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Le Black Monday

Your correspondent writes and edits this newsletter, but he is also the Founder and CEO of the company that publishes it, which means he has to do business things like raise money. And so for several months investors and others have been telling him to speed up his fundraising as the market was overdue for a correction.

We suppose that correction has come.

Over the weekend came the news that Berkshire Hathaway, the holding company of legendary investor Warren Buffett, had dumped most of its stocks and bought cash and Treasuries instead. Then the Japanese stockmarket had its biggest one-day drop in history. And as we write this letter the US markets are collapsing.

What’s the policy angle, here?

The biggest role in responding to market crashes belongs to the Fed and, especially since 2008, the Fed has numerous tools at its disposal: interest rates (the market is now pricing in a .75bp cut), quantitative easing (buying large amounts of securities with freshly-printed money), discount window lending (lending directly to banks), forward guidance (signaling future policy to ease the markets), and more. The Fed could theoretically set up more emergency lending facilities or even cut the amount of reserves banks must hold, though this is very rare. Of course, the Fed’s ability to cut rates and stimulate the economy is constrained by inflation–the rate of inflation has been going down since the beginning of the year but it is still historically high.

How about the White House and Congress? The Biden Administration could announce some sort of stimulus, but such a promise would only move markets if it was credible; given a lame duck President in an election year where Congress is not expected to be able to pass major legislation, the credibility would be lacking. It may even backfire, as fears related to the deficit have increased and it might increase interest rates.

Of course, it’s debatable whether a policy response to market crashes is even a good idea. The stock market is a market and markets sometimes go through corrections in line with the laws of supply and demand, and messing with this basic mechanism is rarely good. The stock market is the market for capital, which is one of the most important markets in the US–indeed, the world. Underinvestment is bad, but so is over-investment and bubbles.

According to the economic analysts we’ve spoken to, the sector to watch will be commercial real estate lending, and the small banks that have exposure to this sector. Observers have been forecasting a crash in commercial real estate for a good semester now. Just as a mild recession in 2007 turned into a financial disaster in 2008 by putting the real estate lending sector underwater, worsening economic conditions could spell disaster for commercial real estate, which has been struggling. Commercial real estate is also a politically important industry, since it is regulated and there are commercial real estate investors and operators in every state and every congressional district. The biggest issue will be what to do about the banks. Nobody likes bailouts, and particularly, nobody likes bailouts in an election year. But the alternative would be concentration, and inviting further concentration in the already-cartelized US banking sector would be bad for financial markets over the long run.

In the meantime, the Fed will be pushed to do something. Markets are already expecting a signal of a rate cut. Guessing at the Fed’s future actions is a famously risky game, but here is the most cynical interpretation: the Fed wants the Biden-Harris Administration to continue and so will prop up the markets until November.

Policy Links

#Markets – Bloomberg’s Joe Weisenthal, the smartest financial commentator we know, has jotted down his thoughts on the market selloff.

#Labor – Matt Stoller on the FTC’s non-compete ban.

#Healthcare – Brookings with an update on the state of health insurance coverage: “In 2022, 91.8% of all residents in the U.S. reported having some form of health insurance. Among working-age adults only, 88.4% reported having some form of health insurance. However, 23 million working-age adults in the U.S. were still uninsured as of 2022”

#TaxPolicy – Brookings has a new report out on the TCJA, and they don’t like it. In particular–contrary to what we’ve seen–the author claims the Act didn’t boost investment. Interesting contrarian take, which you know we love.

#MonetaryPolicy – Lots of interesting content from Brookings today! Here, a new paper from renowned economists Christina and David Romer on the Fed’s role in curbing inflation: “Our central finding is that a fundamental determinant of success was the Fed’s commitment to disinflation at the beginning of its attempts. In episodes where its commitment was high, there were significant declines in inflation that were often long-lasting, while in ones where its commitment was low, falls in inflation were at most small and short-lived.”

#CatLadies – FREOPP’s Avik Roy has an intelligent response to the brouhaha over JD Vance’s comments on “childless cat ladies”: he argues, not unreasonably, that the greatest threat to our future is the federal debt, and that when it comes to that, parents & cat ladies have an equal stake. Read our interview with Roy: FREOPP’s Avik Roy On How To Start Your Own Think Tank

#Energy – R Street’s Philip Rossetti with an update on the permitting reform bill in Congress.

#BigTech – Writing against age-verification laws, R Street’s Shoshana Weissmann produces a stunning stat: “25 percent of kids will face identity theft before turning 18.”

#Olympics #Natalism – We appreciated this article by EPPC’s Patrick Brown on the Paris Olympics’s efforts to support parents with athletes, and on the limits of pro-parent policies as pro-natal policies.

Chart of the Day

(We weren’t able to confirm it but it looks like this is real.)

Meme of the Day