The Fed is no longer talking about zero-bound but effective lower bound. What’s the difference? Where is it?
Change Observation
So, I have an observation here. Bernanke was VERY clear about how careful they were with even a single word “given” to markets. I assume that has not changed. If Powell doesn’t want negative rates, why change the verbiage from “zero” to “effective” lower bound?
Here are the pertinent statements from a speech Powell made on June 4 at a “Conference on Monetary Policy Strategy, Tools, and Communications Practices”.
Emphasis is mine.
While central banks face a challenging environment today, those challenges are not entirely new. In fact, in 1999 the Federal Reserve System hosted a conference titled “Monetary Policy in a Low Inflation Environment.” Conference participants discussed new challenges that were emerging after the then-recent victory over the Great Inflation. They focused on many questions posed by low inflation and, in particular, on what unconventional tools a central bank might use to support the economy if interest rates fell to what we now call the effective lower bound (ELB). Even though the Bank of Japan was grappling with the ELB as the conference met, the issue seemed remote for the United States.
The next time policy rates hit the ELB—and there will be a next time—it will not be a surprise. We are now well aware of the challenges the ELB presents, and we have the painful experience of the Global Financial Crisis and its aftermath to guide us. Our obligation to the public we serve is to take those measures now that will put us in the best position deal with our next encounter with the ELB.
The big difference between then and now is that the federal funds rate was 5.2 percent—which, to underscore the point, put the rate 20 quarter-point rate cuts away from the ELB. Since then, standard estimates of the longer-run normal or neutral rate of interest have declined between 2 and 3 percentage points, and some argue that the effective decline is even larger. The combination of lower real interest rates and low inflation translates into lower nominal rates and a much higher likelihood that rates will fall to the ELB in a downturn.
Why the shift?
I believe the answer is the Fed no longer believes zero is the ELB. So this leads to a different question.
Where the Heck is the ELB?
First, we need a definition.
What’s the Definition of ELB?
Effective Lower Bound is the point beyond which further monetary policy in the same direction is counterproductive.
I propose the Bank of Japan and the ECB are already below ELB. I further propose the ELB can never be negative but it can be well above zero.
Reversal Interest Rate
I happened across an article just the other day on the ELB moving target.
The “reversal interest rate” is the rate at which accommodative monetary policy “reverses” its intended effect and becomes contractionary for the economy. It occurs when recapitalization gains from duration mismatch are more than offset by decreases in net interest margins, lowering banks’ net worth and tightening its capital constraint. The determinants of the reversal interest rates are (i) banks asset holdings with fixed (non-floating) interest payments, (ii) the strength of the constraints that they face, (iii) the degree of interest rate pass-through to deposit rates, and (iv) the initial capitalization of banks. Furthermore, quantitative easing increases the reversal interest rate and hence should only be employed after interest rate cut is exhausted. Over time the reversal interest rate creeps up, since the capital gains effect fades out as longterm bonds holdings mature while the net interest margin effect does not.
The authors propose the rate can be above or below zero but it gets higher over time especially if QE is involved.
Bank Lending Constraints
In our model, as in reality, the risk-taking ability of the banking sector is constrained by its net worth. If the latter is high enough so that the constraint does not bind, or if capital gains are strong enough to actually increase net worth, then an interest cut generates the boom in lending that the central bank seeks to induce. However, if capital gains are too low to compensate the loss in net interest income, net worth decreases to the point where the constraint binds, limiting banks’ ability to take on risk. At that point, i.e. at the reversal interest rate, any further interest cuts generate a decline in lending though the net-worth feedback. Moreover, an interesting amplification mechanism emerges. As the negative wealth effect further tightens banks’ equity constraint, banks cut back on their credit extension and are forced to increase their safe asset holdings. As safe assets yield lower returns, banks’ profits decline even more, forcing banks to substitute out of risky loans into safe assets, which in turn lowers their profit, and so on.
If either condition is false, then banks don’t lend.
Negative interest rates did not induce either Japanese or European banks to lend.
What’s Going On?
Either European banks are more capital impaired than the ECB wants everyone to believe, or banks believe there are few good credit risks worth taking.
Take your pick. I expect both are true.
Stealth Recapitalization
We then uncover the determinants of the reversal interest rate in our baseline model. The reversal interest rate depends on bank assets interest rate exposure, the tightness of financial regulation, as well as the market structure of the banking sector. If banks hold more longterm bonds and mortgages with fixed interest, the “stealth recapitalization” effect due to an interest rate cut is more pronounced, and the reversal interest rate is lower. Stricter capital requirements rise the reversal interest rate. Lower market power, which decreases profits, also generates a higher reversal interest rate. For example, in a negative interest rate environment, innovations that allow depositors to substitute bank accounts for cash more easily hurt the banks’ margins and raise the reversal interest rate; if such innovation occurs below the reversal interest rate, it directly feeds back into lower lending.
The article mentions “stealth recapitalization” of banks. I have discussed that many times recently but in a different context.
The Fed pays interest on excess reserves but the ECB charges them. Whereas the Fed gave free money to banks, the ECB charged the banks for excess reserves it forced into the system.
Negative Interest Rates Are Social Political Poison
In contrast to the authors, I do not believe negative interest rate policy can ever work as it violates basis economic principles on time preference and the time value of money.
I like the notion of ELB, or Reversal rate if you prefer.
I do not believe it can ever be below zero but accept the notion it can be higher.
It is not fixed
It varies bank-by-bank and changes over time
Chasing Tail Madness
Searching for the ELB is like chasing tails.
It’s only by accident can a central bank catch the tail. But even if it does catch the tail, the tail can still move. Further efforts to re-catch the tail are as likely as not to be in the wrong direction.
With that, let’s return to the BondFreak’s question. Why the word change?
Perhaps the Fed is aware the ECB is on the wrong course, negative rates are counterproductive, or the ELB just might be above zero.
Every attempt to fix the perceived problem of “too low inflation” goes deeper and deeper down the rabbit hole.
It’s economic madness, yet, here we are.
The solution is to let the free market set interest rates rather than a tail-chasing consortium of economic wizards who have never spotted a bubble or a recession in real time.
Of, course, we also need to get rid of central banks and fractional reserve lending.
Got Gold?
Unfortunately, central banks will not vote to abolish themselves. It’s also certain that government efforts to take direct control of money will be even worse than the actions of central banks.
A position is gold is the best counter to monetary policy madness.
The war against plastic straws lost a little momentum this week after the Canadian Green Party was found to have photoshopped a picture of party leader Elizabeth May to show her drinking from a reusable cup with a metal straw.
The original, undoctored image of May shows the politician holding a single-use paper cup while attending a street fair in the city of Victoria, with no straw in sight.
According to a statement from May, a “well-meaning” party staffer altered this image to make it appear that she was holding a reusable cup sporting the Green Party logo and a metal straw.
The new and improved picture was added to the home page of the Green Party website before the Canadian National Postblew the whole thing up by pointing out that previously published versions of the image showed a strawless May at the fair.
“I was completely shocked to find that the party had photoshopped an image of me,” May said in her statement. “I never drink from plastic water bottles. I always carry my own reusable coffee cup. I carry my own bamboo utensils. I walk the talk every day.”
The minor scandal comes at a tough time for Canadian plastic straws. The city of Vancouver has already banned them. The government of Liberal Prime Minister Justin Trudeau has announced its intention to ban plastic straws, bags, and other single-use utensils as early as 2021.
The Canadian Green Party’s 2019 platform calls for the ban of not only straws, but also single-use plates, cups, lids, cutlery, cotton buds, drink stirrers, cigarette filters, plastic water bottles, carryout bags, and balloons by January 2022.
The idea behind these bans is to address the serious global issue of marine plastic pollution. However, Canada, and rich countries more generally, are responsible for a very small percentage of this plastic waste, most of which comes from poorer Asian and African countries with undeveloped waste management systems.
Banning single-use plastic items in Canada won’t make the world’s oceans significantly less plasticky, but it sure makes for good headlines, especially when the headlines are about editing meaningless symbolism into a photo opportunity.
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NYTimes ‘Outs’ Ukraine-Call “Whistleblower” As CIA Officer
Soon after the Ukraine-gate “whistleblower” complaint was made public, questions about the source’s knowledge and background began to rise, as one former CIA officer noted very specifically:
The way this complaint was written suggested the author had a lot of help. I know from my work on the House Intel Commitee staff that many whistleblowers go directly to the intel oversight committees. Did this whistleblower first meet with House Intel committee members?
My view is that this whistleblower complaint is too convenient and too perfect to come from a typical whistleblower. Were other IC officers involved? Where outside groups opposed to the president involved?
This complaint will further damage IC relations with the White House for many years to come because IC officers appear to be politicizing presidential phone calls with foreign officials and their access to the president and his activities in the White House.
Worst of all, this IC officer — and probably others — have blatantly crossed the line into policy.
And sure enough, if The New York Times is to be believed, the complainant is a C.I.A. officer who was detailed to work at the White House at one point, according to three people familiar with his identity.
The man has since returned to the C.I.A., the people said.
The NYTimes, of course, puts its spin on the news, claiming that the whistle-blower’s expertise will likely add to lawmakers’ confidence about the merits of his complaint. However, given the current state of affairs, we suspect it will simply remind a deeply divided nation of the bias and prejudice that exists behind the President’s back.
As Chuck Schumer once warned Trump:
“Let me tell you: You take on the intelligence community – they have six ways from Sunday at getting back at you… So, even for a practical supposedly hard-nosed businessman, he’s being really dumb to do this.”
After Romney Trash-Talks Trump-Ukraine Call, Former Adviser Exposed As Burisma Board Member
Failed Presidential candidate Sen. Mitt Romney (R-UT) has been talking a massive amount of trash about President Trump’s phone call with Ukrainian President Volodymyr Zelensky – in which Trump urged his foreign counterpart to investigate claims that former Vice President Joe Biden abused his office to help his son, Hunter Biden.
Notably, the younger Biden sat on the board of Ukrainian gas company Burisma – collecting $50,000 per month despite having no previous experience in the field, nor being an investor. His only qualification appears to have been a very connected daddy – who happened to threaten to withhold $1 billion in US loan guarantees unless Ukraine’s top prosecutor, who was investigating Burisma, was fired.
After a ‘whistleblower’ filed a complaint over President Trump asking Zelensky to reopen the investigation into the Bidens – a phone call for which the transcript was released on Wednesday, Romney pounced.
“I did read the transcript. It remains troubling in the extreme. It’s deeply troubling,” said Romney to reporters on Wednesday. “Clearly what we’ve seen from the transcript itself is deeply troubling.”
“If the President asked or pressured Ukraine’s president to investigate his political rival, either directly or through his personal attorney, it would be troubling in the extreme,” Romney tweeted, adding that it’s “Critical for the facts to come out.”
Interestingly, however – Romney’s 2012 national security adviser sits on the board of Burisma.
Well, this is certainly an odd coincidence! In fact, when you dig in, you find an amazing series of coincidences. If you believe in coincidences when the CIA is involved, that is.
Mitt Romney’s national security advisor in his 2012 campaign — a career CIA spook who rose to its top levels — sits on the board of directors of Burisma, the Ukrainian gas company that formerly paid Hunter Biden $50k a month despite his complete lack of credentials or qualifications.
And it also an odd coincidence that Mitt has as CNN puts it “been a lone Republican voice expressing concern about President Donald Trump’s July phone call with Volodymyr Zelensky in which Trump asked Ukraine’s President to investigate former Vice President Joe Biden and his family.”
Still more oddly coincidental is the background of Mitt’s adviser deep in the CIA, part of the intelligence community that has “six ways from Sunday” in foiling a mere president who might oppose them, according to Chuck Schumer.
“He’s being really dumb to do this.” -Senator Schumer on Trump taunting US intelligence agencies https://t.co/QbGSmx9Xvp
Back on October 6, 2011 presidential candidate Mitt Romney proudly announced that Joseph Cofer Black (listed as “Cofer Black”) was among the people chosen as “special advisers”
…to advise Governor Romney on foreign policy strategy, defense issues, intelligence matters, counterterrorism, and regional policy. These advisers will assist Governor Romney as he presents his vision for restoring American leadership in the world and securing our enduring interests and ideals abroad.
Mr. Black brought to this role his extensive background at the CIA, which he joined in 1974 and trained for covert operations. He rose rapidly through the ranks, becoming Director of the National Counterterrorism Center from 1999-2002. Coincidentally, this was the time in which Al Qaeda planned and carried out the 911 attack without hindrance from the counterintelligence apparatus of the intelligence community. But Black was not penalized, he failed upward, being appointed Ambassador at Large and Coordinator for Counter-terrorism by President George W. Bush in December 2002.
And in yet another amazing coincidence, Black was succeeded in his job as Director of the National Counterterrorism Center by John Brennan.
Cofer Black left the CIA in 2006 (does anyone ever completely leave the CIA after being a spook?) to join Blackwater, the huge contractor for services related to military and intelligence action, where he served as vice chairman until 2008
When dealing with spooks, politicians, and bigtime power politics, sometimes coincidences are not accidental. But of course nobody wants to be a conspiracy theorist.
Big hat tip to this tweet from NoRoseGlasses and Clarice Feldman
Wall Street’s Favorite Steakhouse Once Again Has New Owners
Wall Street’s favorite steakhouse once again has new owners.
The owner of Landy’s Inc., Tilman Fertitta, has agreed to buy Del Frisco’s Steakhouses and Del Frisco’s Grilles from a private equity firm, according to Bloomberg.
According to a statement by Landry’s on Wednesday, the deal was consummated on the same day that buyout firm L Catterton closed its acquisition of Del Frisco’s Restaurant Group for roughly $650 million.
We reported the $8 per share in cash deal back in June. Leading up to the sale, activist investor Engaged Capital had taken a 9.9% stake in the company at under $7 per share and encouraged it to sell itself after its stock had plummeted from highs in the high $20 range in mid 2014 and early 2015.
Del Frisco’s Restaurant agrees to be bought by private equity firm L Catterton for $8 per share in cash, or about $267 million.
Terms for Landry’s deal were not disclosed and L Catterton will remain the owner of the bartaco and Barcelona Wine Bar brands, which are also part of the restaurant group.
According to the statement, Landry’s had been trying to acquire the company since 2012, with owner Fertitta “tracking it for many years”. Jefferies was the lead financial adviser on the deal, with help from Deutsche Bank and North Point Advisors.
Del Frisco’s operates more than 35 restaurants, with locations like Midtown Manhattan, Boston, Philadelphia and Dallas.
Fertitta is also chairman and CEO of Fertitta Entertainment, which operates the Golden Nugget Casinos and owns the Houston Rockets. His worth, according to the Bloomberg Billionaires Index, is $3.9 billion.
“Impeachment Without Conviction”: Here Are The 5 Scenarios For Trump’s Presidency
Authored by Philip Marey, senior US strategist at Rabobank
Summary
The Democrats in the House of Representatives have decided to start impeachment proceedings against President Trump. While impeachment is possible as the Democrats have a majority in the House of Representatives, conviction is unlikely as long as the Republicans in the Senate continue to support their President. In this case the removal of President Trump from office is unlikely, neither by conviction nor by the 25th Amendment.
What’s more, history suggests that it will be a challenge for the Democrats to complete the process of impeachment & conviction before Election Day 2020. And then there is – at least as things stand now – virtually no chance of conviction. Consequently, it is unlikely to affect who is on the Republican ticket for the presidential elections in 2020.
However, it will set the tone for the election campaign. In fact, it could even backfire on the Democrats as it may energize Trump voters to go to the polls. Meanwhile, the impeachment theme may overshadow any political message that the Democrats might want to sell to the electorate. What’s more, Democratic candidate Joe Biden may not come out of this process unscathed. This would strengthen the position of the remaining leading candidates in the Democratic primaries, which are far more left-wing than Biden. While this strengthens the position of the left wing in the Democratic Party, it may scare away centrist voters on Election Day. Since impeachability is a political decision rather than a legal matter, history will tell whether starting an impeachment inquiry was the right decision for the Democrats.
Impeachment proceedings and the related further deterioration of the US domestic political climate add to the range of factors that are creating the uncertainty for the economic outlook that the Fed is monitoring closely. What’s more, they reduce the chance of meaningful fiscal policy legislation. Therefore, a third insurance cut before the end of the year – which is already in our baseline forecast – has become more likely. It also makes our forecast of a recession in 2020 and the Fed cutting all the way back to zero before the end of next year more likely
Introduction
Yesterday, the White House released a memorandum of the 30 minute telephone conversation between President Trump and President Zelenskyy – as spelled in the memorandum – on July 25. According to the memorandum President Trump said: ‘The other thing, There’s a lot of talk about Biden’s son, that Biden stopped the prosecution and a lot of people want to find out about that so whatever you can do with the Attorney General would be great. Biden went around bragging that he stopped the prosecution so if you can look into it… It sounds horrible to me.’ Both the Senate and the House adopted resolutions calling on President Trump to release the whistleblower complaint to Congress. Earlier, the House Intelligence Committee set a Friday deadline for the Justice Department to release the whistleblower’s account of this event.
On Tuesday, House Speaker Nancy Pelosi (D) announced on television that she was directing six House committees that were already investigating President Trump to continue their efforts under the umbrella of an impeachment inquiry. She said that ‘the actions taken by the President have seriously violated the Constitution.’ She referred to reports that President Trump has withheld aid to Ukraine while he was pressing President Zelenskyy to investigate Democratic presidential candidate Joe Biden and his son.
In this special we sketch the different scenarios that could now unfold for Trump’s presidency. We start by explaining how the processes of impeachment & conviction work, and the likely outcomes given the current distribution of seats in the House of Representatives and the Senate. We also consider an alternative route to remove the President from office, through the 25th Amendment. We discuss the crucial role that Republican senators will play and the decisive role of voter support for President Trump. We take a look at the likely timeline of impeachment & conviction and the impact on the campaign for the 2020 elections. We also try to assess how this will affect the Fed’s rate decisions.
Impeachment and conviction
People often talk about impeachment as if it were identical to removing the President from office. However, this is not the case. In order to remove a President from office, the House of Representatives first has to impeach him, and then the Senate has to convict him. Note that President Clinton was impeached by the House in 1998, but he was subsequently acquitted by the Senate, so he was not removed from office. The only other President who was impeached by the House was Andrew Johnson in 1868, but he was also acquitted by the Senate. Formally, no US President has ever been removed by impeachment and conviction. When the Republican leadership informed Richard Nixon that impeachment and conviction were inevitable he resigned prematurely and it never came to a vote.
Due to the two stage procedure of impeachment and conviction it is not that easy to remove a President from office. What’s more, while for impeachment in the House of Representatives only a simple majority of more than 1/2 is needed, conviction in the Senate requires a 2/3 majority. At present, the Democrats have a 235-198 majority in the House (1 independent, 1 vacancy). In contrast, the Republicans have a 53-47 majority in the Senate (2 independents formally caucus with the Democrats). Assuming that all the Democrats vote for impeachment and conviction, it would take 20 Republican defectors in the Senate to remove the President from office. This equals about 38% of the Republican Senators. So while impeachment is within reach of the Democrats, the hurdle for conviction is much higher.
An additional complication is that not everybody votes along party lines. President Clinton was impeached by a House of Representatives in which the Republicans had a 228-206 majority. However, while the vote was 228-206 on the perjury charge, it was only 221-212 on the obstruction of justice charge. In fact, 5 Republicans voted against the perjury charge and 12 Republicans voted against the obstruction of justice charge (5 Democrats voted in favor of both charges). Two other charges – another perjury charge and ‘abuse of power’- failed. The impeachment in the House was followed by a trial in the Senate. The Republicans had a 55-45 majority in the Senate, but 5 Republican Senators voted ‘not guilty’ on both charges, while 5 other Republicans voted ‘not guilty’ on the perjury charge. All Democratic Senators supported their President. Hence President Clinton was acquitted on both charges. In fact, the vote got nowhere near the 2/3 majority needed for conviction. So even with a majority in both the House and the Senate, the Republicans were not able to remove a Democratic President from office. This should give us some idea of how difficult it could be to get a Republican President removed by a Senate with a Republican majority.
The crucial factor was that President Clinton kept the support of his fellow Democrats in Congress. In contrast, President Nixon was abandoned by many Republicans during the Watergate affair in the end. In the House of Representatives the Democrats had a 235-182 (18 vacancies) majority and in the Senate a 57-40 majority (1 Conservative, 1 Independent, 1 vacancy). In the Senate it would have taken at least 7 Republican defectors (17.5% of the Republican Senators) to convict Nixon. This underlines that it will be crucial whether the Republicans will continue to defend their President or whether they will defect.
Figure 1: Impeachment and conviction
Resignation
Besides being removed from office by the Congress, a US President can also decide to step down ‘voluntarily’. In fact, this is what Nixon did when it became clear that impeachment and conviction were inevitable. However, the difference between Watergate and Trumpgate is that Nixon was dealing with Democratic majorities in the House of Representatives and the Senate, while Trump finds his fellow Republicans in control of the Senate. So while Nixon stepped down to avoid a humiliating impeachment and conviction, Trump could survive a trial in the Senate. Nevertheless, in the end Nixon was abandoned by his own party. So if removal from office would become inevitable, President Trump might decide to resign as well.
The 25th Amendment
In theory, there is an alternative legal route to remove the President from office. Since 1967 when the 25th Amendment to the United States Constitution was adopted, if the President is removed from office, resigns or dies, his Vice President automatically becomes the next President of the United States. In 1974 when Richard Nixon stepped down, he was succeeded by Gerald Ford. If Trump is removed from office or if he resigns, the next President would be Mike Pence. This amendment to the Constitution was made because the latter is unclear about who succeeds the President if he or she is removed from office, resigns, dies, or is otherwise unable to discharge the powers of the presidency. While most of these reasons for succession are clearcut, the last provides an interesting twist. What are the criteria for being unable to discharge the powers of the presidency? And who decides when to invoke the 25th Amendment in this case?
Section 4 of the 25th Amendment states that the President could be removed from office by his own Vice President with the support of the majority of the President’s own cabinet. If they send a written declaration that the President is unable to discharge the powers and duties of his office to the President pro tempore of the Senate (Chuck Grassley) and the Speaker of the House of Representatives (Nancy Pelosi) the Vice President (Mike Pence) shall immediately assume the powers and duties of the office as Acting President.
If the President (Donald Trump) then sends a written declaration that no inability exists to the President pro tempore of the Senate and the Speaker of the House of Representatives, he shall resume the powers and duties of his office unless the Vice President and a majority of the Cabinet transmit within 4 days to the President pro tempore of the Senate and the Speaker of the House of Representatives their written declaration that the President is unable to discharge the powers and duties of his office.
Finally, Congress shall decide the issue, assembling within 48 hours for that purpose if not in session. If the Congress, within 21 days after receipt of the latter written declaration, or, if Congress is not in session, within 21 days after Congress is required to assemble, determines by two-thirds vote of both Houses that the President is unable to discharge the powers and duties of his office, the Vice President remains Acting President; otherwise, the President shall resume the powers and duties of his office.
Note that invoking the 25th Amendment would work much faster than impeachment and conviction proceedings: it could be done within 25 days. However, it would require not only 2/3 of the Senate, but also 2/3 of the House of Representatives. What’s more, Section 4 has never been invoked. However, it was briefly considered during the Reagan presidency in 1987 when there were doubts about his abilities to discharge the powers of the presidency, because he appeared ‘inattentive’, ‘inept’, and ‘lazy’. What’s more, it has been argued that Section 4 should have been invoked after the assassination attempt at President Reagan in 1981. While at present it appears unlikely that President Trump will lose the support of his own Vice President and Cabinet before he loses the support of Congress, if time becomes an issue we cannot rule out that Section 4 of the 25th Amendment will be invoked for the first time, especially if impeachment proceedings have not yet started.
What’s more, if the Vice President and the majority of the Cabinet were to invoke Section 4 of the 25th Amendment that could in itself raise the number of Senators and Representatives willing to remove the President from office because of the signal it would provide about the President’s abilities from his inner circle. In fact, the Vice President may decide to consult with the Republican leadership in Congress beforehand.
While Section 4 may not have been written for the current circumstances, the way it is formulated does offer the possibility to use it nevertheless. Note that Section 4 of the 25th Amendment is similar to the ‘high crimes and misdemeanors’ in case of impeachment: it is vague and allows for some discretion to deal with unforeseen circumstances.
Figure 2: The 25th Amendment
Source: Rabobank
Republican Defense or Defection?
While impeachment & conviction has the appearance of a judicial process, it is in fact political. This means that conviction is unlikely as long as the Republicans in the Senate are willing to support their President. The same can be said about the invocation of the 25th Amendment. A crucial event that could determine the willingness of the Republicans to do so is Election Day 2020, when in addition to the White House, all seats in the House of Representatives and 1/3 of the seats in the Senate are at stake. A Republican Senator has no incentive to support the President if it will cost him his re-election. If support for Trump among the Republican voters is waning, this will increase the probability of impeachment and conviction. However, at present it seems that President Trump’s approval rating has stabilized, after a decline in his first year in office. What’s more, according to a Sept 16-20 Reuters/Ipsos poll 82% of registered Republicans approved of his job performance.
An important consideration for the Republicans is that if they remove their own President from office, they will not have to hand over the White House to the Democrats: in fact the Vice President will take over. So once President Trump is removed, Vice President Pence will become the next President of the United States. He has a much longer track record within the Republican Party than President Trump and Pence’s views are broadly in line with the conservative wing of the party.
In terms of the legislative agenda we could see a new chance of progress if we move from a constitutional crisis to a new President as Washington DC could refocus on making policy. Therefore the incentives for the Republicans to defect depend both on their re-election chances in 2020, and the increased probability of getting things done once they remove the President from office if progress on the legislative agenda has come to a standstill.
Impeachment timeline
How much time could impeachment and conviction take? President Clinton’s impeachment proceedings lasted from January 3, 1998, until December 19, 1998. The Senate trial took place from January 7, 1999, until February 12, 1999. So impeachment of Clinton by the House took almost 12 months, his trial in the Senate ended two months later. If we are going to see the same time schedule, it could take until September 2020 before President Trump is impeached and his trial in the Senate would last until November 2020, probably after Election Day. So it will be a challenge for the Democrats to get President Trump impeached before Election Day 2020, and then there is – at least as things stand now – virtually no chance of conviction.
Impact on the elections
Consequently, it will not affect who is on the Republican ticket for the presidential elections in 2020. However, it will set the tone for the election campaign. In fact, it could even backfire on the Democrats as it may energize Trump voters to go to the polls. Meanwhile, the impeachment theme may overshadow any political message that the Democrats might want to sell to the electorate. What’s more, Democratic candidate Joe Biden may not come out of this process unscathed6. This would strengthen the position of the remaining leading candidates in the Democratic primaries, which are far more left-wing than Biden. While this strengthens the position of the left wing in the Democratic Party, it may scare away centrist voters on Election Day. Since impeachability is a political decision rather than a legal matter, history will tell whether starting an impeachment inquiry was the right decision for the Democrats.
Scenarios for Trump’s presidency
To summarize, we have identified 5 possible scenarios for Trump’s presidency. In the two most likely scenarios President Trump remains in office, at least until Election Day 2020.
In the first scenario, the Democrats fail to impeach the President, despite their majority. This could occur if the Democratic leadership fails to persuade enough Democratic Congressmen that impeachment is either justified or smart politics. In the second scenario, the Democrats are successful in impeaching the President, but the Republicans prevent a conviction in the Senate.
A less likely scenario is that the Republicans abandon their President and contribute to a 2/3 majority in the Senate to convict Trump. This would lead to his removal from office. It would take an alarming decline in voter support for Republicans to take this approach.
Two other unlikely scenarios involve the invocation of the 25th Amendment. In this case Trump’s own Vice President and Cabinet, with the approval of Congress, decide that his removal from office is warranted, either because of irresponsible behavior or because he is hurting the reelection chances of the Republicans in Congress. So the initiative would come from President Trump’s own Republican Party, not the Democratic opposition. The ‘25th Amendment’ route offers 2 scenarios: resumption of office or removal from office. The latter would require the largest decline in voter support for Trump.
While at present we think that President Trump will not be removed from office through either Impeachment & Conviction or through the 25th Amendment, the probabilities that we attach to the various scenarios could evolve over time. Events in recent years have taught us that what seems unlikely today could be reality in the not too distant future. What’s more, history has shown that in the end Nixon was abandoned by his own party and Reagan’s inner circle at one time contemplated invoking the 25th Amendment.
More for the Fed to worry about
For the Fed, the impeachment proceedings and the related further deterioration of the US domestic political climate add to the range of factors – such as the global economic growth, trade policies, Brexit – that are creating the uncertainty to the central bank’s outlook that it is monitoring closely. What’s more, the increased partisanship reduces the chance of meaningful fiscal policy legislation. This means that the burden of sustaining the economic expansion will continue to fall on monetary policy. Therefore, a third insurance cut before the end of the year – which is already in our baseline forecast – has become more likely. It also makes our forecast of a recession in 2020 and the Fed cutting all the way back to zero before the end of next year more likely.
Editor at Large Matt Welch speaks with former Republican congressman and talk show host Joe Walsh, who is currently mounting a long-odds primary challenge against President Donald Trump. Walsh, who served one term in the House representing Illinois’ 8th District, used to be a Trump supporter. Now he says the president is a liar, a bully, and a racist who is completely unfit for office. The one-time Tea Party favorite called for Trump’s impeachment after the Mueller report came out earlier this year.
Walsh confesses to his role as a hype man for Trump and to his own past racist comments about Barack Obama. He also talks about the decline of the Tea Party as a political force and the need for the GOP, which has gone astray on such issues as trade, debt, and spending, to embrace libertarian ideas.
Audio production by Ian Keyser and Regan Taylor.
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Editor at Large Matt Welch speaks with former Republican congressman and talk show host Joe Walsh, who is currently mounting a long-odds primary challenge against President Donald Trump. Walsh, who served one term in the House representing Illinois’ 8th District, used to be a Trump supporter. Now he says the president is a liar, a bully, and a racist who is completely unfit for office. The one-time Tea Party favorite called for Trump’s impeachment after the Mueller report came out earlier this year.
Walsh confesses to his role as a hype man for Trump and to his own past racist comments about Barack Obama. He also talks about the decline of the Tea Party as a political force and the need for the GOP, which has gone astray on such issues as trade, debt, and spending, to embrace libertarian ideas.
Audio production by Ian Keyser and Regan Taylor.
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After a strong 2-Year, and poor, tailing 5-Y auction, moments ago the US Treasury concluded the last coupon auction for the week, selling $32 billion in 7 year paper in what was no less than a spectacular auction, with a high yield of 1.633%, which while above last month’s 3-year low yield of 1.489%, stopped through the When Issued by a solid 0.5bps, the biggest stop through since March.
Confirming the strong demand for today’s paper was the impressive surge in the bid to cover, which jumped from a ten year low of 2.159 in August to 2.492, the highest since March, and far above the 2.37 six auction average.
But it was the internals that were most impressive, with the Indirects taking down a whopping 65.2%, the highest since December, and far above the 58.0% recent average. And with Directs allotted 14.6% of the auction, Dealers were left holding just 20.22%, the lowest Dealer allocation since March. On the other hand in this time of severe repo deficiencies, perhaps Dealers should have held on to more of the paper just so they can convert it to liquidity with the Fed when the need arises.
Overall, a very strong auction, and one which pushed the yield on the 10Y back to 1.68%, near session lows.
Since its founding in 2016, Christian satire site The Babylon Bee has been regularly making fun of Christians, the left, the right, Trump, and various cultural fads. The site has steadily grown in popularity and now boasts about 10 million monthly page views. In addition to making poignant jokes, Kyle Mann, the site’s editor-in-chief, aims to use satire as a weapon to separate truth from fiction.
But less than five months after its inception, The Babylon Bee found itself being labeled as a “fake news site” by the prominent online fact-checker Snopes. Satirical articles from The Bee have now been fact-checked by Snopes more than 30 times.
In an effort to justify fact-checking satire, Snopes republished an article from the academic commentary and analysis site The Conversation arguing that “too many people think satirical news is real.” While he’s not inherently opposed to fact-checking satire, Kyle Mann says that the original study was meant to observe the effects of satire in general, but when tweeting out their link of the study, Snopes specifically targeted The Babylon Bee.
What’s more, the study’s methodology was questionable: Instead of showing participants articles as they appeared online, satirical headlines were stripped of both context and comedy. For example, the Babylon Bee headline “CNN: ‘God Allowed the Mueller Report to Test Our Shakeable Faith in Collusion.’” was presented to participants as “CNN news anchor Anderson Cooper said his belief that Trump colluded with Russia is unshakable; it will not change regardless of statements or evidence to the contrary.”
Reason’s John Osterhoudt sat down with Mann to discuss the Snopes criticism, his aspirations for the Bee, and why he believes that satire can divide what’s important from what’s not, revealing important truths about the world.
