Throughout comic book, TV, and movie history, many superheroes had a sidekick. A friend who fights by their side and gives them encouragement, wisdom, and friendship, when they need it most. A superhero knows that they can rely on their sidekick who is committed to achieving the same mission.
One of the most famous superhero sidekicks is Dick Grayson, also known as Robin. He first appeared in the Batman comic books in April 1940. He was the youngest member of a family of acrobats known as the Flying Graysons. As a youngster, he witnessed a mafia boss named Tony Zucco kill his parents to extort money from the circus that employed them.
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Bruce Wayne, a.k.a. Batman, takes Dick in as his legal ward and trains him to become his crime-fighting partner, Robin. You will likely remember that Bruce Wayne had also witnessed the murder of his parents, so he deeply understood the pain, the loss, and the motivation of young Master Grayson.
Over the last year, Jay Powell has been trying to be an economic superhero from his perch as Chairman of the Federal Reserve Bank. He has been trying to fight multiple economic battles concurrently. This includes both trying to slay the inflation dragon, while not pushing the economy into a recession. He has been doing all of this without a sidekick to help him with these colossal tasks.
Rising and persistent inflation was initiated and exacerbated by a combination of the Fed keeping interest rates too low for too long, while simultaneously increasing the M2 monetary supply at the fastest rate in decades. To compound this, the federal government went on a monetary spending spree. To help with their primary mission of bringing down inflation the Fed embarked on a campaign of raising interest rates nine times in just over a year.
As you can see from the chart below inflation is coming down from its peak last June. However, it is not coming down nearly as quickly as the Fed or most economists or politicians would like.
As interest rates rose, it created multiple problems and potential risks to the banking system. We have seen this play out in the news recently with several high-profile banking failures. This has led to government interventions and backstops to help prevent further spread and contagion.
Now, in what seems to be a very unlikely turn of events, the very banks that have been hurt by the Fed’s interest rate policies may become the sidekick that Jay Powell, our aspiring economic superhero, needs.
You see, when banks are nervous about solvency and liquidity, they often cut back on lending to make sure there is not too much risk to their balance sheets. When credit becomes more expensive due to higher interest rates, or loans become harder to get due to tougher underwriting standards, consumer demand for cars, appliances, and other large purchases that are generally financed slows dramatically. This slows both economic growth and inflation.
As you can see from our second chart, senior loan officers across the country have reduced their willingness to make loans to levels often associated with recessions.
This means that the recession so many people have been expecting, and that so many economic indicators have been pointing toward, may be even closer than we thought. It is pure economic irony that the same banks that have been put into turmoil by Fed policy, would unwittingly come to their rescue by slowing both the economy and inflation, by simply trying to protect their own financial institutions.
Batman, the Green Hornet, and the Lone Ranger all needed sidekicks to help them accomplish their missions. Fed Chair Jay Powell has found an unlikely sidekick in the banking system. We will continue to watch and monitor the interactions of the Fed, the Treasury, the FDIC, and the banks themselves to try to determine what happens next.
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© 2023 Jesse Hurst
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