Commentary
Is the Bank Crisis Already Over?
Taking the path of least resistance eventually leads to disastrous places. Like the Alexandria Hotel in Los Angeles, circa 1990s, these are places that are best to be avoided. Still, some people, after consistently choosing the easier and softer way, ended up there, going mad, in their SRO unit.
The same holds true for monetary policy. Terminally intelligent policies, which favor short-term expediency, have the effect of layering society up with an abundance of long-term mistakes. Intervening in credit markets to suppress interest rates via central bank asset purchase schemes is not without consequences.
What’s more, once set in motion these consequences cannot be readily undone. The booms of plentiful credit must always be followed by the busts of unserviceable debt. There’s no way around it.
Over time the easier and softer way becomes fraught with pain, upset, and turmoil. Debt problems that could have been addressed with hard work and perseverance become all consuming. The debt pile becomes too mega.
Then, at the worst possible time, nature takes over. Prices appear higher in relation to debased currencies. And despite the best laid plans of mice and central planners, cheap credit becomes expensive. Layers of terrible decisions are exposed. The debt death spiral takes over.
As more and more debt drifts into arrears the debt structure breaks down. Banks go bust. Individuals and businesses go broke. Governments do too.
When the actual tipping point is crossed is often unclear until well after the fact. The consequences of artificially cheap credit take time to be revealed. And by the time they are, it is far too late.
Cut the Crap
Quantitative Tightening 2 (QT2) officially commenced on June 1, 2022. It appeared to have come to an abrupt and ignoble end following the panic at Silicon Valley Bank. After shrinking its balance sheet by $626 billion through the end of February 2023, the Fed then quickly added nearly $400 billion to liquify the financial system. This is credit that’s created out of thin air.
Yet maybe QT2 isn’t dead after all. Yesterday [Thursday], the Fed published its weekly H.4.1 balance sheet update. And, come to find out, there was shrinkage of roughly $28 billion. At that rate, the Fed’s balance sheet will be back to where it was at the end of February in about 14 weeks.
Could it be that QT2, after momentarily falling off the wagon, is back to walking the straight and narrow? We’ll all find out soon enough.
With respect to the Fed’s recent balance sheet expansion, a real monetary policy geek will tell you this is merely discount lending via the new Bank Term Funding Program (BTFP). And because the Fed isn’t buying actual securities it isn’t truly quantitative easing.
If you want to split hairs over technical details that’s fine. You can be right without being correct.
Perhaps, technically speaking, the Fed’s recent balance sheet expansion is not truly quantitative easing. But make no mistake, BTFP is a bank bailout – even if Joe Biden says it isn’t.
Again, you can be right without being correct. The taxpayers may not be directly paying for the Silicon Valley Bank bailout. But let’s cut the crap. Everyone – including you – will be paying for it for decades to come through inflation.
Mass Fraud and Theft
To be clear, the Silicon Valley Bank bailout is not just of lowly deposits that are already FDIC insured. This is a bailout of the ultra-wealthy and their business interests. These are people and organizations that had the means to appropriately manager their risk. But they didn’t.
So, instead, you’re on the hook for California Governor Gavin Newsom’s wineries, billionaire businessman Mark Cuban’s drug company, along with a number of other Silicon Valley elites. This is the ultimate welfare for the rich through the socialization of losses.
The BTFP also perpetuates the extreme moral hazard that has been gifted to bankers over the last several decades. Why manage risk and act with prudence when you can borrow money and speculate without facing the consequences of poor decisions?
For example, not one banker or mortgage broker that we know of went to jail for the mass fraud and theft that was perpetrated leading up to and following the 2008-09 housing market bubble and bust. Not even Angelo Mozilo…who personally pocketed $45 million in ill-gotten gains. But even that’s small potatoes.
From September 2019 through April 2022, the Federal Reserve issued over $5 trillion of fake money, which the U.S. Treasury spent into the economy. All this free money came with a steep penalty. Like day after night and night after day, price inflation has followed the mass issuance of fake money.
Similarly, interest rate hikes, in an attempt to contain the consumer price inflation of the Fed’s making, have also followed. Bankers who should have known better and should have understood the ramifications of rising interest rates, got caught with their pants down.
Is the Bank Crisis Already Over?
The idea that the worst of the bank crisis is behind us is wishful thinking. Silicon Valley Bank and Credit Suisse are not random one offs. The illnesses that plagued these banks have infected many other banks too. Though the extent of the sickness may not be fully revealed for another six months.
If you recall, when Bear Stearns blew up in March 2008, interrupting CEO Jimmy Cayne’s bridge game, the eggheads were quick to dismiss it. The Federal Reserve Bank of New York orchestrated a fire sale to JPMorgan Chase.
On June 8, 2008, the Fed Chair at the time, Ben S. Bernanke, said: “The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.”
Then, on September 15, 2008, Lehman Brothers blew up and everything went to hell. Hence, roughly six months passed between the collapse of Bear Stearns and the collapse of Lehman Brothers.
In this respect, we're not saying today’s bank crisis is the same as 2008-09. We’re merely pointing out that when extended periods of artificially cheap credit compel rampant speculation and asset price inflation, followed by rapid interest rate hikes, bad things happen.
Namely, asset prices fall, and the debt pyramid topples over. These occurrences, whether Bear Stearns or Silicon Valley Bank, are not isolated. Rather, they’re systemic. And the ultimate fallout takes several months – or more – to manifest.
In the meantime, depositors continue to pull their money from small regional banks. As the Wall Street Journal recently reported:
“The 25 biggest U.S. banks gained $120 billion in deposits in the days after SVB collapsed, according to Federal Reserve data. All the U.S. banks below that level lost $108 billion over the same period. It was the largest weekly decline in smaller banks’ deposits in dollar terms on record.
“Meanwhile, more than $220 billion has flowed into money-market funds over the past two weeks.”