Everyone is talking about Iowa and speculating about New Hampshire. But it would be wise for Americans to spend some time paying attention to how the Federal Reserve prepares for the future, and what kind of future they expect. According to Bloomberg, it looks like the Powers That Be expect the economy to turn a lot worse—an “adverse scenario” that “posits harsh worldwide recession.”
As interest rates turn negative around the world, the Federal Reserve is asking banks to consider the possibility of the same happening in the U.S.
In its annual stress test for 2016, the Fed said it will assess the resilience of big banks to a number of possible situations, including one where the rate on the three-month U.S. Treasury bill stays below zero for a prolonged period.
“The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities,” the central bank said in announcing the stress tests last week.
That scenario includes the unemployment rate jumping to ten percent!
Their “test” is pretty specific. They want to know how banks will handle a negative interest of half a percentage point from the second quarter of this year to early 2019. Of course, they tell us that they’re not forecasting such a situation. The Bloomberg story quotes a Fed authority claiming that the central bank is not seriously considering instituting a negative interest rate.
They obviously are considering such a thing, or they wouldn’t be testing banks in this way. It looks like we’re in for another financial crisis and recession, perhaps much worse than in 2008. It will be interesting to see what the media says about the Obama presidency and compare it to how they blamed the Bush presidency for the economic collapse during his first year in office.
But voters should demand answers of the candidates. What will they do if (really, when) another crash occurs? Everyone is pretending that the economy is hurting and needs to be improved, but I don’t think anyone is discussing that the economy is headed for an implosion and we need to be prepared.