When the Federal Reserve conducts stress tests to measure risk in the U.S. financial markets, it may study “extraordinary” events like a “collapse in the Bitcoin market.”
Indeed, the U.S. central bank has recognized Bitcoin as potentially being a “salient risk” to the market at-large.
Since the 2009 Great Recession, the Federal Reserve has been constantly on the prowl for detecting where the next economic meltdown might occur. Congress and the Obama Administration passed the Dodd-Frank Act, which made it a law for the Fed to run these stress tests moving forward.
According to a new policy rule for the Federal Reserve, studying historical patterns is not enough to figure out where the next market panic might break out. Instead, the central bank is heeding recommendations to “consider extraordinary shocks, such as a war with North Korea, the collapse of the Bitcoin market, or major losses caused by trader misconduct.”
According to the Board of Governors of the Federal Reserve System’s newest Final Rule:
Similarly, a commenter expressed support for the incorporation in the stress test of shocks unlike those already experienced, since firms should be prepared to withstand events beyond those already endured. The commenter recommended that the Board consider extraordinary shocks, such as a war with North Korea, the collapse of the Bitcoin market, or major losses caused by trader misconduct, in its scenarios.
The current policy statement states that it may be appropriate to augment scenarios with salient risks, as approaches that only look to past recessions or rely on historical relationships between variables may not always capture current risks to the economic environment.
Where appropriate, the Board intends to continue augmenting the scenarios with risks it considers to be salient.
Since it started conducting stress tests, the Fed has studied the possibility of failure in the corporate sector and the U.S. housing market, a rapid slowdown in China’s growth, dramatic changes in oil prices, major economic contraction in the euro area, and “stresses” in emerging economies.
Once the Fed starts to monitor Bitcoin, it’s really not that far of a jump for the U.S. central bank to get involved in that market.
And I sincerely believe with you, that banking establishments are more dangerous than standing armies; & that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.
I think what populists need to explain is how the dollar has stayed so strong on international markets when U.S.D. holders in the country are simultaneouslylosing purchasing power over time.
Congress ultimately has the power to issue currency and not the Fed, because Congress wrote the Fed into existence at the request of the J.P. Morgan (the man) and other industrial barons with the Federal Reserve Act of 1913. It was actually designed for the express purpose of being a ‘keeper of the payments’ system and lending money to private financial institutions.
Moving the ball back to Congress creates obvious difficulties given the present legislative environment in which sabotage, bad faith negotiations, and a whole lot of grandstanding take priority over results. It’s plausible shifting this responsibility back to the Congress would be worse for inflation than the Fed, since principals would be strapped to two- and four-year horizon electoral incentives. And every incumbent in Congress tends exhaust all the tools at their disposal in an attempt to hold power.
Last modified: March 4, 2021 2:54 PM