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      Should US get rid of debt ceiling altogether? Lawmakers consider it as crisis looms

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      In just a few weeks, the US may be unable to pay its bills.A divided Congress has still not reached an agreement on raising the debt ceiling, and time is running out to avoid a default. The treasury secretary, Janet Yellen, has warned that the government may be unable to cover its financial obligations as early as 1 June. And economists predict that a federal default would cause unemployment and interest rates to rise as the country’s GDP shrinks, wreaking havoc on Americans’ finances.As Congress clashes, some lawmakers and economists have suggested a novel way to avoid future disputes over the debt ceiling: get rid of it entirely.Critics argue that the debt ceiling, created by Congress in 1917, has long since outlived its usefulness and has instead become a political weapon that could ultimately sink the US economy.Senator Sheldon Whitehouse, the Democratic chair of the Senate budget committee, recently reintroduced a bill that would eliminate what he derides as “the bear trap in the bedroom that is the debt ceiling”.“Extremist Republicans threatening the American people with default – again – puts a very fine point on the need to get rid of this arbitrary mechanism that offers no benefits yet carries with it the power to deliver serious damage,” Whitehouse told the Guardian. “The immediate priority is for Congress to cleanly raise the debt limit to avoid driving our economy off a cliff, and then we can get to work making sure we avoid future destructive rinse-and-repeat scenarios.”Economists echoed Whitehouse’s point at a Senate budget committee hearing on Thursday, suggesting that Congress should find a new way to handle the government’s borrowing limit.Speaking to the Guardian after the hearing, Mark Zandi, chief economist at Moody’s Analytics, described the debt limit as “totally anachronistic”. Although the debt ceiling might have previously spurred bipartisan negotiations over government spending levels and priorities, the threat of default was much too high in the US’s current era of hyper-polarized politics, he argued.“It’s doing more harm than good,” Zandi said. “Twenty-five years ago, the debt limit may have resulted in some policy changes. I don’t think that’s the case any longer. It’s doing real damage, and we just need to get rid of it.”But for those looking to curtail the nation’s ballooning debt, which now stands at more than $31tn, the debt ceiling has served as a useful tool to spur budgetary reform. House Republicans’ debt ceiling bill, which narrowly passed the lower chamber last week, would raise the government’s borrowing limit until May 2024 while cutting federal discretionary spending to 2022 levels and capping annual increases at 1%.“Right now, the debt limit, as flawed as it is, is the only real, true lawmaker vote available that truly covers and trades off the whole federal budget,” Brian Riedl, senior fellow at the conservative thinktank Manhattan Institute, said at the Senate committee hearing on Thursday.“If we don’t want lawmakers to use this risky and flawed process to address growing deficits, then let’s debate and come up with a federal budget process tool to have these debates and trade-offs.”The drawbacks of playing politics over the debt limit are severe. In 2011, when congressional Republicans clashed with Barack Obama over the debt ceiling, they ultimately succeeded in passing the Budget Control Act. The law included government spending caps, but Congress ended up raising them to avoid painful funding cuts, leading even the architects of the legislation to deem it a failure. However, as a result of the prolonged standoff over the debt ceiling, the US experienced its first ever credit downgrade.skip past newsletter promotionafter newsletter promotionDemocrats emerged from the 2011 crisis with a determination to never again negotiate over the debt ceiling. Biden has stuck to that strategy, rejecting House Republicans’ proposal and insisting that Congress must pass a “clean” bill raising the debt ceiling without any strings attached.“America is not a deadbeat nation,” Biden said last week. “We pay our bills, and we should do so without reckless hostage-taking from some of the Maga [Make America great again] Republicans in Congress.”Biden is scheduled to meet with the top four congressional leaders, including the House speaker, Republican Kevin McCarthy, on Tuesday to discuss the debt ceiling. Senator Chuck Grassley, the ranking member of the Senate budget committee, urged Biden to negotiate in “good faith” with McCarthy to reach an agreement.“I hope when the president sits down with the speaker, he will bring an open mind and a serious counteroffer,” Grassley, a Republican, said at the Thursday hearing. “The longer the president spends dragging his feet and putting off negotiations, the closer President Biden brings us to the first ever federal default in US history.”Compared with other recent clashes over the debt ceiling, the current conflict appears to be “more serious”, Zandi said. Even if lawmakers can successfully raise the debt ceiling in the coming weeks, Zandi fears the country is on a crash course.“We’re getting inured to it, and so we’re just taking it closer and closer to the brink,” Zandi said. “And at some point, you’re going to make a mistake.” More

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      Federal Reserve increases interest rates by a quarter point to 16-year high – as it happened

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      From 6h agoThe Federal Reserve is set to raise interest rates this afternoon, with an announcement coming at 2pm ET from the central bank after its most recent board meeting. Analysts expect the Fed will raise rates by a quarter point, which will bring rates up to 5% to 5.25%. This would be the central bank’s 10th interest rate increase since March 2022, when rates were at zero.The interest rate increase will come at what in hindsight may seem like an inflection point for the economy. Inflation is down, consumer spending has flattened and growth in the job market is starting to slow down, but Fed officials, especially Fed chair Jerome Powell, have been stringent on getting inflation down to their target of 2%. Inflation in March was 5%, the lowest it’s been since 2021, but still quite far from 2%.Analysts and economists will be closely watching Powell’s press conference at 2.30pm, where he will discuss the direction Fed staff see the economy going, giving hints as to whether even more interest rate hikes are to come or whether the Fed will end its rate-hike campaign.Here’s a quick summary of everything that’s happened today:
      The Federal Reserve increased interest rates by a quarter point, bringing rates up to 5% to 5.25%. Fed chair Jerome Powell said that Fed officials no longer anticipate more hikes, but will monitor economic data to see if they are necessary in coming months. The stock market dipped slightly after the Fed’s announcement.
      The debate over the debt ceiling continued today, with news that Senate majority leader Mitch McConnell will keep himself out of the specific of negotiating talks and hints that senators Joe Manchin and Kyrsten Sinema are breaking from Dems and looking to take Senate negotiations seriously.
      2024 is already gearing up: Joe Biden released his second TV ad since launching his campaign last week, while US rep. Colin Allred of Texas announced his bid to unseat Texas senator Ted Cruz. In Nevada, Jim Marchant, an election denier and staunch supporter of Donald Trump, also announced a Senate big.
      We’ll be closing this blog for today. Thanks for reading.Democratic senator Raphael Warnock from Georgia said that his two young kids were on lockdown at school because of the shooting in midtown Atlanta.“They’re there. I’m here, hoping and praying they’re safe,” he said on the Senate floor. “Thoughts and prayers are not enough.”One person has been confirmed dead and at least four injured after a gunman opened fire in a building in midtown around 12.30pm ET. Police said they are still searching for a suspect.The Washington Post just published a cheery report that the White House and lawmakers on Capitol Hill technically have just six working days together before the US government potentially defaults on its debt on 1 June.With the House and Senate in session on different days, and Biden making international trips for the G7 summit in Japan and another “Quad” meeting with Australia, Japan and India in Australia, the legislative and executive branches are scheduled to have just six more days together to figure out the debt ceiling.Of course, negotiations can take place even when a chamber is not in session, but the precariousness of negotiations and the closeness of default makes the timing a tad inconvenient.Talking about the fallout of the collapse of Silicon Valley Bank in March, Federal Reserve chair Jerome Powell said that it seems the worst of the crisis is over.“The severe period of stress, those have now all been resolved and all the depositors have been protected,” he said, adding that JPMorgan’s acquisition of First Republic bank marked the end of the worst of it all.Asked about lessons that he learned from the crisis, he noted that there needs to be stronger regulation and supervision, but declined to offer any specifics as he has tasked Fed vice chair Michael Barr with drafting specific policy proposals.“I am not aware of anybody thinking [the collapse] could happen so quickly,” Powell said. “Now that we know that was possible… it will be up to vice chair Barr to design ways to address that.”Today’s Federal Reserve interest rate hike is its second quarter-point hike in a row, after a series of half- and three-quarter point hikes over the last year. Fed chair Jerome Powell said at his press conference this afternoon that “slowing down was the right move”.“I think it’s enabled us to see more data and it will continue to do so. We have to always balance the risk of not doing enough and not getting inflation under control against the risk of maybe slowing down economic activity too much,” he said. “We thought that this rate hike, along with the meaningful change in our policy statement, was the right way to balance that.Asked about the possibility of a recession, Powell seemed optimistic that the Fed could achieve a “soft landing” – keeping interest rates high without seeing huge impacts on unemployment. He noted that even as rates have hit 5% over the last 14 months, the unemployment rate stands at 3.5%.“It’s possible that we can continue to have a cooling in the labor market without having the big increases in unemployment that have gone with many prior episodes,” he said.Of course, Powell noted earlier in the press conference that the full impacts of the interest rate increases have yet to be seen, acknowledging uncertainty about the full economic impact of rate hikes.Federal Reserve chair Jerome Powell emphasized the importance of raising the debt ceiling, though noted that the debt limit is “fiscal policy matters”.“It’s essential that the debt ceiling be raised in a timely way so that the US government can pay all of its bills when they’re due. Failure to do that would be unprecedented,” he said. “We’d be in uncharted territory.Powell noted that the Fed doesn’t “give advice to either side” and also noted that “no one should assume that the Fed can protect the economy from the potential short- and long-term effects” upon default.He also noted that debt limit standoff did not play a role in the Fed’s decision today to increase interest rates.Federal Reserve chair Jerome Powell is holding a press conference after the central bank announced a quarter-point interest rate increase. Powell’s tone in the press conference has changed since he last addressed the press in March. The Fed is no longer anticipating needing more rate increases, but will monitor the economy in determining future interest rate changes.While Powell is still reiterating the Fed’s inflation target of 2%, he acknowledged that the economy is “seeing the effects of our policy tightening on demand and the most interest-rate-sensitive sectors of the economy, particularly housing and investment”. In other words, the Fed sees its interest rate hikes taking effect in the slowing of the economy.“There are some signs that supply and demand in the labor market are coming back into balance,” Powell said. He added that the “economy is likely to face further headwinds from tighter credit conditions”, meaning the full effects of the interest-rate hikes have yet to be seen.Taking a question from a reporter on whether the Fed’s statement today should be taken as a hint that officials will pause rate hikes, Powell said the officials did not make a decision on a pause, but noted that they intentionally updated their stance in today’s press statement that removed a line suggesting more increases would be appropriate.“Instead, we’re saying that in determining the extent to which [more hikes are needed], the Committee will take into account certain factors,” he said. “That’s a meaningful change that we are no longer saying we anticipate [changes] and we will be driven by incoming data meeting by meeting.”The press statement that came with the Federal Reserve’s announcement of another interest rate hike is nearly identical to the one that was released at its last meeting on 22 March, with one key exception.In its 22 March release, Fed officials in the Federal Open Market Committee (FOMC) hinted that more interest rates are to come, saying: “The Committee anticipates that some additional policy firming may be appropriate” in order to bring inflation down to the target of 2%.In today’s statement, that line was cut.The rest of the statement was in line with FOMC’s March meeting statement. They reiterated their stance that “inflation remains elevated” and the jobs market has been strong, with the unemployment rate low. They emphasized that “the US banking system is sound and resilient” and that they are “highly attentive to inflation risks”.Analysts have been wondering whether this interest rate increase will be the Fed’s last, with pauses to come after as the interest rate is held steady at future meetings.Any more hints about what is next for interest rates after this most recent hike will likely be made at Fed chair Jerome Powell’s press conference at 2.30pm ET.The Federal Reserve just announced a quarter-point interest rate increase. This brings the interest rate to a 16-year high at 5% to 5.25%. The central bank has been on a year-long campaign to temper inflation, though it has had to delicately balance the potential of shaking the economy too much with stringent rate increases.Fed chair Jerome Powell will lead a closely watched press conference, where he will discuss the Fed’s view on the state of the economy.The United Auto Workers (UAW) union said in an internal memo that it is holding off on a Joe Biden endorsement due to the president’s electric vehicle policies.UAW president Shawn Fain said in the memo that union leaders met with Biden last week and discussed “our concerns with the electric vehicle transition”, according to the New York Times. The union is concerned that auto workers will suffer during the transition to EV as less workers are needed to assemble EVs.“The EV transition is at serious risk of becoming a race to the bottom,” the memo reads, referring to electric vehicles. “We want to see national leadership have our back on this before we make any commitments.”The union has 400,000 members across the country, though members are primarily in auto-industry heavyweight Michigan, a key election battleground state.The FBI arrested a man in Florida on Tuesday for his involvement in the January 6th Capitol riots, specifically for setting off an “explosive device” in the US Capitol tunnel that leads into the building. Daniel Ball, 38, was first arrested last week by the Citrus County Sheriff’s Office for assaulting seven people, including law enforcement officers, in Florida. Ball’s probation officer, upon being shown photos and videos of the Capitol riot, identified Ball as the person throwing an explosive device in the tunnel, where law enforcement was blocking rioters.Ball faces multiple charges related to the riot, including assaulting police officers and entering a restricted area with a deadly weapon.The justice department said in March that at least 1,000 people have been arrested on charges related to the riots, with 518 pleading guilty to federal crimes so far.Election denier Jim Marchant announced that he will be running for US Senate, challenging Democrat incumbent senator Jacky Rosen for the seat she won last year.During his announcement speech on Tuesday, Marchant said that he is running to “protect Nevadans from the overbearing government, from Silicon Valley, from big media, from labor unions, from the radical gender-change advocates,” the Washington Post reported.His election campaign was acknowledged by Rosen on Twitter, who replied to Marchant’s announcement:
      Nevadans deserve a Senator who will fight for them, not a MAGA election denier who opposes abortion rights even in cases of rape and incest…
      While far-right politicians like Jim Marchant spread baseless conspiracy theories, I’ve always focused on solving problems for Nevadans.
      Marchant has described himself as a “MAGA conservative”, the Post reports, and is an avid supporter of Donald Trump. More

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      Danger and deja vu: what 2011 can tell us about the US debt ceiling crisis

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      Angry at the size of the government debt, House Republicans have passed a bill that ties spending cuts to any lifting of the US’s debt limit. A tense fight is escalating, with Democrats refusing to budge and hard-line Republicans digging in. Without a solution, economists and others warn, the US could be plunged into an “economic catastrophe”.You can be forgiven a sense of déja vu. This has all happened before. Only this time, it could be worse.The federal government has a legal maximum on how much debt it can accumulate –often called the debt ceiling or the debt limit. Congress has to vote to raise that limit and has done 78 times since 1960 – often without fuss. But in recent years, the debt negotiations have become Washington’s most heated – and potentially dangerous – debate.This year’s fight looks like the most high-risk one since 2011, when Republicans used the debt limit debate as a bargaining chip for spending cuts. It was a fight to the bitter end. One former congressman told the New York Times that the battle drew “parallels and distinctions with other tumultuous times such as the civil war”.With stock markets reeling and 72 hours left before the US would have defaulted on its debts, a disaster that threatened to wreak havoc on the economy, Republicans and Democrats finally agreed on a bill that raised the debt ceiling by $900bn and cut spending by nearly the same amount.For Republicans, particularly the new rightwing Tea Party members who refused to budge even as default loomed, it was a political win.Politics are once again deeply embedded in this year’s debt ceiling debate and many see a mirroring of the debt ceiling crisis of 2011.The House speaker, Kevin McCarthy, is caught between his party’s moderate and far-right factions. Though McCarthy rallied his party behind a House bill, Democrats are so far refusing to negotiate.The US treasury is already running on fumes. In January, the treasury started using “extraordinary measures” to avoid defaulting on US debts while the debate over raising the limit started. Some estimate that the US government’s default date – the so-called “X date” when the government officially runs out of funds to pay its bills — will arrive in late July, giving the GOP and Democrats less than three months to find a solution.The US has never defaulted on its debt. Failure to find a solution would send stock markets reeling, recipients of federal benefits might not get their monthly checks, parts of government would grind to a halt and “long-term damage” would be inflicted on the US economy, according to the Federal Reserve chair, Jerome Powell.Fights over the US debt ceiling are common and usually resolved after a session of bloviating. Wall Street has so far ignored this scrap, betting on a repeat. But, as in 2011, all that could change as the X date approaches. This time the Tea Party Republicans have been replaced by even more hardline politicians – the Freedom Caucus – who begrudgingly signed on to McCarthy’s plan but have sworn to hold out for cost cuts no matter the price.“What will damage the economy is what we’ve seen the last two years: record spending, record inflation, record debt. We already know that’s damaging the economy,” Representative Jim Jordan, a founding member of the Freedom Caucus, told Reuters.David Kamin, a New York University law professor who served as an economic adviser to the Obama and Biden administrations, including during the 2011 crisis, said: “Congress has negotiated [the debt ceiling] over the many decades that it’s been in its current form. But what is different about this episode, and the episode in 2011, is the very credible threat from the Republican side to not raise the debt limit, to demand a large set of policy in exchange for a vote.” He added: “That then sets up a dangerous negotiation where what’s at stake is severe repercussions for the economy.”A default would be catastrophic for the US and global economy, creating instability in financial markets and interrupting government services. But, as the 2011 crisis showed, even getting close to default comes with a price. Markets plummeted and the ratings agency S&P downgraded the US’s credit rating for the first time in history, making it more expensive for the country to borrow money. The cost to borrow went up $1.3bn the next year and continued to be more expensive years later, essentially offsetting some of the negotiation’s cost-cutting measures.To some economists, that was just the short-term impact. The spending cuts ushered in years of budget tightening whose impacts were felt for years.“We were still in a pretty depressed economy and in recovery from the great recession when those cuts were instituted. They just made the recovery last far longer than it should have,” said Josh Bivens, chief economist for the Economic Policy Institute, a leftwing thinktank. “Over the next six or seven years, really valuable public goods and services were not delivered because they were cut so sharply.”Government spending tends to rise after recessions but per-capita federal spending fell after the debt crisis. Bivens argues that if government spending had continued at its normal levels, the unemployment rate would have returned to its pre-recession level five or six years before 2017, when the job market finally recovered its losses.This time around the Republican bill, called the “Limit, Save and Grow Act”, would increase the debt ceiling by $1.5tn in exchange for $1.47tn in cuts during the next fiscal year and a 1% spending increase cap thereafter. The Congressional Budget Office estimates that the bill would cut federal spending by $4.8tn over the next 10 years.The bill would mean cuts to things like defense, education and social services over time, though Republicans have outlined few specific cuts in the bill. House Republicans are proposing scrapping Joe Biden’s student relief program, making more stringent work requirements for government benefits, namely Medicaid, and rolling back several Inflation Reduction Act investments, particularly clean energy tax credits.The IRS would lose $71bn in funding under the new bill, a move that would lead to more lenient tax collection and ultimately cost the federal government $120bn over the next decade. Republicans have been targeting the IRS for budget cuts for over a decade, weakening the agency’s tax enforcement over corporations and the wealthy and allowing $18bn in lost government revenue, ProPublica estimated in 2018.While Republicans are using old tricks from 2011, Democrats appear to have learned some lessons from the Obama-era spat. After 2011, the Obama administration refused to negotiate over the debt ceiling. Biden and other Democratic leaders have continued the practice: the Senate majority leader, Chuck Schumer, called the Republican bill “dead on arrival” when it got to the Senate.“President Biden will never force middle class and working families to bear the burden of tax cuts for the wealthiest, as this bill does,” the White House press secretary, Karine Jean-Pierre, said in a statement Wednesday. “Congressional Republicans must act immediately and without conditions to avoid default and ensure that the full faith and credit of the United States is not put at risk.”The question now is: what are the political costs for the Democrats and Republicans? As the crisis deepens, how long will they hold and who will fold?Despite Republicans preaching fiscal discipline, US debt actually rose by $7.8tn under the Trump administration. Spending cuts would also likely target GOP-friendly expenditures. The party has already had to make a tough compromise over ethanol tax credits, which were ultimately left untouched at the behest of “Corn Belt” Republican lawmakers. And McCarthy still lost four Republican votes, the most he can afford to lose with the Republicans’ slim House majority. He has little room to compromise even if he can get Biden to negotiate.Matt Gaetz, a Republican representative from Florida and another Freedom Caucus member, voted against McCarthy’s bill and said in a statement that it would “increase America’s debt by $16tn over the next ten years”.“Gaslighting nearly $50tn in debt to America is something my conscious [sic] cannot abide at this time,” Gaetz said.Kamin pointed out that Republicans only focus on the debt ceiling as a leverage point when there is a Democratic president – the debt ceiling was raised three times during Trump’s presidency – showing that their objective is less about actually reducing the deficit than it is about playing politics.“The Republican party – at least elements of the Republican party – have organized themselves using this as a litmus test for adherence to their beliefs and are really focused on it as a central element of their agenda,” Kamin said. But the fight is “not fundamentally about deficits and debt”, he said. It is a fight about politics.As in 2011, the two sides are locked in a game of chicken and waiting for the opposition to cave. If neither side blinks, the impact on the economy will be felt for years to come. More

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      What is the US debt ceiling and what will happen if it is not raised?

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      The US is teetering on the edge of a fiscal cliff. Over three months ago the treasury warned that the US government had hit its borrowing limit, also known as the debt ceiling. Since then the US treasury has been taking “extraordinary measures” to ensure the government can continue to pay its bills. But time is quickly running out. Congress and the White House have until late summer to raise the debt limit, or else the US government will default on its bills, a historic first, with likely catastrophic consequences.Here is more on the debt ceiling and what it means for the US government:What is the debt ceiling?The debt ceiling is the limit on the amount of money the US government can borrow to pay for services, such as social security, Medicare and the military.Each year, the government takes in revenue from taxes and other streams, such as customs duties, but ultimately spends more than it takes in. This leaves the government with a deficit, which has ranged from $400bn to $3tn each year over the last decade. The deficit left at the end of the year ultimately gets tacked on to the country’s total debt.To borrow money, the US treasury issues securities, like US government bonds, that it will eventually pay back with interest. Once the US government hits its debt limit, the treasury cannot issue more securities, essentially stopping a key flow of money into the federal government.Congress is in charge of setting the debt limit, which currently stands at $31.4tn. The debt ceiling has been raised 78 times since 1960, under both Democrat and Republican presidents. At times, the ceiling was briefly suspended and then reinstated at a higher limit, essentially a retroactive raising of the debt ceiling.What happens if the US defaults?The US has never defaulted on its payments before, so exactly what will happen is unclear. It’s not likely to be good.“Failure to meet the government’s obligation would cause irreparable harm to the US economy, the livelihoods of all Americans and global financial stability,” the US treasury secretary, Janet Yellen, said in a letter to Congress earlier this year.Investors would lose faith in the US dollar, causing the economy to weaken quickly. Job cuts would be imminent, and the US federal government would not have the means to continue all its services.Why is the US debt so high?The US debt grows when the government is spending more money or when its revenue is lower.Throughout its history, the US has had at least some amount of debt. But the debt really started to grow in the 80s, after Ronald Reagan’s huge tax cuts. Without as much tax revenue, the government needed to borrow more money to spend.During the 90s, the end of the cold war allowed the government to cut back on defense spending, and a booming economy led to higher tax revenues. But then, in the early 2000s, the dotcom bubble burst, leading to a recession. George W Bush cut taxes twice, in 2001 and 2003, and then the US military campaigns in Iraq and Afghanistan increased spending by as much as nearly $6tn over the course of the war.When the 2008 Great Recession started, the government had to bulk up spending to bail out banks and increase social services as the unemployment rate hit 10%.When the unemployment rate returned to its pre-recession levels, in 2017, a major tax cut was passed under Donald Trump. The debt rose by $7.8tn while he was in office.And then the Covid-19 pandemic hit. The US government passed a series of stimulus bills to offset the worst of the pandemic’s impacts that ultimately totaled $5tn.What are the main contributors to federal government spending?The biggest chunk of US government spending goes to mandatory programs, such as social security, Medicaid and Medicare, which comprise nearly half of the overall annual budget. Military spending takes up the biggest chunk of discretionary spending, taking up 12% of the budget. Other big-ticket items include spending on education, employment training and services and benefits for US veterans.Why isn’t Congress raising the debt ceiling?On 26 April Republicans passed a bill in the House that would raise the debt ceiling by $1.5tn but mandated $4.8tn in spending cuts over a decade. Given the stakes, Democrats have refused to negotiate spending cuts over the debt ceiling. Lawmakers including Alexandria Ocasio-Cortez have argued that Republicans should bring forth spending cuts during budget negotiations, not over the debt ceiling.Still, Republicans seem adamant on using the high-stakes timeline toward default to pressure Democrats into agreeing to spending cuts. They did this successfully in 2011, when Democrats agreed to spending cuts 72 hours before the government defaulted. This time around, with neither side budging, a continued stalemate could bring the US economy closer to disaster. More

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      Pacific trade deal is more useful to Joe Biden than it is to the UK’s economy

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      Tory MPs hailed the UK’s entry last week into the Indo-Pacific trading bloc as a major step on the road to re-establishing Britain as a pioneer of free trade.It was a coup for Rishi Sunak, said David Jones, the deputy chairman of the European Research Group of Tory Eurosceptics, who was excited to be aligned with “some of the most dynamic economies in the world”.Trade secretary Kemi Badenoch also used the word “dynamic” to describe the 11 members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). She pushed back against criticism that signing a trade deal with a loose collection of countries on the other side of the world would only add 0.08% to the UK’s gross national product, and then only after 10 years of membership. That figure was an estimate by civil servants 10 years ago, she said in an interview with the Daily Mail. The CPTPP is more important these days.And it might be, but not for the trade it facilitates. The significance lies in the geopolitical realignment it promotes and how such pacts could harm future Labour governments.The CPTPP was signed on 8 March 2018. Australia, Brunei, Canada, Japan, Mexico, New Zealand and Singapore were the first to form a bloc before being joined in the five years that followed by Vietnam, Peru, Malaysia and Chile.Former president Barack Obama hoped the US would also be a founder member before coming up against a Republican Congress that disagreed. Later, Donald Trump abandoned the deal altogether.Obama wanted to throw a friendly arm around Pacific countries threatened by China’s increasingly aggressive attitude to its neighbours – or, looked at another way, maintain open markets for US goods and services across south-east Asia in opposition to Xi Jinping’s Belt and Road investment initiative. Joe Biden, despite having control of Congress, refused to consider reopening talks about US membership, paving the way for China to apply in 2021.Thankfully for Biden, Britain’s application preceeded Beijing’s by six months, putting the UK ahead in the queue; quickly it became apparent that Britain’s role could be to help block China’s entry to the CPTPP without the US ever needing to join. For the Americans, the potential loss of trade was a side issue.Brexit was never considered by Washington to be a positive development, but there was a silver lining once it became clear the UK could be deployed more flexibly in a fight with China – a confrontation that Brussels has so far backed away from.The Aukus defence pact between Australia, the UK and US is another example of this anti-China coalition – and of Sunak’s efforts to win back Washington’s approval.The move also plays to a domestic agenda. In the same way that Margaret Thatcher’s sale of state assets – from council housing to essential utilities – denied Labour the means to directly influence the economy without spending hundreds of billions of pounds renationalising those assets, so global trade deals undermine Labour’s promise to use the state to uphold workers’ rights and environmental protections.Secret courts form the foundation stone of most trade deals and allow big corporations to sue governments when laws and regulations change and deny them profits.Badenoch’s civil servants say they are comfortable with the investor-state dispute settlement (ISDS) tribunal system because the UK government has never lost a case.However, a government that wanted to push ahead at a faster pace with environmental protections, carbon taxes, or enhanced worker’s rights might find themselves on the wrong end of a court judgment.The TUC’s general secretary, Paul Nowak, was quickly out of the blocks to voice these fears when the deal was announced on Friday. That is why the EU parliament has forced Brussels to ban ISDS clauses from future trade deals.Sunak, on the other hand, appears comfortable with the prospect of CPTPP countries beginning to dictate how the UK considers basic rights – and how this could become the price of easier trade, and more importantly, foreign policy. More

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      To prevent more bank runs, the Fed should pause rate hikes | Robert Reich

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      The global financial system is facing a crisis of confidence. Which makes this week’s meeting of America’s central bankers critically important.None of the 12 members of the Federal Reserve Board’s Open Market Committee were elected to their posts. The vast majority of Americans don’t even know their names, except perhaps for the chairman, Jerome Powell.But as they try to decide whether to raise interest rates and, if so, by how much, America’s central bankers are deciding on the fate of the American – and much of the world’s – economy.And they’re sitting on the horns of a dilemma.On one horn is their fear that inflation will become entrenched in the economy, requiring more interest-rate hikes.On the other horn is their fear that if they continue to raise interest rates, smaller banks won’t have enough capital to meet their depositors’ needs.Higher rates could imperil more banks, especially those that used depositors’ money to purchase long-term bonds when interest rates were lower, as did Silicon Valley Bank.That means that raising interest rates could cause more runs on more banks. The financial system is already shaky.The two objectives – fighting inflation by raising rates, and avoiding a bank run – are in direct conflict. As the old song goes: “Something’s got to give.” What will it be?The sensible thing would be for the Fed to pause rate hikes long enough to let the financial system calm down. Besides, inflation is receding, albeit slowly. So there’s no reason to risk more financial tumult.But will the Fed see it that way?The Fed’s goal last week was to stabilize the banks enough so the Fed could raise interest rates this week without prompting more bank runs.The Fed bailed out uninsured depositors at two banks and signaled it would bail out others – in effect, expanding federal deposit insurance to cover every depositor at every bank.On top of this, 11 of America’s biggest banks agreed to contribute a total of $30bn to prop up First Republic, another smaller bank caught in the turmoil.This “show of support” (as it was billed, without irony) elicited a cheer from Jerome Powell and the treasury secretary, Janet Yellen, who called it “most welcome”. (Of course it was welcome. They probably organized it.)But investors and depositors are still worried.Other regional banks across the US have done just what Silicon Valley Bank did – buying long-dated bonds whose values have dropped as interest rates have risen. According to one study, as many as 190 more lenders could fail.On Monday, First Republic remained imperiled notwithstanding last week’s $30bn cash infusion. Trading in its shares on the New York Stock Exchange was automatically halted several times to prevent a freefall.Multiple recent downgrades of banks by ratings agencies like Moody’s haven’t helped.Reportedly, the Biden administration is even in talks with Warren Buffett, the chairman of Berkshire Hathaway, who invested billions to bolster Goldman Sachs during the 2008 financial crisis.Meanwhile, on the other side of the Atlantic, the European Central Bank last week raised interest rates by half a percentage point, asserting its commitment to fighting inflation.Yet the higher interest rates, combined with the failure of the two smaller American banks, have shaken banks in Europe.Just hours before the European Central Bank’s announcement, the banking giant Credit Suisse got a $54bn lifeline from Switzerland’s central bank.Yet not even this was enough to restore confidence. After a several days of negotiations involving regulators in Switzerland, the US and the UK, Switzerland’s biggest bank, UBS, agreed over the weekend to buy Credit Suisse in an emergency rescue deal.Finance ultimately depends on confidence – confidence that banks are sound and confidence that prices are under control.But ever since the near meltdown of Wall Street in 2008, followed by the milquetoast Dodd-Frank regulation of 2010 and the awful 2018 law exempting smaller banks, confidence in America’s banks has been shaky.November’s revelation that the crypto giant FTX was merely a house of cards has contributed to the fears. Where were the regulators?The revelation that Silicon Valley Bank didn’t have enough capital to pay its depositors added to the anxieties. Where were the regulators?Credit Suisse had been battered by years of mistakes and controversies. It is now on its third CEO in three years.Swiss banking regulations are notoriously lax, but American bankers have also pushed Europeans to relax their financial regulations, setting off a race to the bottom where the only winners are the bankers. As Lloyd Blankfein, then CEO of Goldman Sachs, warned Europeans: “Operations can be moved globally and capital can be accessed globally.”One advantage of being a bank (whether headquartered in the US or Switzerland) is that you get bailed out when you make dumb bets. Another is you can choose where around the world to make dumb bets.Which is why central banks and bank regulators around the world must not only pause interest rate hikes. They must also join together to set stricter bank regulations, to ensure that instead of a race to the bottom, it’s a race to protect the public.Banking is a confidence game. If the public loses confidence in banks, the financial system can’t function.In the panic of 1907, when major New York banks were heading toward bankruptcy, the secretary of the treasury, George B Cortelyou, deposited $35m of federal money in the banks. It was one of the earliest bank bailouts, designed to restore confidence.But it wasn’t enough. JP Morgan (the man who founded the bank) organized the nation’s leading financiers to devise a private bailout of the banks, analogous to last week’s $30bn deal.Confidence was restored, but the underlying weaknesses of the financial system remained. Those weaknesses finally became painfully and irrevocably apparent in the great crash of 1929.
      Robert Reich, a former US secretary of labor, is professor of public policy at the University of California, Berkeley, and the author of Saving Capitalism: For the Many, Not the Few and The Common Good. His new book, The System: Who Rigged It, How We Fix It, is out now. He is a Guardian US columnist. His newsletter is at robertreich.substack.com More

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      Why did the $212bn tech-lender Silicon Valley bank abruptly collapse?

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      The collapse of Silicon Valley Bank continues to reverberate, hitting bank stocks, revealing hidden stresses, knocking on to Credit Suisse, and setting off a political blame-game.Why the $212bn tech-lender abruptly collapsed, triggering the most significant financial crisis since 2008, has no single answer. Was it, as some argue, the result of Trump-era regulation rollbacks, risk mismanagement at the bank, sharp interest rate rises after a decade of ultra-low borrowing costs, or perhaps a combination of all three?Federal investigations have begun and lawsuits have been filed and no doubt new issues at the bank will emerge. But for now, here are the main reasons experts believed SVB failed.Trump rollbacksThe Vermont senator Bernie Sanders argues that the culprit was an “absurd” 2018 law, supported by Congress and signed by Donald Trump, that undid some of the credit requirements imposed under the Dodd-Frank banking legislation brought in after the 2008 banking crisis.Dodd-Frank required that banks with at least $50bn in assets – banks considered “systemically important” – undergo an annual Federal Reserve “stress test” and maintain certain levels of capital as well as plans for a living will if they failed.SVB’s chief executive, Greg Becker, argued before Congress in 2015 that the $50bn threshold (SVB held $40bn at the time) was unnecessary and his bank, like other “mid-sized” or regional banks, “does not present systemic risks”.Trump said the new bill went a “long way toward fixing” Dodd-Frank, which he called a “job-killer”. But the non-partisan Congressional Budget Office (CBO) warned before the bill passed that raising the threshold would “increase the likelihood that a large financial firm with assets of between $100bn and $250bn would fail.” Joe Biden says he wants Trump’s rollbacks reversed.SVB’s managementThe bank didn’t have a chief risk officer (CRO) for some of 2022, a situation that’s now being looked at by the Federal Reserve, according to reports. SVB’s previous CRO, Laura Izurieta, left the company in October but stopped performing the role in April. Another was appointed in December.Early SVB shareholder lawsuits are said to be looking at the key vacancy, especially as the board’s risk committee was meeting frequently before the bank collapsed.“It means perhaps management was hiding something or didn’t want to disclose something, or had disagreements over the risks it was taking,” said Reed Kathrein, a lawyer specializing in shareholder lawsuits, to Bloomberg.“This isn’t greed, necessarily, at the bank level,” said Danny Moses, an investor who predicted the 2008 financial crisis in the book and movie The Big Short. “It’s just bad risk management. It was complete and utter bad risk management on the part of SVB.”SVB and Signature, the second mid-size bank to fail last week, have also been accused of prioritizing social justice over financial management. The Republican House oversight committee chairman, James Comer, called SVB “one of the most woke banks”.The narrative fed into a larger conflict over ESG, or environmental, social and corporate governance-driven investing, that has become a target of conservatives.But the bank’s loans to community and environmental projects were not central to its collapse nor are its diversity, equity and inclusion (DEI) policies dissimilar to other banks. The argument also fails to take into account all the banks that existed in 2008, before DEI or “woke” became a part of corporate or political discourse.Nevertheless the Florida governor, Ron DeSantis, continued on that theme, telling Fox News, that SVB was “so concerned with DEI and politics and all kinds of stuff. I think that really diverted from them focusing on their core mission.”Inflation and interest ratesSVB had benefited from from more than a decade of “zero money” interest rates as billions poured into the bank via tech venture capital. Looking for some kind of a return, it put the money into long-term US treasury bonds. But when interest rates started sharply rising last year, and depositors demanded higher returns, the bank was forced to sell some of those bonds at a loss. When news of that hit social media, tech investors panicked, triggering a classic bank run. From there, it took 36 hours for the second-biggest bank failure in US history to materialize.Before the collapses, investors had been expecting the Federal Reserve to raise interest rates by a quarter or half a percentage point when the governors meet next week. Now central bankers are in a bind: continue raising rates to tame inflation still running at 6% and risk another break in the financial system, or continue tightening money supply.The treasury secretary, Janet Yellen, gave a hint on Thursday when she told the Senate finance committee that “more work needs to be done” on inflation.What happens next?Financial jitters eased on Thursday after Wall Street rode to the rescue and propped up First Republic, another mid-sized bank whose customers were fleeing. But the respite may be brief.Goldman Sachs has raised its prediction for a recession in the next year to 35%, partly as a result of lending drops by regional banks.In the meantime it seems clear that investigators are likely to uncover more problems at the banks as their inquiries continue. Those revelations may trigger more concerns from depositors and investors.On Thursday, the Republican house financial services chairman, Patrick McHenry, said people should hold off on assigning blame for the collapse of SVB and Signature while Congress and watchdogs investigate.“When people jump to these conclusions at this stage of the game – a week in on this really stressed moment for our banking system – it’s unhelpful and quite politically hackish,” McHenry told Bloomberg. More

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      Low-income Americans face a ‘hunger cliff’ as Snap benefits are cut

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      Gina Melton is facing a dilemma. Like millions of other Americans, Melton and her family relied on food assistance benefits boosted by Congress to help them through the pandemic. Now that extra cash is gone.The reduction has hit them hard. Three of her family members are disabled and one of her daughters works to take care of them through an agency. They had already relied on credit cards to pay for medical equipment that wasn’t covered by the federal health insurance schemes Medicare or Medicaid but have had to stop paying a couple of them in order to afford food.“When you have to choose between feeding your family and paying a credit card bill, you have to choose food,” said Melton, 62.Around 42 million Americans are currently enrolled in Supplemental Nutrition Assistance Program (Snap) benefits. Congress increased Snap benefits in response to the Covid-19 pandemic in March 2020. The last extra payments went out at the end of February in the remaining 32 states that were still issuing them, in addition to the District of Columbia, Guam and the US Virgin Islands.The emergency allotments were authorized in tandem with the Covid-19 emergency declaration in March 2022, but in December 2022, Congress passed a law to end the allotments.The lapse in the additional benefits will reduce Snap allotments for the average recipient by $90 a month, with some households losing $250 a month or more. Older adults at the minimum benefit level will see their monthly Snap benefits drop from $281 a month to $23.Though Melton’s husband, a diabetic, is still recovering from a recent surgery, he has been considering going back to work part time at the age of 65 as the family struggles to afford basic necessities, including healthy food. They’ve cut back on food purchases and buy what’s on sale or in reduced-price bins.“The extra food allotment was helping us a lot,” said Melton. “We’ve started shopping at lower-priced stores that don’t bag your groceries, but for a disabled person like myself, that requires me to go with a helper. We’ve also cut back on some more expensive necessities and are relying on the local food pantry more.”The end of the expanded benefits comes at a time when US consumer debt has been on the rise, with 20.5 million Americans currently behind on their utility payments and nearly 25 million behind on credit card, auto loan or personal loan payments, the highest number since 2009. Low-wage workers in the US, who make less than $20 an hour, have experienced drops in wage growth compared with other workers in recent months.Food prices have and are expected to continue to significantly rise in 2023 as well. The US Department of Agriculture estimated that all food prices will increase by 7.9% in 2023 – and they were already 9.5% higher in February 2023 compared with February 2022.With so many Americans receiving Snap benefits because of low wages, unemployment and underemployment, the sudden end of the emergency allotment has been characterized as a “hunger cliff”.Ellen Vollinger, Snap director for the nonprofit Food Research and Action Center, said: “The cliff is aptly named because this a very abrupt change in what people are going to have in their food budget and it’s affecting tens of millions of people.“When the federal government doesn’t provide as much support for food, it doesn’t mean that hungry people all of a sudden are better off, or no longer need assistance, or they go away. The hunger is still there, people are still there, the need is there, but the federal government is too abrupt in shifting the burden and costs of dealing with that downstream, to states [and] localities, and puts a greater burden on charities.”Vollinger noted that the end of emergency allotments leaves low-income families facing difficult choices around food, from forgoing meals and purchasing less to buying cheaper food.“There’s a lot of stress, that’s why we call it a hunger cliff. It’s very precipitous,” she added.Food banks have been bracing for a surge in demand as the expanded Snap benefits expire, with state agencies directing recipients to food pantries to help cope with the reduction in benefits.Studies have shown that the extra payments worked. The Urban Institute found that the increased Snap benefits during the Covid-19 pandemic kept 4.2 million Americans out of poverty in the fourth quarter of 2021, reducing poverty by 9.6% and child poverty by 14% in states with emergency allotments. They also have a wider economic benefit. Every $1 invested in Snap benefits yields between $1.50 and $1.80 in economic activity during economic downturns.A 2022 survey conducted by Propel found that among Snap recipients, there was a significant level of higher food insecurity in states where emergency allotments were cut off. In a January 2023 survey, there was an increase in the number of Snap recipients who reported skipping meals, eating less, visiting food pantries or relying on family or friends for meals compared with December 2022.The end of the emergency Snap allotments also coincides with a push from Republicans in Congress to cut regular Snap benefits this year, despite the majority of Americans having favorable views of the benefits. A January 2023 survey conducted by Purdue University found that seven out of 10 respondents supported permanent expansions of the Snap program.But an expansion looks very unlikely in the current Congress. In the meantime, recipients are facing tough choices.“I just received the last one last week,” said Patricia Ameral, 67, of Massachusetts, referring to the Covid emergency benefits. “I am certain it will mean the difference between consuming less fresh produce and less meat, fresh or frozen.” More