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    First Republic Lurches as It Struggles to Find a Savior

    The bank is sitting on big losses and paying more to borrow money than it is making on its loans to homeowners and businesses.First Republic Bank is sliding dangerously into a financial maelstrom, one from which an exit appears increasingly difficult.Hardly a household name until a few weeks ago, First Republic is now a top concern for investors and bankers on Wall Street and officials in Washington. The likeliest outcome for the bank, people close to the situation said, would need to involve the federal government, alone or in some combination with a private investor.While the bank, with 88 branches focused mostly on the coasts, is still open for business, no one connected to it, including its executives and some board members, would say how much longer it could exist in its current form.First Republic, based in San Francisco, has been widely seen as the most in-danger bank since Silicon Valley Bank and Signature Bank collapsed last month. Like Silicon Valley Bank, it catered to the well-off — a group of customers able to pull their money en masse — and amassed a hoard of loans and assets whose value has suffered in an era of rising interest rates.Yet while SVB and Signature survived just days under pressure, First Republic has neither fallen nor thrived. It has withstood a deposit flight and a cratering stock price. Every attempt by the bank’s executives and advisers to project confidence appears to have had the opposite effect.The bank’s founder and executive chairman, Jim Herbert, until recently one of the more admired figures in the industry, has disappeared from public view. On March 13, Jim Cramer, the CNBC host, said on the air that Mr. Herbert had told him that the bank was doing “business as usual,” and that there were “not any sizable number of people wanting their money.”That was belied by the bank’s earnings report this week, which stated that “First Republic began experiencing unprecedented deposit outflows” on March 10.Neither Mr. Herbert nor the bank’s representatives would comment Wednesday, as First Republic’s stock continued a harrowing slide, dropping about 30 percent to close the day at just $5.69 — down from about $150 a year earlier. On Tuesday, the stock plummeted 49 percent. The company is now worth a little more than $1 billion, or about one-twentieth its valuation before the banking turmoil began in March.In what has become a disquieting pattern, the New York Stock Exchange halted trading in the shares 16 times on Wednesday because volatility thresholds were triggered.

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    First Republic Bank’s share price
    Source: FactSetBy The New York TimesStock prices are always an imperfect measure of a lender’s health, and there are strict rules about what types of entities can acquire a bank. Still, First Republic’s stock slide means that its branches and $103 billion in deposits could be bought for, theoretically, an amount less than the market capitalization of Portillo’s, the Chicago-area hot dog purveyor. Of course, any company that buys First Republic would be taking on multibillion-dollar losses on its loan portfolio and assets.The bank is more likely to fall into the hands of the government. That outcome would likely wipe out shareholders and put the bank’s fate in the hands of the Federal Deposit Insurance Corporation.The F.D.I.C. by its own rules guarantees that deposit accounts only up to $250,000 will be made whole, though in practice — and in the case of SVB and Signature — it can make accounts of all sizes whole if several top government officials invoke a special legal provision. Of First Republic’s remaining deposits, roughly half, or nearly $50 billion, were over the insured threshold as of March 31, including the $30 billion deposited by big banks in March.In conversations with industry and government officials, First Republic’s advisers have proposed various restructuring solutions that would involve the government, in one form or another, according to people familiar with the matter. The government could seek to minimize a buyer’s financial risk, the people said, asking not to be identified.Thus far, the Biden administration and Federal Reserve appear to have demurred. Policy experts have said officials would find it more difficult to intervene to save First Republic because of restrictions Congress enacted after the 2008 financial crisis.As a result, six weeks of efforts by First Republic and its advisers to sell all or part of its business have not resulted in a viable plan to save the bank — at least thus far.The state of affairs became plain after the close of trading on Monday, when First Republic announced first-quarter results that showed that it had lost $102 billion in customer deposits since early March. Those withdrawals were slightly ameliorated by the coordinated emergency move of 11 large U.S. banks to temporarily deposit $30 billion into First Republic.To plug the hole, First Republic borrowed $92 billion, mostly from the Fed and government-backed lending groups, essentially replacing its deposits with loans. While the move helped keep the bank going, it essentially undermined its business model, replacing relatively cheap deposits with more expensive loans.The bank is paying more in interest to the government on that new debt than it is earning on its long-term investments, which include mortgage loans to its well-heeled customers on the coasts, funding for real estate projects and the like.One of the biggest parts of the bank’s business was offering large home loans with attractive interest rates to affluent people. And unlike other banks that make a lot of mortgages, First Republic kept many of those loans rather than packaging them into mortgage-backed securities and selling them to investors. At the end of December, the bank had nearly $103 billion in home loans on its books, up from $80 billion a year earlier.But most of those loans were made when the mortgage interest rates were much lower than they are today. That means those loans are worth a lot less, and anybody looking to buy First Republic would be taking on those losses.It is not clear what First Republic can realistically do to make itself or its assets more attractive to a buyer.Among the only tangible changes that the bank has committed to is cutting as much as 25 percent of its staff and slashing executive compensation by an unspecified amount. On its earnings call, First Republic’s executives declined to take questions and spoke for just 12 minutes. More

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    First Republic Bank Enters New Free Fall as Concerns Mount

    The bank’s shares fell by about 50 percent on Tuesday, a day after it said customers had pulled $100 billion in deposits in the first quarter.First Republic Bank’s stock closed down 50 percent Tuesday, a day after a troubling earnings report and a conference call with analysts in which the company’s executives refused questions. The speed of the decline set off a series of volatility-induced trading halts by the New York Stock Exchange.On Monday, after the close of regular stock trading, First Republic released results that showed just how perilous the bank’s future had become since mid-March following the failure of Silicon Valley Bank and Signature Bank. First Republic said its clients pulled $102 billion in deposits in the first quarter — well over half the $176 billion it held at the end of last year.The bank received a temporary $30 billion lifeline last month from the nation’s biggest banks to help shore up its business. Those banks, however, can withdraw their deposits as soon as July. In the first quarter, First Republic also borrowed $92 billion, mostly from the Federal Reserve and government-backed lending groups, essentially replacing its deposits with loans.First Republic is considered the most vulnerable regional bank after the banking crisis in March. What happens to it could also affect investors’ confidence in other regional banks and the financial system more broadly.The bank’s executives did little to establish confidence during its conference call, offering just 12 minutes of prepared remarks. The bank also said on Monday that it would cut as much as a quarter of its work force, and slash executive compensation by an unspecified sum.“This is a trust issue, as it is for any bank, and when trust is lost, money will flee,” Aswath Damodaran, a finance professor at New York University, wrote in an email.An analyst at Wolfe Research, Bill Carcache, laid out what he called “the long list of questions we weren’t allowed to ask” in a research note on Tuesday. Among them: How can the bank survive without raising new money, and how can it continue to provide attentive customer service — a staple of its reputation among wealthy clients — while cutting the very staff who provide it?The bank’s options to save itself absent a government seizure or intervention are limited and challenging. No buyer has emerged for the bank in its entirety. Any bank or investor group interested in taking over the bank would have to take on First Republic’s loan portfolio, which could saddle the buyer with billions of dollars in losses based on the recent interest rate moves. The bank is also difficult to sell off in pieces because its customers use many different services like checking accounts, mortgages and wealth management.There are no easy solutions for First Republic’s situation, said Kathryn Judge, a financial regulation expert at Columbia Law School. “If there were attractive options, they would have pursued them already,” Ms. Judge explained.The Fed can no longer take on some of a bank’s financial risk to ease a takeover in the way it did in 2008, because reforms after the financial crisis changed its powers. And while the Federal Deposit Insurance Corporation might be able to help in some way, that would most likely involve failing the bank and invoking a “systemic risk exception,” which would require sign-off by officials across several agencies, Ms. Judge said.Yet if the bank does fail, the government will have to decide whether to protect its uninsured depositors, which could also be a tough call, she said.“There’s really no easy answer,” Ms. Judge said.Representatives for the Fed and the F.D.I.C. declined to comment.Shares of other banks also fell on Tuesday, though not nearly as much as First Republic. The KBW Bank Index, a proxy for the industry, closed down about 3.5 percent.Separately, the Fed said on Tuesday that its review of the supervision and regulation of Silicon Valley Bank will be released at 11 a.m. on Friday.Rob Copeland More

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    The banking crisis is having a slow-burn impact on the economy

    A banking crisis that erupted less than two months ago now appears to be less a major broadside to the U.S. economy than a slow bleed.
    “The small banks are going to be lending less. That’s a credit hit on Middle America, on Main Street,” said Steven Blitz, chief U.S. economist at TS Lombard.
    The reading on first-quarter economic growth is expected to be largely positive despite the banking problems.
    Where things go from here depends greatly on the consumers who account for more than two-thirds of all U.S. economic activity.

    People walk by the New York Stock Exchange (NYSE) on February 14, 2023 in New York City.
    Spencer Platt | Getty Images

    A banking crisis that erupted less than two months ago now appears to be less a major broadside to the U.S. economy than a slow bleed that will seep its way through and act as a potential catalyst for a much-anticipated recession later this year.
    As banks report the impact that a run on deposits has had on their operations, the picture is a mixed one: Larger institutions like JPMorgan Chase and Bank of America sustained far less of a hit, while smaller counterparts such as First Republic face a much tougher slog and a fight for survival.

    That means the money pipeline to Wall Street remains mostly alive and well while the situation on Main Street is much more in flux.
    “The small banks are going to be lending less. That’s a credit hit on Middle America, on Main Street,” said Steven Blitz, chief U.S. economist at TS Lombard. “That’s negative for growth.”
    How negative will come to light both in the approaching days and months months as data flows through.
    First Republic, a regional lender seen as a bellwether for how hard the deposit crunch will hit the sector, posted earnings that beat expectations but reflected a struggling company otherwise.
    Bank earnings largely have been decent for the first quarter, but the sector’s future is uncertain. Stocks have been under pressure, with the SPDR S&P Bank ETF (KBE) off more than 3% in Tuesday afternoon trading.

    “Rather than bringing concerning new information, this week’s earnings are confirming that the banking stress stabilized by the end of March and was contained at a limit set of banks,” Citigroup global economist Robert Sockin said in a client note. “That’s about the best macro outcome that could have been hoped for when stresses emerged last month.”

    Watching growth ahead

    In the immediate future, the reading on first-quarter economic growth is expected to be largely positive despite the banking problems.
    When the Commerce Department releases its initial estimate on gross domestic product gains for the first three months of the year, it’s expected to show an increase of 2%, according to the Dow Jones estimate. The Atlanta Fed’s data tracker is projecting an even better gain of 2.5%.
    That growth, though, isn’t expected to last, due primarily to two interconnected factors: the Federal Reserve interest rate hikes aimed purposely at cooling the economy and bringing down inflation, and the constraints on small-bank lending. First Republic, for one, reported that it suffered a more than 40% decline in deposits, part of a $563 billion drawdown this year among U.S. banks that will make it tougher to lend.
    Yet Blitz and many of his colleagues still expect any recession to be shallow and short-lived.

    “Everything keeps telling me that. Can you have a recession that is not led by autos and housing? Yes, you can. It’s a recession created by a loss of assets, a loss of income and that eventually flows through to everything,” he said. “Again, it’s a mild recession. A 2008-2009 recession occurs every 40 years. It’s not a 10-year event.”
    In fact, the most recent recession was just two years ago in the early days of the Covid crisis. The downturn was historically steep and short, ended by an equally unprecedented fusillade of fiscal and monetary stimulus that continues to flow through the economy.
    Consumer spending has seemed to hold up fairly well in the face of the banking crisis, with Citigroup estimating excess savings of about $1 trillion still available. However, delinquency rates and balances are both rising: Moody’s reported Tuesday that credit card charge-offs were 2.6% in the first quarter, rising by 0.57% from the fourth quarter of 2022, while balances soared 20.1% on an annual basis.
    Personal savings rates also have tumbled, falling from 13.4% in 2021 to 4.6% in February.

    But the most comprehensive report released so far that takes into account the period when Silicon Valley Bank and Signature Bank were shuttered indicated that the damage has been confined. The Federal Reserve’s periodic “Beige Book” report released, April 19, indicated only that lending and demand for loans “generally declined” and standards tightened “amid increased uncertainty and concerns about liquidity.”
    “The fallout from the crisis seems less serious than I had expected just a few weeks ago,” said Mark Zandi, chief economist at Moody’s Analytics. The Fed report “was a lot less hair-on-fire than I had expected. [The banking situation] is a headwind, but it’s not a gale-force headwind, it’s just kind of a nuisance.”

    It’s all about the consumer

    Where things go from here depends greatly on the consumers who account for more than two-thirds of all U.S. economic activity.
    While the demand for services is catching up to pre-pandemic levels, cracks are forming. Along with the rise in credit card balances and delinquencies is likely to come the further obstacle of tightening credit standards, both by necessity and through an increased likelihood of tougher regulation.
    Lower-income consumers have been facing pressure for years as the share of wealth held by the top 1% of earners has continued to climb, up from 29.7% when Covid hit to 31.9% as of mid-2022, according to the most recent Fed data available.

    “Before any of this really started unfolding in early March, you were already starting to see signs of contraction and reining in of credit,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “You’re seeing reduced demand for credit as consumers and businesses start to pull in the deck chairs.”
    Baird, though, also sees chances slim for a steep recession.
    “When you look at how all the forward-looking data lines up, it’s hard to envision how we sidestep at least a minor recession,” he said. “The real question is how far can the strength of the labor economy and still-significant cash reserves that many households have propel consumers forward and keep the economy on track.” More

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    Commerce Dept. Outlines Its Bid to Fund Cutting-Edge Chip Research

    The Biden administration announced its strategy for the National Semiconductor Technology Center, a string of facilities aimed at propelling U.S. innovation.WASHINGTON — The Biden administration outlined plans on Tuesday to propel research on the type of cutting-edge microchips needed to power computers, cars and other devices, saying it would establish a new national organization with locations in various parts of the United States.The Commerce Department, which is in charge of the administration’s efforts to revitalize the American chip industry, said its new National Semiconductor Technology Center would bring together companies, universities and others to collaborate on next-generation chip technology. The organization would include a string of research centers, the locations of which have yet to be chosen, and aim to be operational by the end of this year.The organization would help “regain America’s leadership in research and development and technologies of the future, and importantly, make sure we stay there for decades to come,” Gina Raimondo, the commerce secretary, said in a briefing Monday.“It’s a place where industry and academia and start-ups and investors can come together to solve the biggest, grandest challenges and set priorities,” she added.The plans are part of the Biden administration’s effort to reinvigorate semiconductor manufacturing and ensure that the United States has a steady supply of chips necessary to feed its factories and support its national defense. The Commerce Department has been charged with doling out $50 billion to revitalize the industry, including $11 billion devoted to research and development.The technology center is expected to be central to that effort. Some of its locations would be capable of end-to-end manufacturing of new chip designs, while others would focus on experimenting with new materials and equipment, or with new ways of putting chips together to make them more powerful, Ms. Raimondo said.Laurie Giandomenico, the vice president and chief acceleration officer of MITRE, a nonprofit organization that operates federally funded research centers, called the $11 billion investment by the United States “pretty significant,” given that the semiconductor industry has in past years spent about $70 billion on research and development globally.The challenge, she said, would be to ensure that the money was spent to encourage collaborative research to solve the industry’s biggest problems, not the “siloed innovation” now carried out by chip firms that carefully guard their creations from competitors.“It should be on areas that no one company can solve alone,” she said.Companies, universities, lawmakers and local governments have been lobbying the administration to set up an outpost of the new organization in their area. Ms. Raimondo emphasized that the organization would be an independent “trusted” player, with board members appointed by a separate selection committee and strict controls for protecting intellectual property.One of the organization’s primary goals, Ms. Raimondo said, would be making it easier and less expensive for start-ups and other new entrants to develop and commercialize new chip technologies.“We want to cut in half the projected cost of moving a new chip from concept to commercialization over the next decade,” she said.Chris Miller, the author of “Chip War,” which chronicles the industry’s development, said it was comparatively easy for a researcher to develop a new idea for a chip in a laboratory. But given the high cost of producing chips, researchers can have a hard time getting their inventions manufactured.Designing an advanced chip, which may have tens of billions of transistors, can cost hundreds of millions of dollars, according to analysts. The latest systems for defining the smallest circuitry on wafers cost more than $100 million each, while the new factories called “fabs” that make advanced chips can cost $10 billion to $20 billion.“The big fabs are interested in producing 100 million chips for an iPhone, not 10 chips for a professor at M.I.T.,” Mr. Miller said.Venture capitalists also often shy away from investing in chip start-ups because they require more initial funding than other kinds of tech companies and more time to generate a return on that investment.To help address some of these issues, the government’s technology center will establish an investment fund to support start-ups, and provide manufacturing facilities for small players to experiment with new technologies.“I see a world where the U.S. can actually revitalize this microelectronics industry because we could bring down the costs of doing a chip start-up by a factor of five to a factor of ten,” said Gilman Louie, a tech investor and chief executive of a nonprofit investment organization called America’s Frontier Fund.The center’s research priorities are expected to be refined in the coming months. But the Commerce Department specified several areas it would focus on, including advancing the technology for analyzing the microscopic components of chips and setting technical standards for new kinds of chip packaging.As progress slows in squeezing ever-smaller transistors onto each piece of silicon, many companies are now breaking up big products into smaller “chiplets” that are placed side by side or stacked on top of one another.The Commerce Department said that setting new standards for these practices would pave the way for the creation of marketplaces in which companies can assemble new products using chiplets from multiple vendors. More

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    First Republic Bank Lost $102 Billion in Customer Deposits

    The regional bank received a $30 billion lifeline from big banks last month, but depositors and investors remain worried about its prospects.First Republic Bank, the most imperiled U.S. lender after last month’s banking crisis, on Monday disclosed the grisly details of just how troubled its business has become — and not much else.In the bank’s highly anticipated first update to investors since entering a free-fall over the past month and a half, its leaders said little. In a conference call to discuss its first quarter results with Wall Street analysts, the bank’s executives offered just 12 minutes of prepared remarks and declined to take questions, leaving investors and the public with few answers about how it would escape its crater.“When a bank feels like it has few options remaining, it starts to play by its own rules,” said Timothy Coffey, a bank analyst at Janney Montgomery Scott. “Every day, every week from now until whenever — it’s going to be a fight for them.”One thing is certain: The bank, which caters to a well-heeled clientele on the coasts, seems to be hanging by a thread. During the first quarter, it lost a staggering $102 billion in customer deposits — well over half the $176 billion it held at the end of last year — not including a temporary $30 billion lifeline it received from the nation’s biggest banks last month.Over that same period, it borrowed $92 billion, mostly from the Federal Reserve and government-backed lending groups, essentially replacing its deposits with loans. That’s a perilous course for any bank, which generally do business by taking in relatively inexpensive customer deposits while lending money to home buyers and businesses at much higher interest rates.First Republic is still making some money; it reported a quarterly profit of $269 million, down one-third from a year earlier. It made far fewer loans than it had in earlier quarters, keeping with a general trend in banking, as industry executives worry about a recession and softening home prices and sales.The bank’s stock dropped about 20 percent in extended trading, with the fall worsening after executives declined to take questions from analysts.First Republic’s share price is down more than 85 percent since mid-March.The bank said that its deposit exodus largely ceased by the last week of March. From March 31 to April 21, the bank said that it lost only 1.7 percent of its deposits and that most of those withdrawals were related to tax payments by its clients.The slide began roughly six weeks ago, when the midsize lenders Silicon Valley Bank and Signature Bank were taken over by federal regulators after customers pulled billions of dollars in deposits. First Republic, based in San Francisco, was widely seen as the lender most likely to fall next, because it had many clients in the start-up industry — similar to Silicon Valley Bank — and many of its accounts held more than $250,000, the limit for federal deposit insurance.First Republic has been in talks with financial advisers and government officials to come up with a plan to save itself that could include selling the bank or parts of it, or raising new capital.Much more remains to be done. The bank said on Monday that it would cut as much as a quarter of its work force, and slash executive compensation by an unspecified sum.Until recently, First Republic was a darling of Wall Street. It was founded in 1985 by Jim Herbert, who is still the bank’s executive chairman at 78. The company distinguished itself by offering wealthy clients jumbo mortgages, which can’t be sold to the government-backed mortgage giants Fannie Mae and Freddie Mac. Mr. Herbert consistently touted First Republic’s business model as a sound one because its borrowers had good credit records.In 2007, Merrill Lynch paid $1.8 billion to acquire the bank, but its ownership lasted only three years. Mr. Herbert, with the help of other investors, bought the bank back after the 2008 financial crisis and took it public.Since then, First Republic has focused on expanding by setting up branches in the poshest parts of New York, Boston, San Francisco and Los Angeles and in places synonymous with wealth like Greenwich, Conn., and Palm Beach, Fla. The bank’s branches endeared themselves to clients and prospective customers with personal touches, like warm, freshly baked cookies.Janna Koretz, a 37-year-old psychologist in Boston, started banking with First Republic roughly a decade ago as she was building a group practice. “It’s not like I had all this money,” she said, but her banker was constantly available. The bank would send couriers to her office to pick up cash from her practice.In mid-December, the bank hosted a holiday party at a performing arts space in Manhattan for hundreds of employees and clients, according to two attendees who spoke on the condition of anonymity because they wanted to preserve their relationships with the bank. A graffiti artist wielding black spray paint, and flamenco dancers entertained the crowd. The bank’s chief executive Mike Roffler, who had been in the top job only since March of 2022, warned the crowd that 2023 could be a challenging year for the bank.Three months later, the bank found itself in the spotlight of a different sort. In the days and weeks after Silicon Valley Bank’s demise, numerous larger banks looked into buying First Republic. But a deal didn’t come together and the chief executive of JPMorgan Chase, Jamie Dimon, and the Treasury secretary, Janet L. Yellen, worked together to inject $30 billion in deposits into the bank. The big banks that put in that money can withdraw it in as soon as four months.On the brief conference call on Monday, Mr. Roffler said little about what could happen next and merely reiterated the bank’s public disclosures. “I’d like to take a moment to thank our colleagues for their commitment to First Republic and their uninterrupted service of our clients and communities throughout this challenging period,” he said. “Their dedication is inspiring.” More

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    The Debt Ceiling Debate Is About More Than Debt

    Republicans’ opening bid to avert economic catastrophe by raising the nation’s borrowing limit focuses more on energy policy than reducing debt.WASHINGTON — Speaker Kevin McCarthy of California has repeatedly said that he and his fellow House Republicans are refusing to raise the nation’s borrowing limit, and risking economic catastrophe, to force a reckoning on America’s $31 trillion national debt.“Without exaggeration, America’s debt is a ticking time bomb that will detonate unless we take serious, responsible action,” he said this week.But the bill Mr. McCarthy introduced on Wednesday would only modestly change the nation’s debt trajectory. It also carries a second big objective that has little to do with debt: undercutting President Biden’s climate and clean energy agenda and increasing American production of fossil fuels.The legislation, which Republicans plan to vote on next week, is meant to force Mr. Biden to negotiate over raising the debt limit, which is currently capped at $31.4 trillion. Unless the cap is lifted, the federal government — which borrows huge sums of money to pay its bills — is expected to run out of cash as early as June. The House Rules Committee said on Friday that it will meet on Tuesday to consider the bill and possibly advance it to a floor vote.More than half the 320 pages of legislative text are a rehash of an energy bill that Republicans passed this year and that aimed to speed up leasing and permitting for oil and gas drilling. Republicans claim the bill would boost economic growth and bring in more revenue for the federal government, though the Congressional Budget Office projected it would slightly lose revenue.The Republican plan also gives priority to removing clean energy incentives that were included in Mr. Biden’s signature climate, health and tax law. That legislation, known as the Inflation Reduction Act, included tax credits and other provisions meant to encourage electric vehicle sales, advanced battery production, utility upgrades and a variety of energy efficiency efforts.The proposal does include provisions that would meaningfully reduce government spending and deficits, most notably by limiting total growth in certain types of federal spending from 2022 levels.The bill would claw back some unspent Covid relief money and impose new work requirements that could reduce federal spending on Medicaid and food assistance. It would block Mr. Biden’s proposal to forgive hundreds of billions of dollars in student loan debt and a related plan to reduce loan payments for low-income college graduates.As a result, it would reduce deficits by as much as $4.5 trillion over those 10 years, according to calculations by the Committee for a Responsible Federal Budget in Washington. The actual number could be much smaller; lawmakers could vote in the future to ignore spending caps, as they have in the past.Even if the entire estimated savings from the plan came to pass, it would still leave the nation a decade from now with total debt that was larger than the annual output of the economy — a level that Mr. McCarthy and other Republicans have frequently labeled a crisis.The Republican plan is estimated to reduce that ratio — known as debt-to-G.D.P. — in 2033 by about nine percentage points if fully enacted. By contrast, Mr. Biden’s latest budget, which raises trillions of dollars in new taxes from corporations and high earners and includes new spending on child care and education, would reduce the ratio by about six percentage points.Those reductions are a far cry from Republicans’ promises, after they won control of the House in November, to balance the budget in 10 years. That lowering of ambitions is partly the product of Republican leaders’ ruling out any cuts to the fast-rising costs of Social Security or Medicare, bowing to an onslaught of political attacks from Mr. Biden.The lower ambitions are also the result of party leaders’ unwillingness or inability to repeal most of the new spending programs Mr. Biden signed into law over the first two years of his presidency, often with bipartisan support.At the New York Stock Exchange on Monday, Mr. McCarthy accused the president and his party of already adding “$6 trillion to our nation’s debt burden,” ignoring the bipartisan support enjoyed by most of the spending Mr. Biden has signed into law.The speaker’s plan would effectively roll back one big bipartisan spending bill, which Mr. Biden signed at the end of 2022 to fund the government through this year. But the other big drivers of debt approved under Mr. Biden that are not singled out for repeal in the Republican bill include trillions in new spending on semiconductor manufacturing, health care for veterans exposed to toxic burn pits, and upgrades to critical infrastructure like bridges, water pipes and broadband.Some of that spending could potentially be reduced by congressional appropriators working under the proposed spending caps, but much of it is exempt from the cap or already out the door. Most of the $1.9 trillion economic aid plan Mr. Biden signed in March 2021, which Republicans blame for fueling high inflation, is already spent as well.The plan squarely targets the climate, health and tax bill that Democrats passed along party lines last summer by cutting that bill’s energy subsidies. It would also rescind additional enforcement dollars that the law sent to the Internal Revenue Service to crack down on wealthy tax cheats. The Congressional Budget Office says that change would cost the government about $100 billion in tax revenue.Taken together, those efforts reduce deficits by a bit over $100 billion, suggesting debt levels are not the primary consideration in targeting those provisions. The bill’s next 200 pages show what actually is: a sustained push to tilt federal support away from low-emission energy and further toward fossil fuels, including mandating new oil and gas leasing on federal lands and reducing barriers to the construction of new pipelines.Republicans say those efforts would save consumers money by reducing gasoline and heating costs. Democrats say they would halt progress on Mr. Biden’s efforts to galvanize domestic manufacturing growth and fight climate change.The plan “would cost Americans trillions in climate harm,” said Senator Sheldon Whitehouse of Rhode Island, the Democratic chairman of the Budget Committee. “And it would shrink our economy by disinvesting in the technologies of tomorrow.”Republicans have positioned their fossil fuel efforts as a solution to a supposed production crisis in the United States. “I have spent the last two years working with the other side of the aisle, watching them systematically take this country apart when it comes to our natural resources,” Representative Jerry Carl of Alabama said last month before voting to pass the energy bill now embedded in the debt ceiling bill.Government statistics show a rosier picture for the industry. Oil production in the United States has nearly returned to record highs under Mr. Biden. The Energy Department projects it will smash records next year, led by output increases from Texas and New Mexico. Natural gas production has never been higher.White House officials warn that Republicans are risking a catastrophic default with their demands attached to raising the borrowing cap. “The way to have a real negotiation on the budget is for House Republicans to take threats of default, when it comes to the economy and what it could potentially do to the economy, off the table,” Karine Jean-Pierre, the White House press secretary, told reporters on Thursday.Mr. McCarthy has defended his entire set of demands as a complete package to reorient economic policy. But he mentioned energy only in passing in his speech to Wall Street.The issue he called a crisis — and the basis he cited for refusing to raise the borrowing limit without conditions — was fiscal policy and debt. Debt limit negotiations, he said, “are an opportunity to examine our nation’s finances.” More

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    A recession is coming — and stock markets won’t come through it unscathed, strategist says

    Chris Watling, chief executive of financial advisory firm Longview Economics, said Friday that he believed a recession was coming.
    Watling cited what he described as “pretty compelling” and “brutally bad” leading economic indicators.
    The Conference Board on Thursday said its Leading Economic Index for the U.S. fell by 1.2% in March, slipping to its lowest level since November 2020.

    The latest U.S. economic data suggests a recession is coming, according to the chief executive of financial advisory firm Longview Economics, and investors may need to prepare for some pain in the stock market.
    Speaking to CNBC’s “Squawk Box Europe” on Friday, Chris Watling said he believed a recession was on its way, citing what he described as “pretty compelling” and “brutally bad” leading economic indicators.

    The Conference Board on Thursday said its Leading Economic Index for the U.S. fell by 1.2% in March, slipping to its lowest level since November 2020. The data appeared to indicate that economic weakness could soon intensify and spread throughout the U.S. economy.
    Alongside this warning signal, Watling said the typical timeline for a recession after the inversion of the Treasury yield curve, which first inverted in March 2022, then again in the following months, was roughly one year or so.
    “Every time you’ve had that in the U.S., you’ve had a recession. So, I think it’s coming, it’s on its way. It’s just a timing issue,” Watling said.
    While many economists have warned of a looming recession, the International Monetary Fund suggested only last week that it had been surprised by the recent strength of the U.S. labor market and consumer spending.
    The IMF on April 11 released its latest World Economic Outlook report, in which it said it sees the world’s largest economy expanding by 1.6% this year, up from the 1% forecast in 2022.

    Gita Gopinath, the IMF’s first deputy managing director, told CNBC’s Joumanna Bercetche last week that signs of cooling inflation data had given the fund reason to believe the U.S. economy could avoid a recession. However, a so-called hard landing was still “within the realm of possibilities,” she added.

    Earnings expectations ‘way too optimistic’

    Asked on Friday whether equity markets could come through an expected economic downturn relatively unscathed, Watling replied: “I mean they won’t come through it unscathed in our opinion. I’m not even sure about relatively.”
    “The reality is if you look at profit margins, they went to record highs in 2021 and a bit of 2022, and of course when you have a lot of inflation around, you can get very good operating leverage so you can get record high profit margins,” Watling said.
    “When you get into recession, we’ve got to do a double hit on profit margins. You’ve got to normalize them back to normal levels and then you’ve got to price in a recession. So, I think the expectations for earnings are way too optimistic and therefore the stock market will have to contend with that at some point.”
    — CNBC’s Karen Gilchrist contributed to this report.
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    America’s Inflation Antihero Gets a Makeover

    As the Fed fights inflation with a wary eye on the 1970s, some are arguing that Arthur Burns, the Fed chair at the time, gets too bad a rap.The years have not been kind to Arthur Burns, who led the Federal Reserve from 1970 to 1978 and is often remembered as perhaps the worst chair ever to head America’s central bank. His poor policy decisions, critics say, allowed inflation in the 1970s to jump out of control.Chris Hughes thinks he deserves another look. Mr. Hughes, 39, is a newly accepted doctoral student focused on central bank history at the Wharton School of the University of Pennsylvania. This is a third career for Mr. Hughes, who was Mark Zuckerberg’s college roommate and a founder of Facebook, a first act that left him with a personal fortune estimated to total hundreds of millions of dollars.Mr. Hughes then bought and for four years served as publisher of The New Republic, the liberal magazine. Starting this fall, he will spend his days studying the law and politics of central bank development and writing a book on the history of financial markets and politics.As a person who knows something about reinvention, Mr. Hughes thinks Mr. Burns should get one, too.He wrote a 6,000-word article for the journal Democracy on how America has misunderstood the former Fed chair, made the argument on NPR’s Planet Money and is now taking his spiel to academic gatherings.His point? He thinks Mr. Burns is portrayed in ways that are unfair to him — and which may offer the wrong lessons as America approaches the inflation burdening the rest of us at the grocery store, used car lot and day-care center today.Mr. Burns is frequently remembered in central banking and economic circles as a weak leader who failed to lift interest rates enough to control inflation because he feared harming the economy too much; Mr. Hughes and other Burns revisionists — a small but growing group of historians and economists who don’t necessarily love him, but do think he got an unfair rap — see him as someone who tried to balance concerns about hurting workers with a dedication to slowing down price increases. History often paints him as a political shill; the contrarians argue that he saw controlling inflation as a project that the Fed and elected officials in the White House and Congress could and should share.And because Mr. Burns gets blamed, without much nuance, for his failure to contain inflation, Mr. Hughes thinks that people miss the possible virtues of his more complicated view of price increases — as a problem that required multiple players, alongside the Fed, to successfully tackle.“I think he’s easily weaponized,” Mr. Hughes said in an interview. “The caricature is worth revisiting.”Mr. Burns plays the role of antihero in most stories about the Great Inflation of the 1970s — tales that are repeated often in academic circles and the news media as a warning about what not to do.Mr. Burns, a conservative economist, presided over rate increases during the 1970s, but he never pushed them far enough to bring inflation under control. And he may have pursued that start-and-stop approach partly because he was bending to political pressure.Richard Nixon with Arthur Burns in 1968. In the run-up to the 1972 election, President Nixon, who appointed Mr. Burns as Fed chair, urged him to cut rates.Associated PressPresident Richard Nixon, who appointed Mr. Burns as Fed chair, wanted him to cut rates in the run-up to the 1972 election. In taped conversations, Nixon urged Mr. Burns to push the Fed’s policy committee to lower borrowing costs.“Just kick ’em in the rump a little,” Nixon was recorded saying. Fed officials did cut rates in the latter part of 1971.Inflation deepened as the Fed’s rate moves remained more dawdling than decisive, and Mr. Burns’s name eventually became synonymous with bad central banking: irresolute and politicized. He remains the key historical foil to Paul Volcker, Fed chair from 1979 to 1987, who pushed interest rates up to nearly 20 percent in 1981, crashed the economy into a deep recession and ultimately saw price increases cool. Mr. Volcker, hated by many in his time, is now recalled as an almost heroic figure.The parable of Mr. Burns and Mr. Volcker retains a powerful hold today, as the Fed contends with the first major burst of inflation since the 1970s and ’80s. Fed officials regularly emphasize that they view a noncommittal approach to raising interest rates to slow the economy and choke off inflation — Mr. Burns’s style — as a mistake.Meanwhile, Mr. Volcker described his own approach as one of “keeping at it.” Jerome H. Powell, the current Fed chair, has echoed that phrase aspirationally.It is not clear whether the Fed would pursue a strategy just like Mr. Volcker’s. Mr. Powell has publicly noted that today’s circumstances differ from those of the 1970s. Nor do officials plan to push rates to the double-digit heights they reached in 1981 and 1982. But Mr. Volcker’s policies came at such a cost to workers, pushing unemployment up to a staggering 10.8 percent, that mere admiration of his approach has been enough to stir concern among some liberal economists and historians.Mr. Hughes agrees that rate increases have been necessary, but he is also pushing for a more detailed reading of Mr. Burns’ legacy. He has spent the past four years researching central bank history, including as a graduate student of economics at the New School in New York City, where he lives with his husband — a former Democratic congressional candidate — and their two children. He remains a senior fellow at the Institute on Race, Power and Political Economy at the New School.Chris Hughes, a doctoral student on Fed history at Wharton, wrote a 6,000-word journal article defending Mr. Burns’s actions as Fed chair.Gili Benita for The New York TimesHis own rapid jump from an adolescence in North Carolina’s middle class to a young adulthood at the upper end of the Bay Area elite, one that pushed his net worth to just shy of $500 million before his 30th birthday, piqued his interested in the design of the nation’s economic system — in particular, how it intersects with government policy and how it allows immense inequality.Perhaps no part of that design is more complicated, or less well understood, than the Fed. “Some are looking at Burns as an example of what not to do,” said Mr. Hughes, who quickly became intrigued by the 1970s. “But I think that’s not necessarily right.”Tradeoffs between inflation and employment could be particularly stark in the coming months. Officials have rapidly lifted their main policy rate over the past year to nearly 5 percent. At their upcoming meeting in May or shortly thereafter, central bankers are poised to wrestle with when they ought to stop raising interest rates.And as 2023 progresses and growth slows, unemployment is expected to rise. Policymakers will most likely need to decide how they want to strike the balance between fostering a strong job market and controlling inflation in a slowing economy. Should policymakers keep rates high even if unemployment rises substantially?Mr. Burns avoided punishingly high rates for reasons beyond his politics, Mr. Hughes and those who agree with him argue. While he deeply hated inflation, he blamed supply-related forces, including union bargaining power, for the jump in prices. The Fed’s tools affect mostly demand, so he thought other parts of the government could do a better job of tackling those forces. Relying on rates alone to fully control inflation would come at an untenable economic cost.He was working from “a place of ideological conviction,” Mr. Hughes said.Still, many economists think Mr. Burns deserves his bad reputation, whatever his motivations.Because his Fed took so long to control inflation, households and businesses came to expect fast price increases in the future, said Donald Kohn, a former Fed vice chair who worked at a regional Fed during the Burns era. That changed consumer and corporate behavior — people asked for bigger raises and companies instituted regular price jumps.As that happened, inflation became a more permanent feature of daily life, making it harder to stamp out. If Mr. Burns hadn’t let inflation spin so far out of control, this argument goes, Mr. Volcker might never have needed to cause such a painful recession to tame it.Paul Volcker, the Fed chair from 1979 to 1987, raised interest rates to nearly 20 percent in 1981, crashing the economy into a deep recession.Chick Harrity/Associated Press“It felt like he was trying to find a way to bring down inflation without paying the price — and it just wasn’t possible,” said Mr. Kohn, who remembered Mr. Burns as an “autocratic” leader who did not accept differing views from the Fed’s research staff.“The Fed was dealt a bad hand and played it poorly,” he added.When Mr. Burns’s reputation went down in flames, so did the idea that controlling inflation should be a joint effort of the Fed, Congress and the White House. Since Mr. Volcker’s stand, inflation has been seen, first and foremost, as the central bank’s problem.Many economists see the Fed’s independence from politics and clear focus on controlling prices as a feature, not a bug: Someone now stands ready to promptly clamp down on price increases. Economists even argue that today’s Fed won’t have to act like Mr. Volcker specifically because it will not act like Mr. Burns.Yet skeptics of Mr. Volcker’s economic shock treatment have pointed out that he partly got lucky. Oil embargoes that had pushed inflation much higher eased during his tenure.Given the towering costs Mr. Volcker’s policies inflicted on workers, some are asking: Even if it failed to stem inflation, is it fair to conclude that everything about Mr. Burns’s approach was wrong?“Our simple story about what happened makes it harder to see the complexities of what is happening now,” said Lev Menand, who researches money and central banking at Columbia Law School.Mr. Hughes argued in his essay published last fall that modern policymakers could learn from Mr. Burns’s cross-government collaboration. Raising taxes, revising zoning rules, and other frequent Democratic priorities could help temper price increases, he thinks.Other suggestions for government intervention to tame price increases have gone even further: Isabella Weber, an economist at the University of Massachusetts Amherst, has suggested that price and wage controls should be reconsidered. Their design and implementation in the 1970s did not work, but that does not mean they never could.But such interventions — even if successful, which is far from assured — would take time. The way today’s central bankers understand Mr. Burns as disaster and Mr. Volcker as savior could matter more immediately.And while Peter Conti-Brown, a Fed historian at Wharton and Mr. Hughes’s thesis adviser, said he thought Mr. Burns deserved most of the blame he received for failing to control inflation, he also thought it was possible that Mr. Volcker had been improperly lionized.To foster both maximum employment and stable inflation — the Fed’s twin jobs — is a balancing act, and to do it requires acting like neither Mr. Volcker, with his firm concentration on inflation, nor Mr. Burns, with his yielding one, he said.“I think in the history of central banking, there are few if any heroes,” Mr. Conti-Brown said. “There are also few if any villains.” More