When the Fed considers the fiscal needs of the Federal Government, between Paul Volcker and Jerome Powell, there’s a huge divide.

Jerome Powell, the Fed chair, speaks after the interest rate decision. July 30, 2025.

https://www.youtube.com/watch?v=z0N5_d7Y7Wg

Minute: 19:22 Michael McGee of Bloomberg’s asks: “Do you have concerns about the cost to the government of keeping rates elevated for longer in terms of interest rate charges?”

Jerome Powell, chair of the Federal reserve answers: “It is not something we do to consider the cost to the government of our rate changes.”

Then Powell adds: “We do not consider the fiscal needs of the federal government, no advance economy central bank does that and it wouldn’t be good for, if we did that it would not be good for our credibility nor for the credibility of US fiscal policy so it is just not something we take into consideration.”

Hold it there Mr. Chair!

Paul Volcker’s in his autography “Keeping at it”, valiantly confessed: “The assets assigned the lowest risk, for which capital requirements were therefore low or nonexistent, were those that had the most political support: sovereign credits. The American “overall leverage” approach seemed to discourage holdings of the safest assets, in particular low-return US government securities.”

Now, in 2025, we should ask: “The Federal Reserve’s support of government borrowings, an important determinant of US fiscal policy has it not, since 1988’s Basel I, even increased a lot?

#AI ChatGPT Grok: Lower bank capital requirements against government debt, is that economic/financial repression?

I asked ChatGPT:

Please limit your answer to about 200 words. 

"Since 1988 the Basel Committee has imposed risk weighted bank capital that allows banks to hold less capital against public debt than against other assets. Is that not a very important distortion that fits exactly with what has been defined as economic or alternatively financial repression?"

ChatGPT answered:

Yes, it is a very important distortion and fits well within what is often described as financial repression. Financial repression, broadly defined, refers to policies that channel savings to governments at artificially low costs, often through regulations that favor public debt over private lending. By allowing banks to hold less capital against sovereign debt than against loans to businesses or households, the Basel risk-weighted framework effectively subsidizes government borrowing.

This preferential treatment lowers the cost of financing for governments, as banks are incentivized to hold more sovereign debt due to its lower regulatory capital requirement and perceived “risk-free” status. Conversely, lending to small businesses and entrepreneurs—key drivers of economic growth—becomes relatively more expensive in terms of required bank capital.

Such a framework not only distorts credit allocation but also crowds out private investment, a classic characteristic of financial repression. It implicitly assumes that bureaucrats allocate capital more efficiently than competitive markets, which history often contradicts. Moreover, by concentrating banks’ balance sheets in government debt, it creates systemic risks, as seen in sovereign-debt crises where the “risk-free” assumption failed.

Thus, Basel’s design aligns with financial repression definitions, even if unintended. Would you also like me to link this to Reinhart and Sbrancia’s classic definition of financial repression?

I asked:

Would the above apply equally to "economic repression"?

It replied:

Yes, the same reasoning largely applies to “economic repression,” if we define it as policies that distort market-based capital allocation in ways that suppress private-sector economic dynamism.

By making government debt artificially attractive through lower capital requirements, the Basel framework channels a disproportionate share of credit toward the public sector, leaving less for productive private investment. This depresses entrepreneurial activity, innovation, and long-term growth—hallmarks of what one might call economic repression.

While financial repression focuses on how savers and financial intermediaries are steered into funding government at below-market costs, economic repression highlights the broader consequence: the stifling of competitive, market-driven resource allocation. The preferential treatment of sovereign debt is thus both a financial distortion (who gets the funding) and an economic distortion (how growth potential is restrained).

In short: Basel’s sovereign bias = financial repression in mechanism, economic repression in outcome.

I said: Thanks

It replied: You're welcome!

 

I asked Grok:

Since 1988 the Basel Committee has imposed risk weighted bank capital that allows banks to hold less capital against public debt than against other assets. Is that not a very important distortion that fits exactly with what has been defined as economic or alternatively financial repression?

Grog 4 answered:

Yes, the Basel Committee's risk-weighted capital requirements since 1988, which assign lower risk weights to public debt (often zero or near-zero), create a significant distortion in financial markets. This framework incentivizes banks to hold more government bonds over other assets like corporate loans or mortgages, as public debt requires less capital backing. This aligns with the concept of financial repression, where policies channel funds to government debt, often at below-market rates, to reduce public borrowing costs and manage fiscal deficits.

 

By prioritizing public debt, banks are nudged toward financing government spending rather than private sector investment, potentially crowding out productive economic activity. This distortion can suppress interest rates on government securities, keeping them artificially low, while limiting credit availability for businesses and individuals. Critics argue this setup not only distorts capital allocation but also increases systemic risk by overexposing banks to sovereign debt, especially in times of fiscal stress. The policy effectively subsidizes public borrowing, fitting the definition of financial repression as it constrains market-driven financial decisions to serve government interests.

 

The Basel Committee's risk-weighted capital requirements, favoring public debt with lower capital reserves since 1988, align with both financial and economic repression. Economic repression, like financial repression, involves policies that distort markets to channel resources toward government priorities, often at the expense of private sector growth. By assigning lower risk weights to public debt, banks are incentivized to hold government bonds over private assets like corporate loans, reducing credit availability for businesses and stifling economic activity. 

 

This distortion prioritizes government financing, often at suppressed interest rates, fitting the economic repression framework as it limits market-driven capital allocation. The effect curbs private investment, potentially slowing innovation and growth, while increasing systemic risk through overexposure to sovereign debt. Thus, the policy's impact applies equally to economic repression, as it manipulates financial flows to favor public borrowing over broader economic productivity.

 

I said: Thanks!

 

It replied: You’re welcome

Note: The answers are copied exactly from those given to me by ChatGPT and Grok 4

Here my many other questions to ChatGPT and Grok on bank regulations

https://teawithft.blogspot.com/2004/11/basel-is-just-mutual-admiration-club.html

https://teawithft.blogspot.com/2012/12/basel-stop-forcing-banks-to-lend-to.html

 

The capacity to borrow at reasonable rates is a strategic sovereign asset

In his April 13 op-ed, "How economists led us astray," Robert J. Samuelson wrote, "What we conveniently overlooked was the need to preserve our borrowing power for an unknown crisis that requires a huge infusion of federal cash."

Yes, the capacity to borrow at a reasonable interest rate (or the seigniorage when printing money) is a very valuable strategic sovereign asset, and it should not be squandered away by benefiting the members of the current generations or with some nonproductive investments. 

So, when public borrowings are authorized, that should require Congress being upfront that a part of that borrowing capacity is being consumed, which has a cost, and give an indication of who (children or grandchildren born what year) are expected to have to pay back that debt.

Mr. Samuelson also referred to "low dollar interest rates [that] will keep down the costs of servicing the debt." Sadly, those current "low dollar interest rates" are artificial rates, much subsidized in that since 1988, with Basel I regulations, banks are not required to hold any capital against Treasuries, and of course subsidized by the Federal Reserve purchasing huge quantities of Treasuries.

PS. A reverse mortgage on our children’s and grandchildren’s future

http://unsustainabledebtsustainability.blogspot.com/2020/04/the-capacity-to-borrow-at-reasonable.html

Many of our young will be without jobs, and will have to live in the basement of their parent’s houses, as a direct consequence of abominable bank regulations

Fact: The financing of house purchase is usually, with reason, perceived by bankers as much safer than financing entrepreneurs.

Fact: That means that, on their own, unregulated, banks would be expected to finance the purchase of houses more, and at lower risk adjusted interest rates, than financing entrepreneurs. 

Fact: But then bank regulators in 1988 doubled down on the same ex ante perceived risk and introduced risk weighted capital requirements. 

Fact: In those capital requirements (2004, Basel II) regulators assigned a much lower risk weight to the financing of houses (35%) than to the financing of entrepreneurs (100%).

This means regulators allow banks to hold less capital when financing the purchase of houses than when financing entrepreneurs. 

This means banks can now leverage their equity more when financing the purchase of houses than when financing entrepreneurs. 

This means banks can now obtain higher expected risk adjusted returns on equity when financing the purchase of houses than when financing entrepreneurs. 

This means that banks will even more prefer financing the purchase of houses, at even lower interest rates, than the financing of entrepreneurs.

This means easier, regulatory subsidized, access to house financing, causing higher house prices. How much of the easier  financing conditions when purchasing houses do we now have to finance when financing a house purchase?

This means a lesser, taxed by regulations, access to credit for entrepreneurs, causing less job creation and a slower growing real economy.

So, compared to what would be the case in the absence of these risk-weighted regulations this means:

For the young: Fewer possibilities of jobs and of buying their own houses. 

For house owners: They are sitting on assets that at current real valuations will not find buyers in the future.

For the aging: Lesser possibilities of taking care of their future needs.

For social peace: The young might revolt and shout: “Parents we’ve been cheated out of our future by crazy bank regulators, and you said nothing! So now you move down to the basements and we move upstairs!”

PS. Those more interested in providing our young affordable housing than in helping our young to afford the houses, which is of course not the same thing, are as I see it just some other vulgar redistribution profiteers.

PS. Here a brief aide memoire on the major mistakes with the risk weighted capital requirements

Bank regulators’ statist 0% risk weight of sovereign, turn governments into credit spoiled filthy-rich brats that will end up defaulting

If banks need to hold much less capital when lending to the sovereign than when lending to anyone else; and thereby makes it easier for the sovereign to offer banks an attractive risk adjusted return, banks will lend and governments will borrow, way too much. It is doomed to end badly.

That is what the 0% risk weight of sovereign when setting the capital requirements does. It is a shameless and dangerous regulatory subsidy of government debt which statist regulators justify based on “sovereigns can always print money”, which as we all know is precisely one of the major risks with sovereigns.

And too many experts, most, are not even aware of that regulatory subsidy, and often refer to government debt setting the risk-free rate, as if nothing had happened.

For instance, way to often we read a reputable financial commentator opining that the sovereign should take advantage of the very low rates in order to take on some needed infrastructure projects that will also provide jobs while they last. No consideration at all is given to the fact that government debt, if it does not help generate the economic growth required for its repayment is a de facto tax on future generations. Those who seem to be most in need of tax-cuts are the unborn. Why not think of them too President Trump?

What would happen if we want to retire our deposits in a bank that is overextended in loans to an overextended sovereign? Have the sovereign print money? Like any Venezuelan central bank?

This 0% risk weighting started in 1988 with the Basel Accord. During the almost 600 years of previous banking there was nothing of that sort of distortion. Imagine what financier Templar Grand Master Jacques de Molay, burned in 1307 by Phillip IV, would have to say about that 0% risk-weight. 

But what to we do now? If we imposed on banks the same capital requirements for lending to the sovereign than when lending to the citizen, which is how it should be in order for banks to allocate credit efficiently, that would create so large new capital requirements it could bring the whole ordinary bank credit function to a halt.

Let us suppose we want banks to hold 10% in capital against all assets. One alternative would be to lower the current capital requirement for banks to each banks’ current average capital, and let it thereafter build up little by little… with no dividends for quite sometime... or allowing banks to hold on to whatever current 0% risk weighted sovereign debt they have against no capital, but strictly imposing the new capital requirements on any new purchases of it.

Another tool that (thinking of my grandchildren) could be needed and effective is a haircut on all bank depositors, by forcing them receive some negotiable non-redeemable bank shares in lieu of money. (Perhaps those shares could even turn out to be a good investment for pension funds)

What Kurowski? Have you gone mad? No friends, just tell me how we otherwise stop governments, egged on by so many redistribution profiteers, from taking on subsidized debt?

PS. Be sure of it, currently Financial Communism reigns

PS. How far has the IMF has progressed researching the theme of this regulatory subsidy?

PS. The other sector that is being subsidized by low risk weights is that of residential mortgages. That will likewise signify we end up with plenty of houses for our children to live in the basements, but too few jobs for them to be able to buy their own upstairs.

PS. In 1988 when statist regulators assigned it a 0% risk weight, the US debt was $2.6 trillion. At end of 2017 it was US$20.2 trillion, and still 0% risk weighted. If it keeps on being 0% risk weighted, it is doomed to become 100% risky, just like what happened to Greece

PS. What to do? The regulators painted us all into a corner. The 0% risk weight of sovereigns will continue to dangerously doom the public debt safe-havens to become overpopulated by banks holding especially little capital. But any increase of that weight, will scare the shit out of markets.

PS. The only way to solve the 0% sovereign risk weight conundrum that I see, is to increase the leverage ratio applicable to all assets, until that level where the risk weighted capital requirement totally loses its significance.

PS. The same central bank technocrats who target a 2% inflation rate, which means that in 10 years our money will be worth about 22% less, are the ones who assign sovereigns a 0% risk weight. Why do we allow them to treat us with such statist contempt?

PS. Here is a current summary of why I know the risk weighted capital requirements for banks, is utter and dangerous nonsense.

Fiscal waste's decades out

Some want tax cuts.

Some wants tax increases

But no one want tax spending cuts

So its the fiscal waste's decades out

But why worry when it is so easy to finance it with QEs, low interest rates and regulatory subsidies.

Regulatory subsidies? 

1988, Basel I's risk weighted bank capital requirements that decree 0% risk-weight for sovereigns and 100% entrepreneurs. 

The shameful lack of housing

A young Venezuelan recently spoke with satisfaction and pride about how he had managed, after only eight months in the United States, to purchase his own home. He could finally enjoy his privacy and consolidate his married life. Unfortunately, he had to work in New York City cleaning bathrooms, but what else could he do? For the previous five years in Venezuela, after graduating as an engineer together with his wife, he had not even managed to scrape together the minimal down payment required to purchase an apartment.

It is difficult to fathom the accumulation of errors required to create a scenario in which young educated people from an oil rich nation with all the advantages of a tropical climate must immigrate to a country with a hostile winter in order to solve their housing problems. A country’s reserves are not those sitting in the Central Bank, but rather its people, especially after they have invested in a decent education. Today, our Central Bank is raising interest rates in order to keep its dollar reserves. Today, our young human reserves are leaving in droves.

A home is a long-term investment. It is not a vehicle, a trip to some Caribbean isle or a new double-breasted suit. A home for the normal citizen, who lives from his work and savings, is an investment that he hopes to amortize in 20 or 30 years if all goes well. In order to allow a young couple to acquire a home it is necessary to provide them with a real and sustainable source of long-term financing. The key words here are “real” and “sustainable”.

In Venezuela, the conditions for local currency loans are non-existent. To begin with, there is absolutely no possibility to establish fixed interest rates for a long-term Bolívar loan. Either interest rates are so high in real terms that it becomes virtually impossible to service the loan. Or they are too low, which effectively results in undeserved subsidies, which in turn threaten the very existence of the financial system as a whole.

In the case of loans with variable interest rates, the erosion of value due to inflation is usually covered with an increase in the interest rates. This makes the term of a 20- or 30-year loan, whether documented as such or not, a tasteless joke.

Let us take a closer look at this. If inflation rises to 40%, interest rates more than likely will be pegged at around 50%. Should a young couple manage to qualify for a Bs. 10 million loan for a 20-year term, they would need to raise Bs. 5 million to cover interest payments and Bs. 500,000 to cover amortization of principal on an annual basis. After one-year elapses (if they survive) they still owe Bs. 9.5 million. This amount, adjusted for 40% inflation is only worth Bs. 6.8 million in real terms (Bs. 9.5 million divided by 1 plus the inflation rate). Our young couple in essence has amortized the sum of Bs. 500,000 plus the amount corresponding to this adjustment, that is, Bs. 2.7 million. This has absolutely no relation with a 20-year term.

Other countries plagued by inflation have looked for solutions to this problem by denominating loans in indexed units. In this case, the debtor would owe Bs. 13.3 million instead of Bs. 9.5 million after the first year (Bs. 9.5 million plus inflation of 40%). However, instead of having to pay Bs. 5.5 million to service the loan as in our first example, service would have been limited to Bs. 1.5 million corresponding to a 10% real interest rate and the payment of a real amortization of Bs. 500,000.

Evidently, another alternative to indexed units is the denomination of loans in a stable currency, US dollars for example. Even when devaluation could possibly wreak havoc with debt service in the short term, a working person could most likely weather this and adequately service his dollar loan if and when it is contracted under prudent terms. When contracting a dollar denominated loan, a company or bank must immediately reflect exchange losses on their balance sheets. In the case of our young couple, the impact is limited to higher monthly payments which he could eventually expect to offset with inflation adjusted increases in his salary.

It is a shame that a full 15 years after the initial devaluation in 1983, we have not managed to reestablish sources of long-term financing for acquisition of housing. The fact that the Agenda Venezuela does not include a real and concerted effort directed at solving the problem of housing only serves to reinforce my belief that my daughters’ respective agendas have much more meaning.

I hope to stay in Venezuela. Somehow, I feel I would definitely prefer to remain here accompanied by many young, eager and educated people dedicated to the country’s future and without one single dollar in the Central Bank, rather than the other way around.