTra, those small sedans. There's a reason that
29:21
Speaker 2: Ford stopped making sedans in generally it was not a
29:24
Speaker 2: high profit margin item for them. They make more money
29:26
Speaker 2: on pickup trucks, and in those vehicles, they're able to
29:31
Speaker 2: manufacture a lot more of it here domestically because those
29:34
Speaker 2: margins are a lot thicker. For those really low priced
29:38
Speaker 2: Civics and Nissan Centra's and Ford Mavericks, they do not
29:42
Speaker 2: make as much money for the automakers, and so they
29:44
Speaker 2: do a lot more of the production down in Mexico.
29:48
Speaker 2: And the piece here is saying, look, you know, because
29:51
Speaker 2: of that shift, you're going to have the least affordable
29:54
Speaker 2: cars become sorry, the most affordable cars become more expensive
29:58
Speaker 2: as a result of Trump's tariff. I would argue that
30:01
Speaker 2: his piece here would be, well, the purpose of these
30:04
Speaker 2: tariffs is to make it so those vehicles are manufactured
30:07
Speaker 2: here in the United States, not so that car companies
30:10
Speaker 2: pay big tariffs on their vehicles. Honestly, you know, I've
30:14
Speaker 2: heard of I was speaking with somebody, for instance, just
30:17
Speaker 2: a few weeks ago who was planning on making a
30:20
Speaker 2: super group purchase before the year end because of concern
30:23
Speaker 2: about tariffs. And I have to say that this to
30:26
Speaker 2: me seems like one of the least certain areas of
30:28
Speaker 2: Trump's policies as to whether or not there will actually
30:31
Speaker 2: be tariffs imposed on two of our closest allies, Mexico
30:35
Speaker 2: and act.
30:36
Speaker 3: I don't know if you have any further thoughts.
30:38
Speaker 5: No, I mean, are we gonna are we gonna buy Greenland?
30:39
Speaker 5: Are we gonna take Greenland? We're gonna negotiate for a
30:42
Speaker 5: better rates than the Panama Every day your head spins.
30:45
Speaker 5: My new attitude to survive the next four years with
30:50
Speaker 5: my brain intact is just to wait until we get
30:53
Speaker 5: something concrete.
30:54
Speaker 3: They may be there with you.
30:55
Speaker 5: My guess is if someone told him this, mister President Ale, sir,
31:00
Speaker 5: there will be a huge adverse impact on less expensive cars.
31:03
Speaker 5: This is going to hurt a key constituency to Okay,
31:05
Speaker 5: let's you know, let's rethink that. Because he's levelheaded guy
31:08
Speaker 5: and he doesn't want to lose voters. So who knows
31:10
Speaker 5: what this is going to look like in terms of
31:13
Speaker 5: the final proposal. Maybe he'll do these things at hawkby
31:17
Speaker 5: executive order, depending on which head of state upsets him
31:20
Speaker 5: from day to day.
31:21
Speaker 1: We have no idea.
31:25
Speaker 3: From a logical perspective.
31:26
Speaker 2: If your end goal here is primarily to get China
31:29
Speaker 2: to the to the trade table here, imposing terraffs on
31:32
Speaker 2: Mexico is one of the really bad results men have
31:37
Speaker 2: from all this, right, because China's BYD has already been
31:40
Speaker 2: making big in roads into Mexico. They're opening manufacturing plants there,
31:44
Speaker 2: They're selling a lot of cars there at prices that frankly,
31:49
Speaker 2: Chevy and Ford cannot compete with and Stillantis can't compete
31:52
Speaker 2: with in any way, shape or form. And so you
31:55
Speaker 2: go slap a bunch of tariffs in order to get
31:57
Speaker 2: production out of Mexico and into the United States. That's
32:00
Speaker 2: going to leave a big vacuum for influence and power
32:03
Speaker 2: from the Chinese. And I think that the Trump administration
32:06
Speaker 2: likely acknowledges all of that. The other piece that I
32:10
Speaker 2: just have to bring up once again on the unaffordability
32:13
Speaker 2: of cars, because they are immensely unaffordable, especially when you
32:16
Speaker 2: look at the average vehicle price out there, which for
32:20
Speaker 2: anyone unfamiliar, hit about forty eight thousand dollars for the
32:23
Speaker 2: average auto price in twenty twenty four in the United States.
32:27
Speaker 2: Combine that with interest rates that are on average over
32:29
Speaker 2: seven percent, and you get a very unaffordable vehicle market.
32:34
Speaker 2: And I will once again reiterate cars are so expensive
32:37
Speaker 2: in the United States because we refuse to buy cheap cars.
32:43
Speaker 2: This is not the dealers and the auto manufacturers colluding
32:48
Speaker 2: to say, oh no, we're gonna we're gonna screw the
32:50
Speaker 2: everyman and just build fifty thousand dollars cars.
32:53
Speaker 3: There's a reason Ford got out of the sedan market.
32:55
Speaker 3: Nobody was buying cheap Sadana.
32:57
Speaker 5: Also, they didn't want to make a transmission. I drove one.
33:02
Speaker 5: I have first and experience. It was not fun. Yeah anyway, Yeah,
33:06
Speaker 5: you're right, Mike, and driving is someone who still drives
33:08
Speaker 5: a cheap car. I can tell you it's not always fun. Yeah,
33:11
Speaker 5: Rattles develop more quickly, the transmission shifts a little more
33:16
Speaker 5: roughly than a slightly nicer car. But the question is
33:19
Speaker 5: do you want to pay thirty or do you Actually
33:21
Speaker 5: I paid a lot less than that, But anyway, you
33:23
Speaker 5: want to pay thirty, you want to pay fifty?
33:25
Speaker 2: Yeah, I just I just struggled with this argument so much,
33:29
Speaker 2: like you know, Yeah, these these dreep jeep Grand Cherokees
33:32
Speaker 2: are so expensive.
33:34
Speaker 3: Yeah, look at the thing. Of course it's expensive.
33:36
Speaker 2: Uh. The reason that cars are so expensive in this
33:39
Speaker 2: country is not because of trade policy or because EPA standards,
33:46
Speaker 2: because we.
33:48
Speaker 3: Refused to buy small cars.
33:50
Speaker 5: Well we all, we also we tariff the heck out
33:51
Speaker 5: of foreign SUVs and pickups and gave our domestic producers
33:55
Speaker 5: a huge advantage there. Yep, it would be they would
33:57
Speaker 5: be arguably cheaper if we allowed.
33:59
Speaker 3: If we will this is our future cuvs, then they
34:04
Speaker 3: would be allowed.
34:04
Speaker 5: Yes, somebody let Jdvans know that, please.
34:07
Speaker 2: I think the overall problem remains a choice piece here
34:11
Speaker 2: where Americans have a car buying habit that is immensely
34:14
Speaker 2: favored towards pickup trucks and SUVs.
34:17
Speaker 3: And we seem immensely we seem immensely willing to.
34:19
Speaker 2: Pay for those in spite of the grumbling that we
34:22
Speaker 2: do when we go to the dealership.
34:25
Speaker 4: Mike is right. Americans do have a choice and use
34:27
Speaker 4: that choice to go to the US Virgin Islands. The
34:30
Speaker 4: islands are Saint Croix, Saint Thomas, and Saint John. You
34:32
Speaker 4: can visit one or all three and enjoy the vacation
34:36
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34:38
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34:41
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34:44
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34:47
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34:50
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34:53
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34:57
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34:59
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35:02
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35:05
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35:11
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35:15
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35:18
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35:24
Speaker 3: Staying on the subject of vehicles.
35:26
Speaker 2: There's a piece out this morning, another op ed piece,
35:28
Speaker 2: this time from Andrew Wheeler, who is a Trump appointee
35:31
Speaker 2: in the last administration, to the EPA on electric vehicle
35:36
Speaker 2: mandates and to spell out where we stand. According to him,
35:40
Speaker 2: the EPA currently effectively mandates that by twenty thirty two,
35:45
Speaker 2: automakers would have to shift at least fifty four percent
35:49
Speaker 2: of their production to evs and sixteen percent to hybrids,
35:52
Speaker 2: which seems just like an unrealistic target that probably won't
35:57
Speaker 2: be hit even if the mandate were to stay in place.
36:00
Speaker 3: But there's a discussion of hey, you know, is.
36:02
Speaker 2: This something that the Trump administration can and would do
36:05
Speaker 2: on day one to start repealing these mandates. It's unclear
36:08
Speaker 2: to me if they will be able to without a
36:11
Speaker 2: vote of Congress. I don't think that he can just
36:13
Speaker 2: you know, appoint somebody that will change the EPA standards.
36:16
Speaker 3: Here.
36:17
Speaker 2: The other big piece that goes along with this, though,
36:19
Speaker 2: is California. California sets as states can do their own
36:24
Speaker 2: emission standards, and when you have a state as large
36:27
Speaker 2: as California mandating certain requirements from vehicle producers, they're not
36:33
Speaker 2: just going to say Oh yeah, we'll make one car
36:35
Speaker 2: for California a completely different set of cars for Texas
36:37
Speaker 2: and the rest of the country.
36:39
Speaker 3: And I do wonder if that's a battle that the.
36:41
Speaker 2: Trump administration is going to engage in, is saying, hey, California,
36:44
Speaker 2: you cannot have stricter, stricter standard.
36:47
Speaker 5: What does these guys were for states?
36:49
Speaker 1: Right?
36:50
Speaker 2: That would be my point here is I hope they don't,
36:53
Speaker 2: because nothing to me seems dumber than a Republican administration
37:00
Speaker 2: trying to set standards where state rights get weakened, unless
37:05
Speaker 2: you just genuinely think that we're only going to have
37:07
Speaker 2: a Republican president for the rest of our lives. Because
37:10
Speaker 2: Democrats would be totally fine with states rights being weakened.
37:12
Speaker 5: I think, yeah, both parties are in a little bit
37:15
Speaker 5: of a pickle here because when it's convenient, they invoke federalism,
37:17
Speaker 5: which for some people means the federal government predominates in
37:21
Speaker 5: certain areas. For others, it means states can assert themselves
37:24
Speaker 5: in some domains. It'll be interesting to see how the
37:27
Speaker 5: courts come down on this. I assume it will be
37:29
Speaker 5: litigated if Trump tries to weakeness.
37:31
Speaker 2: Yeah, it certainly would end up in courts for an
37:33
Speaker 2: extended period of time, and quite honestly, I think that
37:37
Speaker 2: the Supreme Court would favor California on this one, where, hey,
37:40
Speaker 2: you want to create regulations that are more strict.
37:42
Speaker 3: Than the federal ones.
37:43
Speaker 2: Why wouldn't we allow that sort of thing. It's just
37:47
Speaker 2: I just remind folks try and keep into contexts that
37:50
Speaker 2: just because you agree with the way that one president
37:54
Speaker 2: is doing things, remind yourself that you won't always There
37:57
Speaker 2: will always be a future where you disagree with those
38:00
Speaker 2: in power and just empowering them to completely reshape the system.
38:04
Speaker 3: Not usually a good idea.
38:06
Speaker 2: Markets remain here in largely negative territory. We'll have a
38:10
Speaker 2: full recap again in the second hour of the show,
38:12
Speaker 2: along with a heck of a lot more stick around folks.
38:15
Speaker 2: We'll be right back on the financial exchange