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US Economic Crisis Worsens Despite Moves to Bolster Finance Sector and Tame Inflation

While the US Federal Reserve uses interest rates as a bludgeon against inflation, Congress wrangles over the government debt limit. Linwood Tauheed, associate professor of Economics at the University of Missouri-Kansas City, warned the cure to the economic crisis could be worse than the sickness.
Sputnik
The economic crisis in the US could worsen despite — or because of — measures taken to head it off, an academic has said.
The ongoing row between Congress Republicans and Democrats over the federal government debt ceiling, ever-rising interest rates and the consequent run on several regional and industry banks has sent shockwaves through the stock market.
Linwood Tauheed warned Sputnik that the "crisis is not over"
"It's pretty obvious from from failures in this century plus the past century that the banking industry is not capable of maintaining its stability," Tauheed said. "And if it keeps those ways of making money like derivatives, for example, away from being regulated, then the process will eventually collapse."
At that point, he said, the 'first movers', those who are always first in and first out of any investment opportunity, will bail out leaving the rest in debt — which the academic likened to a "Ponzi scheme."
"That needs regulation," Tauheed said. "But these financial innovations like derivatives are not being regulated, and it's being left up to the banking system, which has as its as its mission to increase its profitability regardless of what it does to the taxpayers."
Meanwhile the US Federal Reserve has raised interest rates by another quarter of a percent in a bid to tame rampant inflation — despite the chaos in the banking sector caused by its last three-quarter percent rise which wiped billions off banks' Treasury Bond portfolios.
"The Silicon Valley bank situation and the situation for other banks that have US treasuries is being crippled by the raise and the increasing interest rates, because those treasuries that were purchased at face value are now have been discounted," Tahuheed explained. "If there was a run on the bank, they're actually technically insolvent."
He said the Fed's policy had also crippled the broader economy.
"Lending from banks and other financial institutions is down one and a half percent. Wholesale sales are down to almost two and a half percent. Jobless claims are up and continuing claims are up. So we're seeing weakness in the in the labor market and in finance and credit markets."
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Responding to reports that US President Joe Biden hopes to raise $1 billion from Wall Street for his 2024 re-election campaign, Tauheed said it spoke of the "disconnect between Wall Street and Main Street."
Those donations "come with a cost," he said. "What the donors are saying is they want to make sure that Joe Biden stands up for business. What they mean is stand up for Wall Street, not the businesses on Main Street."
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