The Fed admits it’s a failure

In a recent speech, Fed chair Jerome Powell talked about “balance sheet normalization” in terms that strike me as essentially admitting that the Fed is a failure as a central bank.

Here’s the quote:

The crisis revealed that banks, especially the largest and most complex, faced much more liquidity risk than had previously been thought. Because of both new liquidity regulations and improved management, banks now hold much higher levels of high-quality liquid assets than before the crisis. Many banks choose to hold reserves as an important part of their strong liquidity positions.

Source: Federal Reserve Board – Monetary Policy: Normalization and the Road Ahead

Powell seems to be suggesting that banks have chosen to treat reserves in the same way a gold-standard bank treated specie: as cash on hand to meet demands from depositors who want their money back.

I call this a failure because a big part of the reason behind the creation of the Federal Reserve was that this system—where every bank held some gold—was clearly inadequate. Commentators at the time likened it to a fire protection district which, instead of having a fire engine, required every household to have one bucket of water on hand.

By having a large common stockpile of gold at the Federal Reserve, a loss of confidence in any one bank could be easily handled. Faced with a bank run, a solvent but illiquid bank would bring some assets (loans, bonds, bills, etc.) to the discount window and receive enough gold to handle redemption requests.

Powell is saying that banks seem to have decided that they can’t count on the Fed to discount their illiquid assets—a basic function of a central bank. Instead they’re choosing to stockpile large quantities of reserves exactly the way nervous banks stockpiled gold reserves in the pre-Fed days.

I’m sure this is based on the experience of the financial crisis, where many banks held a bare minimum of reserves and safe assets, choosing instead to invest the maximum amount in complex derivative instruments, which were highly profitable until they suddenly became worthless (or at least of dubious value).

But that just means that this is a double failure by the Fed:

  1. As a lender of last resort it can’t be counted on to provide reserves to a solvent but illiquid bank.
  2. As a regulator it can’t be counted on to require that the banks hold enough high-quality assets with sufficiently transparent valuations to be usable at the discount window.

By paying interest on these reserves, the Fed is enabling this behavior—solving the old problem that “gold in the vault pays no return.” But banks should be in the business of facilitating commerce in the economy, not the business of using their depositor’s money to score some free cash from the Fed.

I completely understand the Fed not wanting to again put itself in the position of having to decide what discount rate is the right one to apply to 3rd tranche mortgage-backed subprime paper. But a strategy of “just hold more reserves” is a pretty poor solution to the problem, for exactly the same reason that “just hold more gold” was a poor solution in the pre-Fed days.

Why isn’t the 1% in a tizzy?

I marvel that the 1% is being so indifferent to the large and widening leftward political shift in the U.S. and elsewhere. It seems to me they should have already started telling their politicians, “Give the poor folks 20% of what they want, quick! We need to nip this in the bud!”

Of course, maybe they’re right and I’m wrong.

They got away with globalization, after all. And then they got away with the financial crisis. And so far they’ve gotten away with Trump’s tax cut.

Now, I can understand the first two. Globalization, despite how it crushed many individuals, families, and communities, did make people better off on average. Having the average person end up better off makes a policy supportable at some level. I can see it providing enough political cover for them to get away with it. Who doesn’t like buying cheap crap at WalMart? Nobody but freaks and weirdos like me.

The financial crisis is harder to understand, which I think is due mainly to it being harder to understand. There was a real sense that our whole economy could implode—and it was a real sense because it was actually true. The technocrats managed to save the economy, so they get some credit for that. They did it in a way that crushed homeowners, which is bad. They did it in a way that subverted the rule of law, which is bad. And they did it in a way that crushed a whole generation, which is also bad. But they did save the economy.

But now we’ve got multiple cohorts of people who have already turned against the system. It’s no longer just the freaks and weirdos who care about their local community and the natural systems that support life. It’s no longer just former homeowners whose homes were seized to save the banks. It’s no longer just millennials who graduated into a job market so bad that they’re a decade behind their parents’ generation in things like family formation (and further than that in preparing to retire).

Now it’s basically everybody except the 1% who is being harmed, and they’re being harmed right now, every day.

The Trump tax cut is just a naked grab at wealth by the wealthy. It didn’t help anybody else. Trump’s tariffs aren’t even that—they don’t help anything but Trump’s ego.

I cannot imagine that any amount of voter suppression and gerrymandering—even with the structural anti-democratic features of our constitution—will keep the supermajority of people being harmed by our current system from making some major changes.

If the 1% had any sense they’d have thrown some bones to the people already. I can’t imagine that the smart ones haven’t figured this out already.

Sure, there are plenty of dumb ones who figure that they can build a survival bunker in Alaska or New Zealand and survive the ensuing revolution and climate catastrophe. But are they really all that dumb?

Evidence so far suggests they are.

Or maybe they’re right and I’m wrong.

Weird (horrifying) study of human movement

A couple of weeks ago the New York Times linked to a new study on age-related declines in human movement. It’s an odd study, but not because of the result (which shows that children start moving less at age 6), because that seems entirely predictable to me, despite the general understanding previously having been that the decline started in adolescence.

Rather, what makes the study seem odd to me is the weird blind spot the researchers seem to have about when and how organisms (including humans) choose to move.

In the study itself the researchers make clear that they had considered the obvious presumption—that kids start moving less when they start going to school: “The overt explanation for this earlier decline could be the increased sitting times due to school.”

The  blind spot I’m talking about is presented in the next sentence, where they immediately qualified that:

However, time-specific analysis of [physical activity] has revealed that in addition to the increased [sedentary behavior] during school hours, there was also a distinct decline on weekends, out-of-school days, and during lunchtime.

Schwarzfischer P, Gruszfeld D, Stolarczyk A, et al. Physical Activity and Sedentary Behavior From 6 to 11 Years.Pediatrics. 2019;143(1):e20180994

What’s weird and horrifying is that they make that statement seemingly without it occurring to them that forcing children to sit still for hours on 5/7ths of the days of the week might affect their behavior on the other 2/7ths of the days.

Right off the top of my head I can think of four obvious reasons that would be true:

  1. The required behavior in school normalizes the behavior of extended sitting.
  2. Even a few weeks of enforced extended sitting will result in the kids becoming deconditioned aerobically, making physical activity more difficult and less appealing.
  3. Extended periods spent in any static posture—especially the static posture of sitting—will begin the process of reducing their range of motion (they’ll pretty quickly lose the ability to squat, for example), again making physical activity more difficult and less appealing.
  4. The addition of “physical education” to the kids’ daily schedule sets the pattern of replacing movement with exercise—a time-bound, regimented activity which attempts to pack the health benefits of a week’s worth of movement into just a few hours. (I’ve written about this before.)

Just one instance of this blind spot is bad enough, but it shows up again in a key reference. The researchers say that it is accepted that physical activity declines with age: “A natural and biologically determined decline of total [physical activity] throughout the life span seems likely.” They support that assertion with a couple of references, one of which looks specifically at movement in non-human animals.

Unfortunately that study (Ingram, D. K. Age-related decline in physical activity: generalization to nonhumans. Med. Sci. Sports Exerc., Vol. 32, No. 9, pp. 1623-1629, 2000, which is sadly behind a pay-wall.) has exactly the same blind spot: All the animals studied were captive animals. That study looked at how animal movement varies when an animal is moved from its “home cage” to some other cage. I can’t say I’m the least bit surprised the behavior of those captive animals closely resembles the behavior of children moved from home to school and back again.

I would be very interested in studies that included some free-range animals. (Which isn’t something I can do, but which seems at least possible now that accelerometers  are cheap.)

Of course school isn’t the only factor that inhibits children from moving more. The restrictions on self-directed play so well documented by Lenore Skenazy of Let Grow no doubt feed in as well.

So it would be great if there were studies of movement in free-range kids as well.

The final weird and horrifying thing isn’t anything new, but is something I hadn’t really been aware of before: The assumption that an age-related reduction in movement is “natural and biologically determined,” has led directly to public policies that normalize it:

This decline is also represented in recommendations from the World Health Organization (WHO): preschool-aged children should accumulate a minimum of 180 minutes per day of total [physical activity], children and adolescents (4–17 years old) at least 60 minutes per day, and adults only a minimum of 30 minutes per day in moderate-to-vigorous physical activity (MVPA).

To which I say, “Argh!”

I probably wouldn’t be so struck by this if I weren’t already tracking my own movement. (Cheap accelerometers again.)

For some time now I’ve been working to a goal of 105 minutes of movement per day, and over the last few weeks I’ve come pretty close, averaging just over 102 minutes of movement per day, according to Google Fit. (This number, based primarily on steps, somewhat underestimates my movement. In particular it gives me almost no credit for the time I spend teaching taiji, because although there’s plenty of movement, there’s not much stepping.)

The WHO recommendations make me strongly motivated to upgrade my goal for movement to 180 minutes per day.

Why should kids under 6 get all the fun?

(The image at the top is topical only in that it is is a photo from our afternoon walk yesterday.)