Maxine Waters’ HR 2543 gives me the impression that Congress does not understand banking …

Jerome Powell, chairman of the Board of Governors of the Federal Reserve System (“Board” or “FRS”), today finished up his semi-annual tour of Capitol Hill when he presented to the U.S. House Committee on Financial Services the status of the Board’s monetary policy as it impacts the US economy.

I have watched hundreds of Congressional hearings over the past twelve years and quite frankly I never expect very much substance.  I would advise that if you can’t read Mr Powell’s entire report, then his written testimony should suffice.

The chairman of the committee, Maxine Waters, Democrat of California, announced early in the hearing that a bill she sponsored, the Federal Reserve Racial and Economic Equity Act (HR2543), had passed the House and is now sitting in the Senate.  The intent of the bill is to add additional demographic reporting requirements; to modify the goals of the Federal Reserve System, and for other purposes.”

Specifically, HR2543 would require the FRS to:

  1. Eliminate disparities across racial and ethnic groups regarding employment, income, wealth, access to credit;
  2. Conduct monetary policy and bank regulation in order to eliminate the aforementioned disparities;
  3. Conduct payment system operations in order to eliminate racial and ethnic disparities;
  4. Continue carrying out the Community Reinvestment Act of 1977; and
  5. Conduct comparisons across different demographic groups including race, ethnicity, gender, and educational attainment.

I have come to accept Congress’ authority to create a central bank system pursuant to Congress’ responsibility under the U.S. Constitution to regulate the value of money.  I can understand a constitutional argument that Congress used an implied or ancillary power to create the FRS.  Using the central bank as a social agency for diversity, equity, and inclusion I can’t fully embrace.

The Constitution does not provide for a central bank much less for a central bank that has as part of its mandate the mitigation of harm in the banking system to ethnic minorities. The boat has long left the harbor for any mitigation of banking harms to blacks.

Blacks were not a part of America’s capital and natural resources allocation plan dating back to the 1600s.  The exponential increase in capital holdings by whites are an expected result of human behavior and lineage maintenance.  Due to slavery and the Jim Crow era, Blacks were doomed to remain behind in the capital holdings race.  In order to participate in true banking activity, the entire population of blacks in America for its first 300 years would have to have owned land, waterways, access to minerals, and access to fair labor markets in order to trade for credit.

What Mrs Waters has proposed in her bill is about the best that the black political class can do in Washington.  Even if the measure passes in the Senate, the necessary reallocation of capital to blacks would not occur. 

HR 2543 serves no other purpose but to rile up Senate Republicans and make them the scape goat for failed policy.      

Alton Drew

23 June 2022

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How can the private sector help government navigate an uncertain second half of the 21st century?

As I shared in my last post, I see the current conflict in eastern Europe as a milestone in the United States government’s move toward a post petro-dollar world.  The jury is still out on the Biden-Harris administration’s ability to map out the best route through uncharted waters where the U.S. dollar is no longer the world’s reserve currency or finds itself sharing that status with the currency of an emerging China.  The first step the private sector can take in getting ahead of the U.S. government and helping direct a soft landing into the second half of the 21st century is by redefining the narrative on the role of the U.S. government.

The current narrative bought into by the electorate is that the federal government is a protector of individual rights and freedoms; inalienable rights of free speech and press; the freedom to choose their political leaders; the freedom to assemble and criticize government policy; the right to have a jury of their peers; and of other personal or commercial liberties.  Maintaining these narratives is necessary on the part of the federal government if it is to get the electorate to buy in to what I deem as the federal government’s primary mission:

  • To maintain the tax base;
  • To maintain the physical and social infrastructure that facilitates and expands the tax base; and
  • To define, design, and deploy money that transmits to domestic and global societies the underlying value (currency) of the U.S. government, a value created and supported by the government’s ability to coerce and extract taxes.

The private sector is charged by the federal and state levels of government to operationalize government’s primary mission.  Labor is converted into a source for taxes when the private sector employs it. 

The private sector accounts for and submits to the government payroll and income taxes derived from labor’s compensation.  The firms that comprise the private sector also submit taxes to the federal and state levels of government, also contributing to the tax base.

The private sector employs human, financial, and natural resources to construct and deploy the physical infrastructure that facilitates the discovery, extraction, processing, and distribution activities necessary for getting goods and services into the hands of the consumer/electorate.  The ability to efficiently move goods and services into consumer/electorate hands helps to encourage or incentivize the consumer/electorate’s compliance with taxation and laws.

Private social agents are primarily operationally responsible for maintaining America’s social infrastructure.  Schools, churches, mosques, and families are the primary suppliers of narrative, philosophy, and teachings consumed by individuals.  Unlike the commercial private sector that operates via state-issued license or certificate of public convenience, social agents, for the most part, receive their “license” from heritage, lineage, traditions, or other social customs.  Where government attempts to supplant lineage, traditions, customs, or philosophies is where the trouble starts, but more on that next time.

The last prong of the mission, the definition, design, and the deployment of money is also carried out by the private sector, specifically the banks.  The banks resell and distribute money by lending money to the consumer/electorate and business associations (firms).

I define “money” as the physical representation of the acknowledgment of the economic value you have generated for exchange with a counterparty.  “Currency”, on the other hand, is your knowledge, data, or intrinsic value, that you put into generating economic value.

The private sector in assisting government’s navigation of the 21st century has to first acknowledge an inconvenient truth.  The private sector is an agent of government.  The private sector is the creation of a public policy called “capitalism.”  As an agent, it advises the government on what the transactional portion of society is prioritizing.  Also, as an agent, it should advise the government on whether policies government wants to pursue actually facilitates the government’s aforementioned mission.

The private sector must re-evaluate the narrative behind its and the government’s existence and roles.

Alton Drew

22.03.2022

For consultation on how this political or legal event impacts your foreign exchange trade, request an appointment at altondrew@altondrew.com.

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Interbank Market News Scan: White House, Treasury focus on economics and finance to neutralize Russia’s military invasion …

Interbank, U.S., White House. The White House provides additional details on how it will impose sanctions on Russia. See press release here. Source: Executive Office of the President.

Interbank, U.S., White House. Joint Statement on restrictive economic measures placed on Russia. See press release here. Source: Executive Office of the President.

Interbank, U.S. Treasury, Russia. U.S. Department of the Treasury announces prohibition on transactions with the Central Bank of Russia. See press release here. Source: U.S. Department of Treasury.

Interbank, U.S., Federal Reserve, consumer survey. The Federal Reserve Board in March will begin a statistical study of household finances, the Survey of Consumer Finances, that will provide policymakers with important insight into the economic condition of a broad cross section of American families. See press release here. Source: Board of Governors of the Federal Reserve System.

Interbank, Bank for International Settlements, view on markets. The BIS released its quarterly view on world markets. In the prior three months, fixed income markets were jolted by shift toward tighter monetary policy; stock markets plummeted; and investor sentiment grew toward Asian economies. See press release and report here. Source: Bank for International Settlements.

Foreign exchange rates of interest and dollar index at 11:08 am AST

EUR/USD=1.12616

GBP/USD=1.34029

USD/CAD=1.27029

USD/MXN=20.3433

Source: OANDA

Dollar Index=96.74

Source: MarketWatch

Sofi Bank, NA approved on condition that it doesn’t play in the cryptocurrency space …

Released 18 January 2022

WASHINGTON—The Office of the Comptroller of the Currency (OCC) today conditionally approved applications from Social Finance Inc. (SoFi) to create SoFi Bank, National Association (SoFi Bank, N.A.), as a full service national bank headquartered in Cottonwood Heights, Utah. As part of the transaction, SoFi Bank, N.A. will acquire Golden Pacific Bank, National Association, a national bank insured by the Federal Deposit Insurance Corporation.

Upon consummation of this transaction, SoFi Bank, N.A., will have $5.3 billion in total assets and $718 million in capital at the end of the first year of operation, and will continue to offer a range of local commercial-focused loan offerings and deposit products previously offered by Golden Pacific. The bank will also provide a fully digital, mobile-first national lending platform for consumers across the country. The conditions imposed require specific capital contributions, adherence to an Operating Agreement, and confirmation that the resulting bank will not engage in any crypto-asset activities or services. In addition, the parent company of SoFi Bank, N.A., SoFi Technologies, has applied to the Federal Reserve to become a bank holding company and therefore subject to consolidated supervision.

“Today’s decision brings SoFi, a large fintech, inside the federal bank regulatory perimeter, where it will be subject to comprehensive supervision and the full panoply of bank regulations, including the Community Reinvestment Act. This levels the playing field and will ensure that SoFi’s deposit and lending activities are conducted safely and soundly, including limiting the bank’s ability to engage in crypto-asset activities,” Acting Comptroller Hsu said. “This action is consistent with the comprehensive legal and policy review of pending licensing decisions I initiated last May, and our work with other federal and state regulators to develop a coordinated approach to modernizing the federal regulatory perimeter. Like every other national bank we supervise, the OCC will require SoFi Bank, N. A., to be adequately capitalized, have strong risk management programs, policies and procedures in place, and provide fair treatment to its customers.”

Source: Office of the Comptroller of the Currency

No surprises out of Powell’s nomination hearing …

The real economy isn’t supposed to support everyone. It is supposed to employ an optimal number of employees that produce the most income at the least cost for the individuals investing the capital. This is my response to the expected drivel coming out of U.S. Senator Sherrod Brown, Democrat of Ohio, during today’s hearing on the re-nomination of Jerome Powell as chairman of the Board of Governors of the Federal Reserve. Senator Brown in his opening statement expressed his concern that Wall Street banks were enjoying over a decade of high profits while individuals on Main Street were facing the threat of unemployment and rising inflation.

Senator Elizabeth Warren’s line of questioning followed a similar vein to Mr Brown, although the Massachusetts Democrat seemed to go all in on “corporations” versus her usual culprits, the banks. Mr Powell probably determined it was best not to interrupt Mrs Warren by pointing out that the Board of Governors has oversight of banks and not your run-of-the mill corporations. Silence is best. Let her ramble on. Besides, Mrs Warren was likely on a stage of satisfaction having her favorite Fed governor (Lael Brainard) as nominee for the Board’s vice-chair, thus having an embedded check on a “dangerous man” (Warren’s words) in the form of Mr Powell.

If any topic out of the Senate was going to peak trader interest, it would be the topic of inflation. Politically, about a third of the Senate would love to have the ability this election year to say that they did something about inflation, but the Senate along with the House of Representatives, punted away their constitutional power over coin and commerce over a century ago. Although Senator Richard Shelby, Republican of Alabama, and Senator Jack Reed, Democrat of Rhode Island, raised the issue of inflation and the Federal Reserve’s policy timing to address it, none of the senators offered policy recommendations or hinted at legislation designed to mandate requirements for addressing inflation. A number of senators acknowledged the Federal Reserve’s dual statutory mandate of bringing about price stability and generating full employment, but that was the extent of serious discussion on inflation.

In just under 14 hours from this writing, the US Bureau of Labor Statistics will issue its year-over-year estimate on overall inflation. Consensus forecast is at seven percent, relatively in line with last month’s annualized rate of 6.8%. While I don’t do market analysis here, I expect that after the inflation print, the morning will be filled with banter on whether the Federal Reserve will have three rate increases or even four.

Otherwise, Mr Powell will be advanced from the Senate banking committee to the full floor of the Senate where he will likely see his nomination approved. He will likely look more hawkish. He may not have a choice if tomorrow’s number ends up being what we expect.

And as for the usual drivel on the economy and the working man, the inflation number will provide the usual fodder for campaign messaging.

Alton Drew

11.01.2022

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Disclaimer: The above is provided for informational purposes and should not be construed as financial or legal advice or as creating an agreement to provide financial or legal advice.

Will the Fed decrease the supply of currency for trade?

A review of the minutes from the Federal Open Market Committee meeting last month left me with the impression that the Federal Reserve will be ready to raise its overnight rate on interbank loans (the fed funds rate) in June of this year versus waiting until 2023. Board members and other FOMC participants see a strong economic outlook for the US along with higher inflation and tighter labor markets. While the “taper” word has for the most part gone the way of the other t-word, “transitory”, both concepts are still integral to Federal Reserve monetary policy over the next year.

By the middle of this month, the Federal Reserve is expected to purchase $40 billion of Treasury securities and $20 billion of agency mortgage-backed securities in part to maintain a smooth transition to a run-off of its balance sheet. The FOMC made clear in its minutes that the fed funds rate was still its primary monetary policy tool for achieving full employment and stable prices. The fed funds rate provides the Federal Reserve with more outcome certainty as opposed to additions to or subtraction from its balance sheet.

The FOMC also noted that during the period between its last two meetings, there were no attempts at intervening in the foreign currency markets as part of any dollar-support policy.

Touching on currency supply for a minute, the fourth quarter of 2021 saw the supply of US currency in circulation increase by 1.48% while the dollar index increased by 1.97%. I raise this merely as an interesting point given that an increase of currency in this instance may have been accompanied by a greater increase in demand by foreign and domestic customers.

In my opinion, there should be no surprise about a decrease in currency supply over the next twelve months. The fed funds rate will increase likely along with an increase in the amount of cash member banks are required to keep on reserve with the Fed. Less money in the system will lead to increases in interest rates. Increases may likely lead to increased yields making US bonds attractive.

People interested in retail forex trade should be mindful of brokers not on the up and up. Volatility and the size of the retail market is like blood in the water for less than scrupulous brokers selling you a pipe dream. Make the new year a great one.

Alton Drew

6.01.2022

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Disclaimer: The above is provided for informational purposes and should not be construed as financial or legal advice or as creating an agreement to provide financial or legal advice.

Toward Public Policy Support for High-value Trade

21 August 2021

I prefer a society that is biased toward trader/merchants; where one lives on the spread and retains the majority of her earnings.  Wage earning is a fancy term for slavery where many in the labor market are subjugated to selling a precious commodity over which they have illusionary control: time.

The irony is that what one earns for their time is inversely related to the wealth of knowledge they have amassed over time.  Unfortunately for the wage earner, the valuation of their labor is made not by the ultimate end user of their product but by the middle man corporation that employs them.  Rather than selling time to the corporation, time should be another input that labor uses to create and sell their product.

Today’s technology makes such a self-ownership approach increasingly feasible depending on the wage earner’s vocation.  Some of us can transition from wage earner to merchant due to digitalization and that sector of the information/knowledge/problem solving industry that we sit in.  So used are we to selling time that we must now start to think of the utilities, database subscriptions, and equipment costs incurred in producing an information product and sell that product at a sufficient margin; to live via the “carry trade.”

The trader wants a profitable balance sheet, one where she has a healthy surplus.  Bankers that provide liquidity to traders also want traders to enjoy a profitable balance sheet because it assures repayment of leverage.

But bankers also want to fund activities generating high returns and I think to ensure that traders are disciplined enough to seek out information on high return activity, banks will want to assess higher interest rates and other margin requirements in order to weed out low-return low value activity.  The Federal Reserve could encourage high-value search behavior by increasing the fed funds and discount window rates.  The Federal Reserve could also start driving up rates by unwinding its monthly purchases of $120 billion in US Treasury and agency-backed mortgage securities.

Higher rates will encourage living on the spread and the seeking of higher returns.

For a consultation on any regulatory or legislative discussions or announcements, please reach out to us at altondrew@altondrew.com for information on consultation rates and to reserve an appointment.

Interbank Market News Scan: Banks as currency agents, foreign exchange, Federal Reserve

The Publisher’s Note: Banks as currency agents …

Banks should think of themselves as the private sector currency agents of the State.  The currency encapsulates the economic, commercial, and social value of a political economy.  A State-issued currency ties the State’s citizens to a particular value system while providing a mechanism that accounts for a citizen’s wealth and serves the citizen as a medium of exchange for goods and services, including the payment of taxes to the State.

Banks help distribute State-issued currency primarily through the creation of credit.  Banks are a “port of call” for currency; receiving deposits from its customers, capital from its investors, and placing State-issued Treasurys, underwritten by the central bank, into its investment portfolio.  Banks issue loans to their customers creating money in the process.  This money can be deposited at other banks or used by consumers or businesses for purchases.  The fees for financial services provided to consumers and the interest earned from lending to end users and producers provide the banks with income that, along with the income generated by businesses financed by banks, can be taxed by the State.

The fallout from the 2007-2008 financial meltdown has created a narrative that banks are entities separate from the State; private sector “bad boys” whose reckless behavior from creating financial instruments doomed to perform poorly caused people to lose jobs and credit to freeze.  The narrative had citizens questioning why these misbehaving banks received bailouts from the U.S. government while ordinary citizens had to bear the brunt of the rippling effects throughout the economy. 

The answer is simple.  Selling debt instruments and earning fees for placing these instruments into the hands of investors part of the implicit agreement between the State and the banks as currency agents.  Even as elected officials such as Senator Elizabeth Warren, Democrat of Massachusetts and Senator Bernie Sanders, Independent of Vermont, argue for increased regulation of America’s larger banks, the truth of the matter is that dismantling the mechanisms of banking would be too costly to the State’s currency distribution system.  The State would have to re-write its laws to support an alternative system and for all the noise against the current system, seems to be in no rush to replace it.    

Links to follow …

Interbank. Orum, which aims to speed up the amount of time it takes to transfer money between banks, announced today it has raised $56 million in a Series B round of funding. https://techcrunch.com/2021/06/29/orum-raises-56m/

Interbank. The overnight Shanghai Interbank Offered Rate (Shibor), which measures the borrowing cost of China’s interbank market, increased 38.2 basis points to 2.177 percent Wednesday. http://www.china.org.cn/china/Off_the_Wire/2021-06/30/content_77597450.htm

Foreign exchange. The Central Bank of The Bahamas says the restrictions placed on foreign exchange outflows at the onset of the economic crisis caused by the COVID-19 pandemic will end this week. https://www.nycaribnews.com/articles/foreign-exchange-restrictions-eased-in-bahamas/

Central banks. Investment decisions over the next three months will be influenced by forward guidance from central banks, according to global fund managers in Reuters polls who recommended increasing equity exposure and lowering bond holdings in June. https://finance.yahoo.com/news/funds-eye-central-banks-guidance-124802638.html

Central banks, Federal Reserve. “[D]eveloping a CBDC could, I believe, pose considerable risks.”—Randal Quarles. https://www.federalreserve.gov/newsevents/speech/quarles20210628a.htm

Banks as currency agents …

Banks should think of themselves as the private sector currency agents of the State.  The currency encapsulates the economic, commercial, and social value of a political economy.  A State-issued currency ties the State’s citizens to a particular value system while providing a mechanism that accounts for a citizen’s wealth and serves the citizen as a medium of exchange for goods and services, including the payment of taxes to the State.

Banks help distribute State-issued currency primarily through the creation of credit.  Banks are a “port of call” for currency; receiving deposits from its customers, capital from its investors, and placing State-issued Treasurys, underwritten by the central bank, into its investment portfolio.  Banks issue loans to their customers creating money in the process.  This money can be deposited at other banks or used by consumers or businesses for purchases.  The fees for financial services provided to consumers and the interest earned from lending to end users and producers provide the banks with income that, along with the income generated by businesses financed by banks, can be taxed by the State.

The fallout from the 2007-2008 financial meltdown has created a narrative that banks are entities separate from the State; private sector “bad boys” whose reckless behavior from creating financial instruments doomed to perform poorly caused people to lose jobs and credit to freeze.  The narrative had citizens questioning why these misbehaving banks received bailouts from the U.S. government while ordinary citizens had to bear the brunt of the rippling effects throughout the economy. 

The answer is simple.  Selling debt instruments and earning fees for placing these instruments into the hands of investors part of the implicit agreement between the State and the banks as currency agents.  Even as elected officials such as Senator Elizabeth Warren, Democrat of Massachusetts and Senator Bernie Sanders, Independent of Vermont, argue for increased regulation of America’s larger banks, the truth of the matter is that dismantling the mechanisms of banking would be too costly to the State’s currency distribution system.  The State would have to re-write its laws to support an alternative system and for all the noise against the current system, seems to be in no rush to replace it.     

Interbank Market News Scan: Federal Reserve, foreign exchange, central banks …

28 June 2021

Links to follow ….

Interbank. China is taking another step to loosen its capital controls and in the process is giving onshore investors greater access to a previously hard-to-reach bond market.  https://www.bloomberg.com/news/articles/2021-06-27/how-china-is-cracking-a-window-for-its-bond-investors-quicktake?sref=oriheOus

Interbank. Only half of loan investors believe their instruments have robust fallback language designed to ensure a smooth transition from the London interbank offered rate, according to a recent survey from Barclays Plc. https://www.bloomberg.com/news/articles/2021-06-25/libor-fears-persist-for-loan-market-with-six-months-to-deadline?sref=oriheOus

Foreign exchange. Deutsche Bank AG compensated a Spanish company for losses the firm made after purchasing foreign-exchange derivatives from the German lender, people familiar with the matter said. https://www.bloomberg.com/news/articles/2021-06-28/deutsche-bank-compensates-firm-over-fx-derivatives-mis-sales?sref=oriheOus

Central banks. They spent 2020 uniting to fend off a historic recession, but central banks are slowly starting to take different paths in 2021. https://www.bloomberg.com/news/newsletters/2021-06-28/what-s-happening-in-the-world-economy-peak-central-bank-stimulus?sref=oriheOus

Central banks. Inflation is now an “influencer” of the Fed and the other central banks, but no more than that. The real question is how the central banks will respond to it, if at all, past their public comments. https://seekingalpha.com/article/4436858-central-banks-claim-check

Central banks, Federal Reserve. The Federal Reserve Board on Friday announced it will extend for a final time its Paycheck Protection Program Liquidity Facility, or PPPLF, by an additional month to July 30, 2021. The extension is being made as an operational accommodation to allow additional processing time for banks, community development financial institutions, and other financial institutions to pledge to the facility any Paycheck Protection Program, or PPP, loans approved by the Small Business Administration through the June 30 expiration of the PPP program. https://www.federalreserve.gov/newsevents/pressreleases/monetary20210625a.htm

U.S. Senate Committee on Banking, Housing, and Urban Affairs. Today, U.S. Senator Chris Van Hollen (D-Md.), a member of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, and Committee Chairman Sherrod Brown (D-Ohio) applauded the bipartisan House passage of their resolution to repeal the Trump Administration’s so-called True Lender Rule through the use of the Congressional Review Act. This regulation, finalized in the last months of the prior Administration, allows predatory lenders to skirt state laws meant to curb interest rates on loans and opens the doors for these lenders to prey on vulnerable consumers. The legislation now heads to the President’s desk for signature.  https://www.banking.senate.gov/newsroom/majority/house-passes-van-hollen-brown-legislation-to-strike-down-trump-era-rent-a-bank-rule-sending-it-to-the-presidents-desk

U.S. House Committee on Financial Services.  This week, Congresswoman Maxine Waters (D-CA), Chairwoman of the House Committee on Financial Services, gave the following statement on the House floor urging the passage of Senate Joint Resolution 15, a resolution that invalidates the Trump Administration’s “True Lender” rule. https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=408055