ep. 174


Learning From Financial Crises | Joseph Wang & Steven Kelly

What is a true financial crisis, how does it differ from the mere popping of a speculative bubble or a vanilla recession, and what are the current risks of a financial crisis right now?

Steven Kelly, an expert on financial crises and Senior Research Associate at the Yale Program on Financial Stability, joins Jack Farley and Joseph Wang (“Fed Guy”) to discuss these questions. Wang, a former senior trader for the New York Federal Reserve, shares his insight on why, despite the Fed’s quantitative tightening (QT) and rapid rate hikes, liquidity remains high. Kelly and Wang agree that the risk of a true financial crisis such as the one in 2008 is unlikely to occur, because as Kelly argues, banks have much more capital to endure losses.

Filmed on February 13, 2023.


Today's show is sponsored by Public.com: Get a 4.9% yield when you open a government-backed Treasury Account.* That's a higher yield than a high-yield savings account.** Go to public.com/forwardguidance

*26-week T-bill rate (as of 2/6/23) when held to maturity. Rate shown is gross of fees.

**As compared to the national high-yield savings average of 3.43% (Source: Time.com/NextAdvisor as of 12/30/22).


Follow Joseph Wang on Twitter https://twitter.com/FedGuy12

Follow Steven Kelly on Twitter https://twitter.com/StevenKelly49

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Steven Kelly on bank regulation: https://rb.gy/isdjlm

Joseph Wang on QT https://rb.gy/fdwd5j


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(00:00) Introduction

(00:38) What Is A Financial Crisis?

(05:14) "It's Really Hard To Find Capital In A Crisis"

(08:16) Bank Capital Ratios

(16:35) What Is The Risk Of A Financial Crisis Right Now?

(22:06) The Federal Reserve As The Dealer Of Last Resort

(27:20) Public Ad

(28:28) Joseph Wang On The Fed During March 2020

(34:25) Do Rate Hikes and Quantitative Tightening (QT) Increase Risk of Financial Crisis?

(36:51) Why Is Liquidity Rising?

(42:51) What Is The "Problematic" Collateral Now?

(46:36) "Everything Looks Fine"

(50:49) Unrealized Losses on Bank Balance Sheets Due To Rate Hikes

(54:05) Inverted Yield Curve

(54:56) The Debt Ceiling

(01:00:41) Is There A Limit To How High The Fed Can Hike?

(01:03:36) Potential Risks In The Shadow Banking System

(01:13:19) Inflation As A Financial Risk Itself


Disclaimer: Nothing discussed on Forward Guidance should be considered as investment advice. Please always do your own research & speak to a financial advisor before thinking about, thinking about putting your money into these crazy markets.

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