Essay by Eric Worrall
“… SVB recognizes the significant societal, ecological and economic threats of climate change. … We enable entrepreneurs with inventions and new businesses that reduce greenhouse gas (GHG) emissions and take seriously the responsibility to reduce our own. …” – SVB ESG Report 2022 Section 8
Pinkerton: Green, Woke, and Now Broke — How SVB Became the 2nd Biggest Bank Failure in U.S. History
Go Woke, Go Bust
Oh so woke, oh so green, oh so diverse Silicon Valley Bank (SVB) just went bust.
One can go to its website—still up for who knows how much longer—and see that it claimsassets of $212 billion. But as they say, the bigger they are, the harder they fall; and so SVB makes for the second largest bank failure in U.S. history.
…
Speaking of ‘splaining, SVB officials will need to answer a lot of questions, including, What role did wokeness play in SVB’s failure?
Another term for wokeness, of course, is ESG, which stands for environmental, social, and governance. ESG is a pertinent question, as there’s a considerable body of economic literature showing that woke investments aren’t good investments. For instance, one study by professors at the London School of Economics and Columbia University finds that:
ESG funds appear to underperform financially relative to other funds within the same asset manager and year, and to charge higher fees. Our findings suggest that socially responsible funds do not appear to follow through on proclamations of concerns for stakeholders.
Read more: https://www.breitbart.com/economy/2023/03/11/pinkerton-green-woke-and-now-broke-how-svb-became-the-2nd-biggest-bank-failure-in-u-s-history/
Of course, it wasn’t just the woke policies of SVB which might have contributed to the disaster. One of the biggest sources of damage to Silicon Valley Bank was the bank’s mistaken belief that fixed rate securities were a safe harbour for depositor’s money.
From Forbes;
How Jerome Powell Killed Silicon Valley Bank
…
With a hat tip to this fine Mint.com explainer, the oversimplified sequence of events is:
Read more: https://www.forbes.com/sites/jamesearly/2023/03/10/how-jerome-powell-killed-silicon-valley-bank/?sh=16a85a065603
- Silicon Valley Bank’s deposits grew from $61 billion at the end of 2019 to $181 billion at the end of 2021, as its startup customers raised ample VC money.
- This was too much of a good thing; Silicon Valley Bank couldn’t lend these deposits out quickly enough, so it began looking for something else to do with this money.
- Unfortunately, a large part of that “something else” happened to be very long-dated (i.e., maturities in excess of 10 years) mortgage-backed securities (MBSes). Silicon Valley Bank put 56% of its assets into fixed-rate securities, which is far higher than most banks.
- Whether it was fully or semi-deliberate, Silicon Valley Bank was betting heavily on interest rates not rising.
- As interest rates rose – one-year Treasuries, for instance, went from yielding around 0.05% (on May 31, 2021) to more than 5% these days – the values of those MBSes cratered.
- Moody’s downgraded Silicon Valley Bank.
- People worried about Silicon Valley Bank. Peter Thiel and other VCs advised portfolio companies to withdraw their money. Account holders had already been withdrawing deposits in 2022 as funding slowed, so convincing them to withdraw more wasn’t hard.
- To provide this money, Silicon Valley Bank had to sell already-depressed assets at fire-sale prices.
- (Silicon Valley Bank also told people “we’re OK” when they were very much not OK, which likely worsened the panic.)
- Silicon Valley Bank, with $209 billion in assets, became the second-biggest US bank failure ever. FDIC insurance covers $250,000 in deposits, but as Silicon Valley Bank is a business bank, less than 3% of its deposits are covered.
- Incidentally, with $620 billion in unrealized losses at other US banks, people are worried about a similar fate at other small, undiversified banks, and bank stocks are tanking overall.
Forbes is wrong to blame Jerome Powell. Rising interest rates are a symptom of economic crisis, not the cause.
One of the Federal Reserve’s main responsiblities is to ensure price stability, to contain inflation to around 2%. If inflation is allowed to soar unchecked, if interest rates are not increased to combat rising inflation, the result could be a deep recession, or even a second Great Depression. High inflation rates scramble market signals. Entrepreneurs pile their money into asset bubble sectors – houses, race horses, fine art, tulips, whatever happens to be fashionable, instead of focusing on real businesses and job creation.
So what caused the instabilities which forced the Fed to raise interest rates?
I would argue the Biden administration created the economic crisis which forced the Fed to raise interest rates, with their wild Net Zero spending spree, and their hostility towards fossil fuel.
Gasoline and energy inflation is a major component of the consumer inflation which the Fed is dedicated to managing. As WUWT has repeatedly documented, the Biden administration’s reckless spending on Net Zero, and hostility to domestic drilling, is largely responsible for the spike in energy prices and consumer inflation.
Could a different President have done better than Biden? The likely answer is yes. If President Trump’s America First energy policies had been continued, abundant domestic supply would have kept gasoline pump prices more under control, and cheap energy exports would have driven up the value of the US Dollar, which in turn would have counterbalanced the impact of global commodity price rises.
I’m not claiming there would have been zero inflationary pressure or interest rate hikes, but there would have been no hesitancy over releasing Federal land for drilling, so America would have been in a better position to laugh off supply shocks. And the US Secretary of State wouldn’t have had to go crawling to a wanted accused felon, apparently to secure US rights to pump Venezuelan oil.
The only remaining question, will the Republican Congress cave in to demands for a bank bailout? In my opinion there will be huge pressure on Congress this week to mount a bailout, to use YOUR money to rescue the rich liberal clients of Silicon Valley Bank, you know, the radical left wing silicon valley giants who helped Federal Government agencies suppress and censor conservatives and climate skeptics.
I can’t tell any of you what to do, but I urge you all to write to your Congress representatives, to let them know exactly how you feel about your hard earned potentially being used to bail out the Silicon Valley Bank wokesters, before your representatives get all their time booked by smart lobbyists in expensive suits flying in from California.
h/t SMC – looks like the Biden administration doesn’t need approval from Congress to release money to Silicon Valley Bank depositors :- https://finance.yahoo.com/news/us-government-guarantees-all-silicon-valley-bank-deposits-money-available-monday-223546372.html
This is foremost a liquidity problem. US bank regulators were apparently fine w that or not paying attention. Yellen has signaled that the gov will back depositors but let the bank fail which seems good to me.
I’m all for a bailout…
The funding must come from budgetary redirects from expenses to be paid to
China funding
UNIPCC funding
Green funding
Social Justice funding
Wind and Solar funding
Biden’s Paycheck
…
And the Strategic Oil Reserve MUST be immediately replaced back to a 700m bbl level
And from payments to Ukraine
We aren’t paying anything to Ukraine. We are paying guys in Lima Ohio to build weapons that we will ship to Ukraine. The money stays here.
The military assets are leaving the US and will have to be replaced at some time in the future. If you think giving away assets is like a free lunch, then you are mistaken.
Government spending has to create net assets to be a net gain.
Try the following thought experiment:
We are paying guys in Lima Ohio to dig holes in the ground, and then fill them back in.
The increase in the net worth of the U.S. is exactly the same in either situation.
(Of course, there are a few caveats. Most people here support the opposition of Russian expansionism. Also, keeping the tooling and skills open for important production lines is a net gain. However, the jobs argument without a corresponding increase in “wealth” is not a valid economic argument in my opinion.)
Reprobate! Hath thy no respect for the Holy Sacrament of the GeeDeePee?
Ev’rybody knows, filling in holes grows GDP, and GDP is the be-all and end-all of all economic effort!
But yes, Russian expansionism is a real and terrible threat to the welbeing and continued operation of the biological warfare facilities the Pentagon has built all around the Russian border.
The one in Georgia being the oldest and thus far most active…
Not Alibammy, the other Georgia. Where it is not America. You know, the one where the CIA is currently burning things down? To protect it from Russian expansionism, I’m sure.
So much paranoia in such a small mind.
Around me, filling in some potholes wouldn’t go amiss, and would be a real benefit, not least in lowering the risk of damage to tyres and suspension that have cost me dearly over the past few years – and I do try to drive with caution for potholes.
But comes out of the tax payers pockets one way or another.
FDIC raises it’s funds from the insurance fees that banks must pay
Any shortfall is covered by a special levy paid by all banks.
The US bonds that caused the problems will be redeemed at face value anyway…..when due. The banks liquidity problem problems were it needed the money not at redemption time, also it had huge amounts of large cash deposits rather than most banks where the borrowers have only small deposits
You aren’t even aware of what I was replying to apparently.
Please try to keep up. It was a reply about who is paying for the weapons we’re sending to Ukraine.
Walter, not one of the guys downvoting you, are even aware that America’s “foreign aid” is ALWAYS distributed as interest-bearing loans.
I won’t even go into the 45% transaction fees over at IMF, or who actually earns that interest, but this much is proven: The taxpayer foots the bill for foreign wars so that privateers can pocket not only the weapon sales, but the interest on the loans for the weapons sales, plus they get to exploit whatever national resource the ‘client state’ signed off as collateral.
All under the watchful eye of UN “peacekeepers”.
Patriotism is a good thing, but as Mike Rivero said: “One should not wave the flag with such vigour, that it obscures reality.”
Wrong. Some significant part of the money is going to MIC, but the US is fully funding the Ukrainian government including bureaucrats and soldier salaries. And of course, kleptocrats.
Fully funding? Really? Do you have evidence to support this or are the voices in your head sufficient?
Go back and listen to Biden and Zelensky. They say it flat out.
In particular: look up what is “military assistance” vs everything else. The non-military assistance is cash for the Ukrainian government to use – i.e. pay for bureaucrats and soldiers among other things.
One simple example: Janet Yellen just gave Ukraine a one billion dollar check last week. She’s a Treasury secretary – and it was cash.
Your ignorance is apparently exceeded only by your insolence.
If you think $1Billion is enough to fully fund the Ukranian government, there is nothing I can do to help you.
If you cannot read or understand that the $1B is only the latest example, then there is nothing I can do to help you.
You clearly don’t understand jack all of just how much money is being sent to Ukraine and for what.
Among other things: Ukraine’s entire GDP in 2021 was $200 billion vs. the $120 billion the US alone has sent to Ukraine.
Do the math, numbskull.
No, the funding definitely will not be redirected from those things. They’ll go ahead and do what they’ve been doing by continuing to spend on those things and just print another $200-billion to bail out their friends in Silicon Valley. After all the profligate additional printing and spending over the last 3 years in the trillions, what’s just another $200-billion? It literally now looks like pennies to them.
https://www.thegatewaypundit.com/2023/03/breaking-fdic-to-make-good-all-deposits-at-silicon-valley-bank-and-signature-bank/
😉
But SVB didn’t have dodgy loans , it had too much invested in rock solid US bonds
Which are redeemed at face value …eventually
But you have a loss if you paid $125 for a bond with a par value of $100.
Why should a failed bank be bailed out? That’s a hint for other banks to go high risk. 2008 was just that.
Ask Trump and GOP who removed thse midsize but regionally significant banks from Dodds Frank stress testing if they faced a crisis
And boy did this bank grow massively after that oversight was removed
Hey, everybody! Remember you heard the Leftist talking point first here from the Duker: It was Trump and the Republicans wot dunnitt.
You’re joking right… it was Clinton Administration that made Banking the scam it is today… First it was the it was Community Reinvestment Act, then it was repealing the Glass-Steagal Act in 1999
https://tinyurl.com/ymjmj465
The stress testing wouldn’t have helped.
Remind yourself what a stress test is …. run on the bank is one of them
I’m absolutely against a bailout. I am, however, in favor of short-term loans to prop up banks to restore consumer confidence and prevent widespread panic, runs on banks, and economic collapse, which is the primary reason the Federal Reserve was instituted in the first place. In 2008, Congress authorized the Trouble Asset Relief Program (TARP), up to $700 billion in loans to prop up the “too big to fail” banks and insurance companies. TARP ended up only loaning $431 billion. It worked and within a year almost all of it was paid back. With TARP and other loan programs, the government spent over $600 billion which was paid back and netted a profit of $121 billion on top of that. But Obama, “never let a crisis go to waste” Rahm Emanuel, and the Democrats seized the moment to ram through an $800 billion “economic stimulus” in 2009 long after the economy was already improving, that was not a loan but a taxpayer-funded giveaway to every progressive dream program; all of which were so bad and unpopular that they languished on the desks of Democrat legislators because they couldn’t get enough votes to pass them in previous Congresses. But with a Democrat majority in both houses, and a Democrat President, they foisted their fiscal madness on us.
So, loans: good. Bailouts and “economic stimulus”: disastrous.
This is foremost a management incompetence problem.
SVB had $15.16B in unrealized losses on its ~$91B investment portfolio listed on its 2022 10-K – published on February 24, 2023. Since it had only $6.6B of shareholder equity, the bank was hanging under an asteroid sized Sword of Damocles.
Now consider that interest rate increases to fight inflation had contracted liquidity at a historic rate. This meant the startups and VCs who deposited money into SVB were guaranteed to collectively have to net withdraw deposits.
The question is: why did SVB not exit these massive long term bond investments in June 2022 when it was 100% clear that the Powell Fed was going to jump interest rates by at least 4%?
Yes, SVB is an extreme case because their deposits went from $49B in 2018 to $109B in 2020 to ~$212B by the end of 2022 – the massive increase was way over their ability to lend it out to wineries and what not, but the nature of its depositors vs. its heavily negative investment portfolio (as marked to market) should have been glaringly obvious to its management. And it was clearly obvious to Peter Thiel because he and Founder’s Fund stampeded out of SVB and were probably a significant chunk of the $42B in deposits that left SVB on Thursday, 3/9.
To put the $42B in perspective (remember this is vs. ~212B of deposits): Washington Mutual was taken down by a bank run that saw ~9% of its deposits leave in 9 days = $16.7B, in 2008.
The entire bank sector is something like $650B in the hole on its investments due to the Powell rate increases.
I have 2 corporate bank accts at SVB but they were well below the insured deposit limit, so I had no concerns albeit I did have to open new accounts at Chase on Saturday, but it was definitely a brown pants moment for a lot of SVB customers.
Apparently 97% of deposits and 91% of depositors were over the limit. Losses would probably “only” have been 10% to 25%, but the bigger problem was that it takes 6-12 months typically for an FDIC takeover to resolve assets into returned deposits.
My Washington State political folks are as clueless as those that were in charge of the failed bank.
Besides, I am likely on the list — “round-file” his comments.
I think I will go split firewood instead of composing a note to them.
Try not to cuss too much doing so.
Looks like team Biden is going to once again go around congress and just do whatever they feel like doing. As every good journalist knows, Democrat presidents aren’t bound by the constitution.
The law allows them to do exactly what they are doing , and no it’s not in the constitution
Eventually the FDIC funds will pay and any short fall covered by all bank levy….that is until the GOP gets ‘influenced’ by the big banks to avoid paying any levy.
Fascinating. No matter how badly team Biden screws up, the left always tries to blame someone else.
BTW, it’s your guys who are being influenced by the big banks to make sure that government pays off these deposits. Just as it was under Clinton and again under Obama.
The government has the FDIC for exactly this situation, which if it runs out of money can do a special levy on all banks
Remind yourself what deposit insurance means
Its an unusual situation but one of SVB problems was it had too much deposits, when most banks that fail have too many bad loans ( Washington Mutual)
But in many ways , the location in Silicon Valley meant they got a better deal than say a bank for peanut farmers in Georgia
Reported in CITY A.M. on Friday:
“As a reminder, Silicon Valley Bank UK is a standalone entity with its own balance sheet and governance structure,” Erin Platts, CEO and Head of EMEA, said in a statement. ………..
UK balance sheet is ring-fenced, liquidity seems OK, a lot of the portfolio (anecdotally told 60%?) locked into term loans.
My current thinking is (a) low risk of “bust” (b) risk of BoE PRA “freeze”.
Reported in CITY A.M. today?
“SVBUK said it will be put into insolvency from Sunday evening. It is a subsidiary of Silicon Valley Bank (SVB) and was the first location it opened outside the US.”
The moral of this is – never trust a banker!
The UK government pulled the trigger not the UK branch of the bank.
Anyway they have a buyer HSBC , so it’s back to keep calm and carry on
Here’s the blurb
The Bank of England (Bank), in consultation with the Prudential Regulation Authority (PRA), HM Treasury (HMT) and the Financial Conduct Authority (FCA), has taken the decision to sell Silicon Valley Bank UK Limited (‘SVBUK’), the UK subsidiary of the US bank, to HSBC UK Bank Plc (HSBC
Silicon Valley Bank’s UK Unit Has Been Sold to HSBC for $1.21 (businessinsider.com)
Following ESG principles is contrary to their fiduciary duty. Lending money as virtue signaling definitely has limits, especially if the Politically Correct borrowers are bad credit risks.
You mean Clinton’s forcing banks to lend to bad credit risks due to the color of their skin, which led banks to lend to those of ALL colors and national origins credit risks to avoid being sued for discrimination leading to the home mortgage collapse.
Yep, new day, different people, bailout coming. The depositors donate to Democrats.
Wow! That was the smoothest guilt-reapportionment for that specific instance of mass fraud I’ve ever come across!
Just remember, friend, the banksters run things. There exists not one enforceable financial law in this world, not lobbied/ bribed/ coerced into existence by them.
Just like all the bankers withdrew billions from SVB just before the stinky stuff hit the fan. You have a regulatory explanation for that, too?
I’m surprised you didn’t bring in the Illuminati and the Bilderburgs.
That’s ignorance . It had too much money from it’s depositors when startups were flush…..so it looked to put in safe as houses US bonds….but longerbterms got slightly higher interest rates
What it failed to do was hedge the interest rate risk. You can thank the GOP and Trump from removing a bank of this size from Dodds_Frank supervision which would have meant it failed stress testing
‘You can thank the GOP and Trump from removing a bank of this size from Dodds_Frank supervision…’
Ah, the good ol’ Statist lack of regulation argument. Well here is a list of just the Federal agencies alone that involve themselves in bank regulation:
https://www.compliancecohort.com/banking-regulations-list
But at least you allude to the real problem, which is that under a fractional reserve banking system for a fiat currency, e.g., the USD, ALL deposit banks have a huge mismatch between the duration of their deposit liabilities (very short) and the duration of their assets (much longer). It’s how they make money and it appears to work when rates are stable or falling. But it become problematic when rates are rising, particularly when rising from effectively zero pursuant to the Fed’s policy of quantitative easing.
If you were honest, you might ask a few questions about what the Federal government has been up to that always requires the Federal Reserve to manipulate interest rates. But no, for the Left it’s always ‘deregulation’, ‘unbridled capitalism’ and ‘Trump’ that’s the problem.
The goal is to get rid of private banks and have government run everything.
You better take that up FDR and his new Deal
Of course you can’t demonstrate that these regulations would have made any difference. But you are good at echoing the Democrat talking points.
Its a lot more ‘certain’ – but not absolute proof -yet, than the authors claim its connected to ESG investing.
Its supposed to be a good thing that local banks reflect the community they operate in.
Its San Francisco after all, its going to have local feel good stuff
Not what I read….
Executives then decided to invest much of its excess funds in higher-yielding, long term bonds, along with $80billion in 10-year mortgage-backed securities that pay out 1.5percent rather than the short-term Treasury Department securities that pay out only 0.25percent.
$80bn of MBS is not long dated Treasuries. As unsafe as houses or worse, in fact.
Economist Richard Werner claims that collapsing small banks is an objective with the “great reset” crowd. It serves to concentrate more power and control in central banks whose objective is central bank digital currency. He further claims that boom and bust cycles are deliberately created by direction of lending into asset purchase, driving up prices. A long, but interesting podcast.
https://www.youtube.com/watch?v=FFAbK20rXa0
see also his web site.
SVB seems pretty big for a “small bank”
JPMorgan Chase is the top largest bank in the US, with a balance sheet total of $3.31 trillion.
14th largest but still small compared to the big boys.
Yes , only a mid size regional bank… But in a critical area for US innovation…well used to be , most is just a Ponzi scheme . For every ChatGPT there’s 50 airheads with no real future
Now change that to “privately owned central banks all belonging to the same overarching privately owned corporation whose objective is to concentrate all property under one account” and I give you full marks.
Too many people are still under the erroneous impression that “central bank” means it belongs to the state, or is run by the Treasury department, or even just a sub-secretary of finance. They have no idea their taxes actually go straight into the pocket of privateers, who allocate the state some minimal amount to run the country, forcing them to borrow whatever they need…from the same banksters!
When the “Book of Life” is opened, we will see how much debt we actually owe that one central bank. Legend has it: Everything!
‘I would argue the Biden administration created the economic crisis which forced the Fed to raise interest rates, with their wild Net Zero spending spree, and their hostility towards fossil fuel.’
Plenty of blame to Biden, as well as predecessors who spent money they didn’t have. This meant borrowing facilitated by FED printing. Remember, inflation is always and everywhere a monetary phenonomen. And every inflationary boom eventually results in a deflationary bust.
Almost no blame to Biden
Can blame Dumbocrats in Congress
But it was Trump who signed the 2020 and 2021 budgets with their huge deficits.
Trump budgets less emergency Covid spending were much less than the Biden budgets less ongoing Covid spending.
You can certainly debate the value of what the country received for all of the emergency Covid spending, but Biden – and the Dumbocrats – and the Republican big spenders are taking monstrous spending to the next level.
Trump pushed for these mid size banks to be less regulated under Dodd Franks , and the GOP legislated for it too happen
Would have picked up they didn’t hedge their interest rate risk, even if they were invested in US bonds
And yet another echoing of the DNC talking points. Are you paid by the post?
Strange then that Dodd Franks deregulation extended down to banks ‘too big to fail’ and it was excluded from stress testing.
Cant handle a run on deposits or didnt have the right amount of hedges on interest rates would seem to be red flags
It is quite clear that the management of risk was entirely missing at the bank, and they hired people with a track record of failure in that regard.
Yiu can’t arbitrarily subtract Covid-related spending and then claim Trump was not a big spender. He signed both 2020 and 2021 budgets WITH all the Covid-related spending.
Exactly .
The $2.2 TRILION stimulus Cares act was signed off by Trump after passing Congress in March 2020.
Some seem to think Trump sat on his hands
Here we go again. I swear that despite the fact that we have probably the most corrupt administration in US history and dems have had control of congress for two years, anything and everything bad that happens is all Trumps fault.
In this case the same dumbass that was instrumental in leading Goldman Sachs down the tubes has been instrumental in leading SVB down the tubes. The Fed has obviously been remiss in monitoring that banks activities. Moody gave SVB its highest rating just three days before the collapse. Forbes put it in the top 5. And the Banks Officers started dumping their stock weeks before the collapse and paid their employees bonuses the day before.
If you still haven’t gotten the picture that the whole system, from top to bottom is corrupted by now, there is no hope for you and you deserve everything that’s coming.
Fool me once, shame on you. Fool me twice, shame on me!
Correction, Lehman Brothers, not Goldman Sachs.
I was reading:
expecting it to fininsh:
But it turns out you were not talking about O’Bammy at all!
Republicans gutted Dodd Franks oversight of exactly these smaller but still significant regional banks.
Trump was cheerleader for exactly this deregulation….and SVB grew massively freed from any sort of stress testing
While Biden’s economic policies drove down the yeild of bonds.
My understanding is that the last report was falsified.
If only there was a political officer in every board room, this falsification would have been caught before anyone could have been hurt. /sarc
Inflation drove down pre existing bond yields
Inflation that has skyrocketing ever since Brandon.
It really is fascinating how to the left, every failure of regulation is proof that only more regulation is the solution.
But the bonds were considered to be safe investments. Nogt reckless investments.
Smart bankers usually hedge interest rate risks. It seems like this bank did not.
Banks use derivatives to hedge, to reduce the risks involved in the bank’s operations.
For example, a bank’s financial profile might make it vulnerable to losses from changes in interest rates.
The bank could purchase interest rate futures to protect itself.
Thanks for that. Its obvious – in hindsight
Complaining that ESG investments caused a rush on deposits is so farcical
Richard,
When the FED purchases government debt it inflates the money supply (monetary inflation). Prior to COVID, the new money typically stayed within the financial / banking system, so CPI inflation (price inflation) typically remained ‘low’, while prices of financial assets, e.g., stocks, bonds, real estate, etc., moved higher. Everyone was happy, even though there actually was damage, mostly hidden, being done to the economy.
Fast forward to the COVID era, and the government ramps up spending, which is accommodated by even more FED debt purchases. The big difference at this point, in addition to magnitude, was that the new spending was being directed to individuals to ‘compensate’ for their being forced to stay home while productive businesses were shut down, schools closed, supply chains broken and rioters took to the street. So now we have more money chasing fewer goods, aka ‘price inflation’, which I might add, has since been greatly acerbated by the government’s stupid domestic and foreign policies, particularly it’s ongoing war on fossil fuels.
You’re free to blame Trump, of course, but COVID hit in March of his last year, and it was primarily the Democrats who instigated the economic shutdown, riots, bad policies and climate change madness.
Trump tax cuts blew the budget deficit long before Covid.
The way budgets are done Trumps fingerprints are on TWO federal budgets…not
a” few months”
Fed fiscal year runs from Oct to Sept, so emergency spending in 2020 and then full budget for 21
Ah yes, the standard excuse of the left. The fault is never that there is too much spending, it’s always that the productive aren’t paying enough in taxes.
So its an excuse that Trump regime affected 2 federal FY budgets, not a ‘few months ‘ that Frank says ?
How does this sound
The Coronavirus Aid, Relief, and Economic Security Act] also known as the CARES Act,[2] is a $2.2 trillion economic stimulus bill passed by the 116th U.S. Congress and signed into law by President Donald Trump on March 27, 2020…
$2.2 TRILLION stimulous from your mighty Trumpy ( and others) didnt have any effect ?
Trump signed bot the 2021 and 2021 budgets,
So who else could i blame?
He did not veto them
It was Trump’s hacks, Fauci and Birx, who led the Covid scaremongering that led to lockdowns and then the HUGE Covid stimulus payments. He gave both of them a HUGE amount of face time on TV. A BIG mistake.
I also mentioned the Democrats in Congress are to blame, since they controlled the budget submitted to the President,
Joe Bidet had nothing to do with those two budgets. In fact, “his” 2022FY budget cut the deficit in half (although it
s still relatively large).
And here’s another story of ‘reckless spending’
From Greece this time and resulting in a real, actual and heart-rending tragedy.
I likened it to the UK and our spending on the HS2 train debacle, windmills, covid and now, arms to Ukraine.
Hot on the heels of the nurses either leaving their jobs or going on strike, the doctors are looking for a substantial pay rise.
iow. UK has neglected infrastructure and real jobs in favour of wokeness, junk science and virtue signalling
Powered by borrowed and printed money – just like Brandon is doing
Read it all
Holes are being dug in back yards everywhere to store coffee tins full of digital currencies.
Good news. JP Morgan gets to buy SVB assets for pennies on the dollar, and the U.S. government gets to acquire all the bad loans.
Actually, it appears Elon Musk and Binance are, currently, the leading potential buyers of SVB.
In any case, gains will be privatized; losses socialized.
I would love to start an ESG investing firm based exactly on the model Scissor describes. That firm would outperform the returns of every other asset class.
(I wonder how I could ensure that the government will always socialize the losses? Perhaps if I was a member of Congress?)
Not so. Buyers of banks usually get to make depositors whole as well as getting assets.
There won’t be a buyer for this one though. Musk would never be allowed to buy a bank, any bank ……it’s fricking obvious
You mean “hide coffee tins of crypto” so your friends don’t find out you bought into a financial scam?
Just kidding, I know how passionate the cryptoids are.
Just one thing, dudes: Where’s my taxes? You say it’s money, you transacted, where’s my taxes?
Oh, they are coming for their taxes, that’s why you are digging holes for coffee tins…
This is my question to WA Speaker Laurie Jinkins regarding the risk to WA pension plans.
Given the recent collapse of SVB and Silvergate, what do you plan to do to protect the WA State Pension plans from experiencing similar crashes in value since the funds now invest close to 30% in high risk Private Equity deals. These funds are not required to report market value and with rising interest rates, many may now be worthless or heading in that direction. These hidden losses are what all banks and pension funds hold without recognizing the potential problems for paying pensioners in the future. Great Britain is another example of a failing pension plan needing a massive bailout.
Never forget what ESG stands for.
Too late for SVB to learn a simple lesson of truth, but here it s.
If you focus on ESG just remember it’s, Economic Suicide Guaranteed.
False . Their problem was rock solid US Treasury bonds was a big chunk of investments, not dodgy loans .
Trouble was market value when they need money this week was below par , but will be redeemed for face value if you wait.
I would guess the bonds were not properly hedged with interest rate futures or some sort of derivatives (which do reduce income from the bonds).
Yes. It seems to be the Swiss cheese problem, eventually all the holes lined up
False.
Executives then decided to invest much of its excess funds in higher-yielding, long term bonds, along with $80billion in 10-year mortgage-backed securities that pay out 1.5percent rather than the short-term Treasury Department securities that pay out only 0.25percent.
Ja. Ja. Woke is not being awake…
Can’t come to a bailout but as many free jabs to SVB clients as they want until net zero is achieved.
Get woke, go broke.
No bailout. Biden caused inflation, Fed countered by raising interest rates. SVB kept too many assets in fixed rate treasuries that tanked in value as a result. So run on bank and poof. Next few days should be interesting, cause SVB is likely not the only bank in this same predicament.
Wall Street Braces for the Next Silicon Valley Bank – WSJ
There are some large regional banks in the article that are in a similar predicament to SVB.
hmmm… why did my comment go to moderation?
According to Charles, most likely because it had a banned word in it. If it goes immediately into moderation it was done by a computer. But Charles told me a comment can be published and later disappear — moved into moderation by a slow moving computer, without ever being seen by a moderator, which happened to me several times.
I wish there was a list of banned words to avoid the confusion caused by the computer moderator program, besides the obvious curse words.
My general experience with moderation over the past decade at many websites is not good — I assume any post in moderation will never be seen. I can only suggest you save a copy of longer posts first, and later submit them again after deleting any words that might have been banned words.
Why can I see it, but not respond to it, while it’s in moderation?
Well, at least you can see it.
I’ve seen my own in moderation. I’ve never before seen someone else’s marked as being in moderation.
Anyway, it’s out of moderation now.
Yep. I am curious why it went to moderation, though.
I had heard elsewhere that they that went long on treasuries, but this article suggests they decided on long dated mortgage-backed securities. Ultimately, that’s probably not an unimportant distinction the key point is they made a bet that interest rates would stay low, even in the face of unprecedented government spending pouring money into the system which has always, always, always push nominal rates up. Why did they think this time it would be different or did they not think at all? Surely they had risk-management professionals on staff — managing interest-rate risk is one of the most basic risks the bank faces.
When did SVB park most of these funds? I can’t see anyone who’s been awake for the past 18 months being this dense.
I may have a little different viewpoint from my experience. I certainly agree with most of what you mention, but I can say that not all impacted thought the same way.
Some thoughts. The dominoes seem to be falling from poor energy policies (as you mention) that increased prices, hence inflation in all parts of the economy as energy touches everything. Then the excessive spending, and non stop spending pushed the inflation even more and hence the rate hikes, which in the end hurt SVB. If one looks closely, government policy also fueled the last bank collapse. Not saying banks did not play a role either, as here with the fixed rate treasures.
However, with Powell, I was disappointed not to hear him push back at government spending. I admit I did not listen to all his testimony over the years, but I did hear him say when asked that in essence government spending really was not a concern. (I may missed other statements) Now whether this was political or not, not sure, but if he really thinks that, maybe he is not the right person for the job as we need someone in that role to call it as it is. Everyone seems to agree that his tools are limited to fight inflation, so then we (as educated citizens) need to push politicians to do the right thing as the spending certainly added to the inflation problem. Seems to me some basic econ 101.
As for SVB- Honestly, I am not sure a bailout is right or wrong. I understand your point of view. I also think in much of corporate America, companies have lost focus on their core business and that is a problem. However, I recently worked in the bio-tech industry and was introduced to SVB when I started in 2013. They were a good partner. I worked closely with a lot of wonderful people there, who I call friends, and my heart breaks for them. The group I worked with was early stage start-ups and we worked on programs to help young companies navigate funding, accounting, R & D etc… The impacts of the collapse touches many people, the start-up companies as well as the people work for those start-ups. Again, for me, more friends. So I admit it is a bit hard for me to make a personal judgment on a bailout, although in general I agree less government is better. Just saying that as with any company made of people, we do not all think alike.
Bailouts are generally used to plug the dyke, so to speak. The PTB don’t want it to spread.
BTW, the CEO of SVB, Joseph Gentile was also CFO of Lehman in 2007, before it collapsed in 2008. Not that there’s anything wrong with that.
I believe Gentile is chief administrative officer, not CEO.
Yes, you’re correct, my mistake…
Prior to joining SVB as Chief Administrative Officer, Gentile worked as Chief Financial Officer at Lehman Brothers’ Global Investment Bank. Gentile left Lehman in 2007, just one year before it went bankrupt in 2008
New India Express
I understand they got their bonuses last week … my guess is all bonuses will be accepted. I don’t feel too bad for them.
I believe management misstated the financial situation of the bank in their latest public guidance – and then cashed out their own stock and options.
In that case, claw-back provisions for the stock sales and bonuses should be rigorously enforced!
Higher energy prices do not cause inflation
Higher energy prices are the result of supply and demand and inflation
Inflation requires an increase of the money supply.
There were very high energy prices in 2008 and low inflation
That could not have happened if high energy prices CAUSED inflation.
I say again: It is possible to transcend your Montessori education. Just concentrate real hard, open your eyes, look at the world, and realise: It does not follow the rules you make, and it cares nothing for your beliefs.
In my part of the world, for example, your 2008 inflation figure was kept low by redefining the so-called “commodities basket” used to calculate (obfuscate) the inflation rate. It all started with the fuel price, I can tell you that!
I have to go now, but I bet the same happened your side, you go look it up. Do you really put store by the “official numbers”?
You are either very young, or incurably naive. You probably have very serious views on deflation, and a dogmatic belief in the existence of stagflation. They are keeping your mind busy with fables…
…but I blame Mme Montessori…or at least those who funded her into relevance.
I blame Mme Montessori
Because traditional public schools are so good?
I have a pubic school edumacation until graduate school. My family could not afford any private schools when I was young.
As did I, Richard. We both managed to overcome the disadvantages thereof 🙂
I am 69 years old, have a Finance MBA, wrote the newsletter ECONOMIC LOGIC for 43 years, with hundreds of subscribers, retired at age 51 to live on my investments, and have forgotten more about economics than you will ever know.
You simply dismiss 2008 price inflation data as no good because they do not fit your erroneous conclusion.
Oil prices reached a very high $145 per barrel in 2008, which is $205 in 2023 dollars, yet consumer price inflation in 2008 was only a very low +2.4%.
Oil prices reached a modest $86 in 2021, which is $86 in 2023 dollars, but the consumer price index increased by a large +7.0%
There was no obvious correlation of oil prices and consumer price inflation in both years. There are many other examples, but that’s my research for today.
Hi Richard,
Oil prices did spike from an extremely low price in April of 2020 to a around $112 in May 2022. according to this: https://tradingeconomics.com/commodity/crude-oil
It did also seem this time to increase gasoline prices to the same level. https://www.in2013dollars.com/Gasoline-(all-types)/price-inflation.
Probably more gasoline taxes now as well. I am in California so if gas was really $3.47 i would be thrilled. 🙂
Richard,
Understand your point. I know a lot of factors come into play and there is an interplay between all three. Increasing the money supply certainly does cause inflation and we did dramatically increase the supply in the past fews year. No wonder we have inflation.
My point with energy, and in another sense fossil fuels as derivatives are used all throughout the economy, impacts costs. [More so say than a an orange blight reducing supply as people can easily change fruits. 🙂 ]
I think the big difference in 2008 was that demand greatly diminished and we did not see that this time. (yet:) Therefore, for example if money supply and demand remained the same, prices go up (inflation). As we make energy more expensive (whether decreased supply or higher cost alternatives) it will increase costs, unless demand drops.
.
Rise in oil prices. In 2008, there was also a peak in oil prices. This complicated matters because it caused cost-push inflation. This cost-push inflation made Central Banks more reluctant to cut interest rates. Also, higher oil prices reduced discretionary income and led to lower spending. Usually, in a recession, oil prices fall. However, because of rising demand in China and India, we saw rising oil prices – even as Europe and the US went into recession. High oil and commodity prices was another factor reducing demand.
Supply- and Demand-Driven PCE Inflation https://www.frbsf.org/economic-research/indicators-data/supply-and-demand-driven-pce-inflation/
As Cilo mentions below we did change how we measure it, which I agree did not make sense.
Respectively,
Jim
There is no such thing as cost push inflation.
At best there is a short term blip in “official” inflation rates, which is nothing more than an artifact of the fact that the official inflation rate is calculated from a small number of items and one of those items happened to be one of the items in the official list.
JViola, thanks for the implied support.
I love this site, they have real scientists with real testable hypotheses, and the engineering crowd really come up with brilliant approaches to problems. In general, it is a fine way to spend coffee break. I can tell you, though, that certain subjects really raise hackles. Economics theory is possibly the most touchy subject, with any criticism of capitalocracy considered a direct attack on mama’s apple pie.
As you may be aware, I have, after many years of observation, come to the conclusion that economics theory is just another form of religion. The corollary is, of course, also true. I do not say this lightly, I do not (easily) dismiss people’s views on the subject/s, as I do not think I know it all, but one thing is for sure: Thou shalt not trivialise the holy dogma of (insert your favourite economics model here).
Have you seen but one single ‘financial expert’, raving against money printing, spend but one moment on the most important fact of money printing, in that every blue cent of it first has to be borrowed, at usurious interest, from the same financial geniuses regaling us with horror stories about runaway mint presses?
This is how we know economics is not science: their hypotheses are not testable, their results not repeatable, and they contradict each other almost as often as they contradict themselves.
Anointed priests, every single one of them bankster puppets, working their mental fingers to the bone, desperately clinging onto their pet theory, scrambling their brains trying to balance all the mutually exclusive fables they insist we hold as divinely revealed wisdom.
I especially like watching their facial muscles contort when they start foaming at the mouth over ‘stagflation’, which seems to be the male form of their worst nightmare: ‘deflation’..
Was it caused by climate activism? No. It was caused by people in charge way over their head caught up in the make believe California culture and depositors putting in very large sums of money without doing their due diligence. Everyone was trusting the bank was being run in a fiscally sound manner and surprise, it wasn’t.
Of the top 100 banks in the US, SVB ranked 99th in FDIC insured deposits with just 2.7% insured. So they had a lot of money from relatively few depositors. They were the hip bank to put your money in, but not a sound one. What will probably happen is all the FDIC insurance money will be distributed next week. Then their assets will be sold and given to the depositors (who are first in line after the lawyers) on a pro-rata basis. Who knows what they get back but it ultimately will be a big haircut.
Hopefully that will be it. We should all know by the end of the coming week.
This is a copy of the Bernie Madoff playbook.
That went well . . .
I’m not sure you’re being practical. Consider this, “ For those who make the case that depositors be damned as it would create moral hazard to save them, consider the feasibility of a world where each depositor must do their own credit assessment of the bank they choose to bank with. I am a pretty sophisticated financial analyst and I find most banks to be a black box despite the 1,000s of pages of @SECGov
filings available on each bank.”
this is a quote from Bill Ackman concerning SVB. To see the comment in context:
Bill Ackman on Twitter: “The gov’t has about 48 hours to fix a-soon-to-be-irreversible mistake. By allowing @SVB_Financial to fail without protecting all depositors, the world has woken up to what an uninsured deposit is — an unsecured illiquid claim on a failed bank. Absent @jpmorgan @citi or…” / Twitter
You don’t need to be able to your own credit assesment, all you need is a private company that you trust, that is able to do such assesments on your behalf.
Much as UL is a private company that rates products and allows companies, for a fee, to put their mark of approval on their products.
Companies are willing to pay the fee, because consumers trust UL. If the consumers lose faith in UL, the value of their seal of approval goes to zero.
A UL marking means nothing to most people/consumers. Most people don’t know who Underwriters Laboratories are, much less what they do.
The UL marking and MarkW’s economics theory has this distinct difference: You can go to a UL listed laboratory/ workshop, and compare their instruments to a known standard, that being the purpose of the idea. You cannot do that to a consultant, who includes a disclaimer on every document, reminding you they are not responsible for wrong guesses.
Comparing an engineering standard to the personal opinion of some self-styled expert working a system he will never disclose, is not only senseless, it is naive. If such infallible experts existed, why do we still have so many buggerups?
Now Mark will edumafy me in 1…2…3…
Beyond that, according to what I’ve read, deposits under $250K were being covered by federal insurance programs.
Of course, the FDIC ensures deposits to $250K. It’s the $190 billion, or so, uninsured deposits that are the issue.
The rich depositors should have done their own due diligence, and not put all their eggs in one basket.
Many did, it seems. There are a few, like ROKU, that significant sums in SVB. Many of the companies were more ‘diversified’ than ROKU however, much of the working capitol for many of the companies was held at SVB. This makes little things, like payroll, extremely problematic for them.
Live and learn
SVB gets their bonuses, sympathetic folks can just be glad for that silver lining while the payroll problems are addressed.
As others have noted, FDIC insurance exist for amount up to $250,000. That entity exists specifically because it is unrealistic to expect ordinary citizens to take the time or have the skills to do a financial assessment of a bank simply because they want to have a checking account with a few hundred or a few thousand dollars in it. However, if you choose to deposit substantially more than 250,000, then the burden on you is to do some due diligence. There are people with well in excess of $1 million in assets that still wouldn’t be likely to have over $250,000 in a single bank. You can spread it across multiple banks, and you can invest it in stocks bonds and treasuries which have their own protections. The people (probably institutions) who have the bulk of the money at SVB ought to be highly sophisticated financial entities who have the wherewithal to do risk analysis.
I only keep about $5K in our bank. Other assets are highly diversified – if any one or two of them goes completely belly up, returning zero dollars on the dollar, it’s going to be “ouch,” but not a disaster.
I also keep two months worth of normal expenses in folding currency. Because I realize that, even though my bank deposits are insured, they won’t be IMMEDIATELY available if my bank goes down (very unlikely, they’re one of the “majors”).
If need be, I could even buy some cash cards with folding currency at the grocery store, and change over our streaming services and the Kindle account over to those cards until things settled out.
So, I don’t worry about the balance sheet at our bank. No reason to.
If I had even ONE dollar over the insured limit sitting there, though, I WOULD be looking at their reports every month. For our own personal deposits, much less if I were in a position to be managing someone else’s funds.
You could teach a personal finance class.
available
3 days before the collapse from their own SVB Website some highlights that show thier focus areas:
From the Wayback Machine 0f 03/07/23: Living Our Values | Silicon Valley Bank (archive.org)
More from the referenced PDF (See link below) about those values:
Another Focus area of SVB bank executives (From the SVB LinkeIn page – at least some Diversity here):
And this:
From: Woke Head of ‘Risk Assessment’ at SVB ‘Prioritized’ LGBT Initiatives — Before Bank Lost Billions and Collapsed (cf.org)
And on Cleantech and Sustainability, “Let us help you drive positive change with our powerful energy banking and lending solutions, expert insights and advice, and unmatched industry connections.”
https://www.svb.com/industry-solutions/cleantech-and-sustainability
What is interesting is that the media ignored this story until Tucker Carlson aired it
Probably hoping to slip a bailout under the radar…
Probably. So Tucker forced Yellen to say this AM no bailout.
SVG failed because they invested heavily in bond (Treasury bonds, I believe). When interest rates rose, the market value of the bonds collapsed. SVG still owns the bonds which upon maturity will pay out at face value. But that’s years out. Thus, a liquidity crisis and a failed stress test. So, the government can buy back the bonds at face value without technically bailing out SVG. At the very least, the bank management will get fired.
It is important to note that a large number of startups deposited their venture funding in SVG. SVG’s mismanagement should not be allowed to ruin these companies.
Insuring your deposits costs banks money, which means they can’t pay as much in interest in order to attract deposits.
If the government bails out uninsured deposits, then why would anyone bother to pay for insurance in the future.
Think about it. Who would pay for fire insurance, if the government had a program to replace any house that burned down, free of charge?
There is an interesting bond sub wrinkle. Bonds ‘available for sale’ must be marked to market quarterly. So the losses incurred from rising interest rates show up. Bonds ‘held to maturity’ don’t since bank will get face value at maturity, so the interim losses don’t show up. Management gets to arbitrarily decide which is which. So SVB hide its bond losses in ‘hold to maturity’ until deposit withdrawals forced them to move some to ‘available for sale’ and then sell them and book the loss—which started the run that led to midday Friday FDIC takeover, itself unusual (showing how bad things were) as that is usually done after close of business Friday giving FDIC a weekend to calm things down.
Management does not arbitrarily decide, they decide as best suits the bank, or the banks management.
Management arbitrarily decides the classification that best suits the goals of the management, which are not necessarily what is best for depositors or investors.
There is an additional subtle wrinkle. The mark to market loss on bonds “available for sale” does not hit the income statement, but does reduce net worth on the balance sheet.
Those “held to maturity” do not show up on either the income statement or balance sheet. The loss shows up only in the footnotes to the financial statements.
Thus the true mark to market liquidity of the bonds is difficult to find without a deep scrub of the financial statements.
But the bonds are still at a premium to par. They were buying when 10 year Treasuries cost $130-135, and have seen $20-25 losses against those purchases. Repayment at par will see just $100 returned and a big capital loss.
https://yhoo.it/4270b0O
There is speculation, reasonable I believe, that the SVB shutdown is intended as an attack on crypto currencies, specifically, USDC (US Dollar Coin, a ‘stablecoin’). SVB has grabbed the headlines but, there are two other banks, Silvergate and Signature that have gone down at the same time. Silvergate has gone down, like SVB, Signature appears to still have its head above water, barely. One thing alle three banks have in common is they hold deposits for Circle. Circle issues the stablecoin USDC.
Update, it appears Signature has been shut down, now, also.
“if interest rates are not increased to combat rising inflation, the result could be a deep recession, or even a second Great Depression.”
Normal inflation is with an overheated economy, the old “Too many dollars chasing too few goods” kind. Ask yourself, do you have too many dollars?
This is a Policy-Caused inflation. Govt action driving up costs of everything can’t be fixed by raising interest rates. All this does is raise costs to individuals even more and burden industries that may be looking to borrow to invest (and create jobs). Sheesh! Yet, this fiscal tool is mindlessly applied by governments throughout the West.
The interest rate/inflation control knob worked in Keynesian economies until the development of Interest related derivatives, which now total several quadrillion dollars. If this castle of cards falls over, it will literally mean “lights out” for at least several years.
Let’s hope not, but consider getting out of the market, buying short term Treasuries (6 month are paying 5%!) and Gold. The panic will probably spread.
Been out of the stock market since Biden took office. An easy call—saved a lot of money even tho ‘cash’ has had essentially no return. Only the second time since started investing while in Bschool. First time was 3 months before the 30% October crash of 98–real bad vibes. Got back in two months after that crash, and made an easy 30% annual return for the ‘year’.
I got out of the market when Biden won.
The man was, and is, not all there
High inflation was already baked in the cake from the 2020 and 2021 budgets that Trump signed.
I was 1/3 in cash when the 1987 crash happened. Invested the cash right after the crash and made a decent profit for the year. People forget the market was up a lot before the 1987 crash and the S&P 500 ended the year up +2% (plus any dividends received) in spite of the crash.
“…smart lobbyists in expensive suits flying in from California.”
Yes indeed, in fleets of private jets. Just to save
themselvesthe planet of course!SVB was used by the VC crowd and their startups. Over 67,000 companies parked their funds, mainly short term use for payroll. Most accounts were over $250K, therefore not FDIC insured.
Call the Uh Oh Squad!
I wrote this in late Jan 2023, so some numbers may be out of date. But if I could see it back then, how can the western world’s reserve banks still pot see it now??? The FReserve Bank mentioned below is the Australian Reserve Bank.
Why does the Reserve Bank raise interest rates?
Much has been written about inflation and interest rates recently, with the Reserve bank having raised interest rates eight times and reportedly looking at a ninth. Does this make sense?
Text-book economics say that to combat inflation you need to raise interest rates. But that’s based on inflation being consumer-driven. Today’s inflation is driven primarily by increasing energy prices, so interest rate rises will not work. All they will do is increase consumer pain.
If the Reserve Bank continues to follow the textbook and raise interest rates, while ignoring the fact that we have energy inflation not textbook inflation, then the Australian public are going to be punished three times for the sins of their governments. The major sin of their government is forcing intermittent wind and solar energy into the economy, for which the Australian people will be punished three times: #1. Eye-watering amounts of our money is being poured by government into intermittent wind and solar energy. That money isn’t their money, it’s our money – the people’s money. $2. Electricity prices are going through the roof thanks to the absurd amounts of intermittent energy in the system. So people need more money for energy, but have less because of #1. $3. Interest rates are being raised, which sucks even more money out of people’s pockets because most people have a mortgage or need to get a mortgage in order to enter the property market.
The Reserve Bank needs to stop raising interest rates right now!
Some numbers:
10-year bond rate today is around 3.5%, a rate which it first reached in May 2022. Since then, it has fluctuated but with no overall increase. There has been a notable change in momentum. Over the same period, the RBA cash rate has gone up rapidly from 1.85% to 3.1%. I think the market is saying that interest rates have gone up enough.
Consumer confidence in May 2022 was at 90, down from 100+ before February 2022, and is now at about 86. There doesn’t appear to be any consumer enthusiasm that needs hosing down by increasing interest rates.
Interest rates still work to contain commodity price inflation, because interest rates raise the value of the US dollar vs the commodity, therefore in US dollar terms, the value of the commodity would be expected to drop, which relieves inflationary pressure.
Of course, a far better solution would be to ease the supply crunch by producing more of the commodity!
Inflation is completely driven by monetary policy.
It is simply impossible for commodity inflation to cause general inflation.
The reason for this is simple. As long as the money supply is fixed, spending more money on one commodity means that there is less money to spend on all the other commodities. Inflation in one commodity, immediately causes deflation in all other commodities. The net result is no general inflation.
Inflation is caused when the supply of money grows faster than the supply of goods. Excess dollars decrease the value of each dollar, as a result it takes more dollars to buy a given supply of goods. In other words, inflation.
They call the interest rate the target rate for a reason. That’s because the Fed doesn’t set interest rates. Based on whether general interest rates are above or below the target rate, the Fed buys or sells Treasury bills, which in turn influences the money supply.
MarkW – I really don’t think your analysis is correct. Yes, there is less money to spend on other things, but that doesn’t mean low prices for those other things. The production costs of the other things goes up because the energy used to create them costs more. The price of the other things therefore has to go up (their suppliers cannot afford to produce at a loss). What goes down is the quantity bought & sold, not the price.
PS. “Inflation is caused when the supply of money grows faster than the supply of goods.“. Yes, that’s demand inflation, the kind for which the traditional interest-rate blunt instrument does work. But we don’t have demand inflation, we have supply inflation. The cure for that is increasing supply. Suppressing demand definitely won’t work, it will just make things worse.
There are no such things.as demand inflation and supply inflation.
There is only monetary inflation which leads to price inflation.
As I showed above, the is no such thing as “supply” inflation.
BTW, if increases in oil prices cause inflation, why has drops in oil prices NEVER caused deflation?
https://www.abs.gov.au/statistics/research/70-years-inflation-australia
“What often happens is that you have some unanticipated change in the global economy, such as an oil price shock, which causes an initial acceleration of inflation or disinflation (a decrease in the inflation rate), often with a lag. The impact of this change is then compounded by conditions in the domestic economy. The inflation rate eventually stabilises once the external shock has subsided, …”. (see chart in abs.gov.au link)
Our current inflation is caused mainly by renewables pushing up power prices, and the initial shock has not yet fully stabilised because our governments are still hell-bent on increasing wind and solar.
There definitely is such a thing as supply inflation, even if the textbooks don’t call it that.
A brief pulse of inflation followed by a subsequent drop in inflation is not general inflation.
You have yet to demonstrate that “supply” inflation exists.
Every few weeks, Danone renegotiates with diary farmers, who have to take the perpetually lowering price, or close up shop. While this has destroyed thousands of diary farms in my country, the price of milk, cheese etc has never gone down.
Why?
Monopolisation. The myth of a Free Market is held before us like a battle standard, but every day more independent producers are cut down by humongous international corporations undercutting everyone until they have no more competition, then they can ASK WHAT THEY WANT.
For those ready to accuse me of blasphemy against the Bank, go see what chicken meat used to cost in South Africa before we signed America’s TTP, see how it fell to pennies per pound during the initial import glut, and see what the price did in the months after every poultry producer here either scaled back to the niche market, or closed down the farm.
I just happen to live in a major poultry production area, and most farms are closed down, just standing there, rotting, because they went bankrupt overnight. Who could compete against $0.20c per pound chicken for a year? Now it costs almost $5/kg, but it’s too late for most to get back in.
It is a ratchet, forever tightening, until the earth be rid of useless eaters…
MarkW is correct.
See my reply to MarkW March 13, 2023 12:52 am
See my reply to your reply.
It may not be immediate, but the drop does happen.
Without more money in the system, it is simply impossible to pay more for everything.
A price shock takes time to work its way through the economy. It takes time for new contracts to be written and for people to change their behavior.
Mark, I am sure you mean well, but what does “money supply is fixed” even mean? Do you think there is some certain sum of money floating around, circulating in the economy?
When 1% of people own 90% of the money, what do they spend it on? A new yacht every week? No, it goes into hoarding, or it is used to play silly games, where people buy into promises and fables, like derivatives and art. There are almost 800 trillion in derivative mythical dollars floating around your ideal economy. How does that translate into roads, bridges, schools, you know, civilisation?
Do you even stop for one second to consider the real meaning of terms like “2% inflation target”? Have you any clue where the value goes, when my government has some divine appointment to devalue my currency by (at least) two percent, because otherwise those with millions won’t have billions next year?
Think about it, an economics system that demands inflation, otherwise the rich feel poor?
Inflation is not about money supply, as much as it has become a procedural requirement for the usurpation of all private property into one globalist fund. Where is your Free Market Price Discovery, when everything you buy comes from one monopolist hand working the lips of your ‘elected’ official sock puppets?
Mammon is a cruel god, but he is not jealous. You are allowed to stop believing his gospel…
Higher interest rates are a main cause of rising costs for new wind and solar and battery projects. They may actually help the restoration of some sanity to energy markets.
Nah! Around here we say: “While it’s raining porridge, one might as well hold out a bowl.”
Why should I lower my lending rate, if you are obliged by law and libtardia to keep increasing your spending on useless baubles?
This is not some arcane economic principle at work, it is legitimised theft under the guise of shareholder right to ever-increasing profits.
It seems SVB supported many facets of woke-ism:
SVB had NO head of ‘risk assessment’ for nine months before it collapsed… as woke boss for Europe, Middle East and Africa was busy organizing a month-long Pride campaign and a ‘Lesbian Visibility Day’
Not that there’s anything wrong with that, but I want my bank execs to be boring dudes in three-piece suits with a deep interest in spreadsheets.
Amen, to that.
Easy on the Schadenfreude, besides depositors these girls may well be looking at a serious problem as well.
Then give cash to the girls, not the idiots who blew billions, or the depositors who supported politicians who helped make it happen.
The risk of financial system moral hazard is more of a concern to me, than the possibility some anti-Trump wokesters might have to get a day job.
A sports team loses a sponsor.
Oh well, it happens.
Once in a while, I cannot help but like MarkW…
Fwiendz?
Sorry. the official story does not add up. I does not take an M.B.A. or a PhD in Finance to understand the interest rate risk in long dated bonds. Silly old me never bought anything longer than 2 years after the Panic of 2008.
BTW. the main victims here seem to be a bunch of tech bros. Probably wokesters, the lot of them, who sip their lattes and call me a racist transphobe.
Couldn’t have happened to a nicer bunch of guys.
They weren’t all necessarily treasuries, my understanding is the bank was created to provide soft money for entrepreneurs, Silicon Valley success stories giving something back to the ecosystem which spawned them. My guess is some of those loans also went bad.
Only speculating, but it is also possible they were playing games with marking to market the true value of their fixed interest holdings. If they got caught by one of the early interest rate rises, to the extent they were already underwater, they might have decided to hang on for the ride in the hope interest rates would drop and put them back into the black, holding off on revaluing their holdings. But this game only “works” if they hang on to their loss making position as its value drops even further.
Another note. Mortgage bonds are much riskier to rate increases than straight treasuries. When rates go up, not only do the suffer from that, but the duration of the bond goes up because re-fi’s and sales go down. Further defaults of the underlying mortgages increase and the value of the underlying collateral goes down.
Still, there are hedges.
Yes, it’s called negative convexity.
The US Federal Government is trying to destroy crypto. This was, potentially, an attack on the ‘stablecoin’ USDC (US Dollar Coin). SVB had about $3.3 billion in deposits from Circle, the issuer of USDC. There are two additional institutions, Silvergate and Signature, that were also part of the attack. Silvergate folded, Signature is still, apparently, solvent, barely.
There are multiple other large regional banks, Fifth/Third among others, that have similar, or worse, issues with US Treasury’s that SVB had. It’ll be interesting to see what happens when the banks open on Monday.
Update, Signature has been shut down.
Signature bank has been shuttered per the Boston Globe.
“The real story will take a while to come out.”
That is usually very wise advice.
Moral of the story: Should your bank go Woke / ESG just get out of it.
Mr. Worrall, I consider you the best climate and energy reporter I read, but you missed the boat with this economic analysis. In fact, you fell off the gangplank into the water.
“I would argue the Biden administration created the economic crisis which forced the Fed to raise interest rates, with their wild Net Zero spending spree, and their hostility towards fossil fuel.”
You can argue until the cows come home but the argument is wrong. Biden had nothing to do with why the Fed is raising interest rates (explained below). The Net Zero spending spree does not yet exist. It is a Fig Newton of your imagination.
“The President’s 2022 Budget invests a total of $44.9 billion in discretionary budget authority to tackle the climate crisis, $16.7 billion more than FY 2021 or an increase of nearly 60 percent.
While +60% was a BIG increase, the $44.9 billion for ALL climate related items is just 0.7% of the $6.270 billion 2022 F.Y. spending. You CAN NOT claim that 0.7% of the 2022 spending is a wild Nut Zero spending spree. That is complete nonsense and ought to be retracted.
SOURCE OF $44.9 billion number (and I’m hoping this is honest reporting):
President Biden’s FY 2023 Budget Reduces Energy Costs, Combats the Climate Crisis, and Advances Environmental Justice | OMB | The White House
Inflation is caused by the Federal Reserve Bank’s excessive credit creation. That is usually done to indirectly help finance federal budget deficits.
Those federal deficits were HUGE in 2020 and 2021 fiscal years. Trump was President for the 2020 FY budget from October 1, 2019 through September 30, 2020. Trump was also president when the 2021 fiscal year budget was approved on December 27, 2020. Jumpin’ Joe Bidet had NOTHING to do with the 2020 or 2021 federal budgets, the Federal Reserve’s unprecedented credit deficits creation to indirectly help fund those budget deficits, and the resulting high inflation in 2021 and 2022.
Based on M2 money supply growth, the US inflation rate peaked last summer.
And the 2022 fiscal year budget under Biden had a much smaller deficit than in FY 2020 and 2021.
The federal budget deficit:
$1.4 trillion in 2022 FY, under Biden
$2.8 trillion in 2021 FY, under Trump
$3.1 trillion in 2020 FY, under Trump
Your hypotheticals about what Trump would have done are speculation.
It was TRUMP who approved the huge deficits in 2020 and 2021 fiscal years that led to the high inflation rates in 2021 and 2022.
“The only remaining question, will the Republican Congress cave in to demands for a bank bailout?”
Bailing out private companies who had deposits exceeding the FDIC insurance limit? That seems unlikely. Also, a moral hazard. But under President Bidet I can’t imagine the right decision will be made, which i believe would be to let the companies fend for themselves. With Bidet I imagine the right decision in my mind, and then just assume he will somehow do the opposite.
There are precedents for bank bailouts
Treasury’s bank bailout list – CNNMoney.com
“Based on M2 money supply growth, the US inflation rate peaked last summer.“.
But the US inflation rate hasn’t peaked yet:
Consumer Price Index (CPI):+0.5% in Jan 2023
So, clearly, this inflation is not driven by money supply (ie, it is not demand inflation), it is supply inflation. As I have been arguing, that is a very different beast, which requires increased supply not decreased demand.
M2 has been decreasing.
M2 Money Supply Shrinkage Accelerates | Seeking Alpha
The year over year consumer price inflation rate peaked at +9.1% in June 2022.
The current year over year inflation rate was +6.4% in January 2023
SOURCE OF DATA:
Monthly inflation rate U.S. 2023 | Statista
M2 money supply went negative three months in a row and is near a 35-year low. It is very unlikely that the year over year consumer price index will reach +9.1% this year.
Money Supply Growth Went Negative for the Third Month in a Row, and Is Near a 35-Year Low | Mises Wire
There is no such thing as demand inflation or supply inflation. There is only monetary inflation that causes price inflation.
Before you start debating me on economics, must warn you that I have a Finance MBA and wrote a for profit economics newsletter, ECONOMIC LOGIC, with hundreds of subscribers, for 43 years. I also am 4′ 8″ tall and weigh 495lbs.
These six charts (link below) explain the relationship between federal deficit spending, Federal Reserve Bank policy (asset purchases), M2 money supply and consumer price inflation:
Honest Climate Science and Energy Blog: OFF TOPIC: Seven Charts Connecting Fed Asset Purchases, Federal Deficit Spending, M2 Money Supply Growth and Consumer Price Inflation
The ALP wants to force the Australian superannuation industry to incorporate environmental goals into their operations. SVB is a very good reason why the ALP’s ideas should be fought tooth-and-nail. Super’s only function should be to maximise investor returns, not embark on what would most probably be loss-making vanity projects.
I don’t know why , because we certainly have had to deal with much worse in the banking sector over the past 30-40 years; but I’ve got a little bit of a bad feeling about this. Panic spreads so easily especially with just about every soul on the planet on the internet now. And the events of the last 3 years have reduced confidence in government and large (tech/financial etc) business to a new low. Even FDIC insurance scheme has its limits if a run should really get out of hand. I will feel better if all is well by the end of next week.
It appears the depositors at SVB will be made whole. The same for Signature.
U.S. government guarantees all Silicon Valley Bank deposits, money available Monday (yahoo.com)
That’s horrific – essential the Federal Government has just signed a blank cheque, fully underwritten all deposits, so people can chase crazy interest rates offered by flaky institutions no matter what the risk.
I think they are trying to contain the contagion they created. If they did nothing, a lot of major regional banks would see runs. I don’t think the Feds thought things through before they acted and now are trying to contain the damage they have caused before it snowballs.
In other words they are passing the buck and creating a much bigger problem for someone else to solve.
Given we just saw the second failure in a week, I wouldn’t rule out runs at all.
Here is the press release.
Federal Reserve Board – Joint Statement by Treasury, Federal Reserve, and FDIC
They are trying to stay ahead of the wave Eric.
Where is Gordon Brown when you need someone to ‘Save the World’ (sarc)
the Fed’s statement was not crystal clear to me but stock market futures are up +1% at 9pm Sunday, so investors are expecting a bailout.
In essence Yellen is spending the FDIC reserve fund to make whole parties who never paid into the FDIC reserve fund.
How long until the FDIC reserve fund, much like the Social Security and Medicare trust funds, run dry and have to be replenished from money from the taxpayers?
Who in their right mind will pay money to be part of FDIC, if everyone is going to be covered anyway?
Another comment went to moderation. I wonder why.
No idea sorry. We have to keep the filter cranked up pretty hard, must have tripped it somehow…
Huh, I would have thought, with having to register, it would have helped keep the less savory folks away. Or at least moderated their excesses.
It helps but we’ve had a few get through, so we still have to filter.
I wonder how much of that is on WPs side? Do we even know all their filter policies?
We created some bespoke filters, so we’re not relying 100% on wordpress.
Anyone that didn’t know from the very beginning that the US tax payer was going to pay for that failure is beyond help.
Here is an interesting Twitter thread.
Tweets with replies by Breaking Market News (@financialjuice) / Twitter
Some more interesting information (unverified) about SVB.
infra on Twitter: “@unusual_whales full-er list from ZH https://t.co/CM8Vwlm1SW” / Twitter
There’s nobody else to blame but idiot management. Rates were so low that they gambled the bank to earn an extra couple of tenths of a percent on deposits. Worse, they didn’t even have a risk management strategy to hedge against rising rates. Once rates started to rise short term securities could have been quickly rolled over, but the longer terms meant real losses that were going to show up on the balance sheet. So management delayed, delayed and then when they finally sold the loss was so large it caused a panic. They couldn’t even manage the situation properly because while they were raising capital to cover the loss they forced themselves into a regulatory quiet period.
So, while I’m sure their woke policies are correlated to their general incompetence, I don’t see any causal relationship. Hopefully none of these clowns will ever be given a senior position at another bank.
Well , I still don’t think we are completely out of woods yet. I got a sense from monitoring the internet and couple folks that work at local institutions was there was a genuine fear/ or potential run building across the sector. Even with FDIC and extra back stops in place; be it a morning run or a “slow” run it’s a problem. Ultimately the whole system is still based on trust and confidence in the system as a whole over time.
“I believe that banking institutions are more dangerous to our liberties than standing armies”
– Thomas Jefferson
Prophetic?
https://youtu.be/KIGbnwCL4iw
Yes indeed!
OT but I thought I just let you all know that this truck driver has done his last run behind the wheel of the big truck. I am currently on vacation at my daughters place in Daytona Beach but when I get back next week I clean out my truck. I’m retired! Financially fine even though I have hung up the keys a few months earlier than I had planned due to health issues in the family. I am just grateful that I am in the financial position to retire at a time when my efforts and attention need to be put elsewhere.
Congrats on your retirement!!
Thanks,
All the best to you rah – you can now go outside with your dog all day long!
Yellen was busy harping climate change catastropy while SVB was exploding. I guess the msm will cover for her.
Wokness comes in many forms. As I write this the US Navy is renaming two ships to “erase Confederate history”. Next will be Army posts. Benning and Bragg will be renamed.
What they are really doing is trying to erase is American history. They were all Americans, no matter which side they fought for.
Besides, Confederate General Braxton Bragg was one of the greatest assets the Union had. His failure at Chattanooga was epic and a turning point in the war for to the favor of the Union.
What’s next? Demolishing all the monuments to the Confederates at the NPS civil war battlefields?
They’ve been trying to erase Columbus for years. Any of the founding fathers who ever said or did anything that the modern wokista disaprove of, is being erases as well.
Crypto will break the system this time in yet another end run around that sleepy Treasury regulatory system while Yellen continues the climate change nonsense.
“We enable entrepreneurs with inventions and new businesses that reduce greenhouse gas (GHG) emissions..”
The absence of logic in such statements is astounding to me.
If SVB did NOT have ESG restrictions would it not STILL fund most inventions and new businesses with that aim?
The difference is at the margin – did it reject a business with a good potential return in favor of a “green” enterprise with a less favorable return?
If so wasn’t it violating its responsibilities to its shareholders?
At present there is no evidence that ESG caused this collapse.
On the other hand there is plenty of evidence that it made the problem worse.
Say what you will, they did manage to reduce their carbon footprint!
This morning Biden tried to reassure Us that the banking system is safe and blaming it on Trump rolling back some regs or something. What a p.&@@ c….p. This problem goes way back actually to excessively low interest rates. But the Lefts economic wrecking ball is a systemic threat to us all at this point.
SVB officials will need to answer a lot of questions, including, What role did wokeness play in SVB’s failure?
They won’t be asked.
will the Republican Congress cave in to demands for a bank bailout?
Enough to pass it, I’m sure.
When 50 Democrats and 1 Republican pass something that the media likes, it’s a bi-partisan effort.
When 26 Republicans and 25 Democrats pass something the media doesn’t like, it’s a Republican initiative.
Bad government. That’s what caused the instabilities. As usual.
In 2020 and 2021 it was government policies in response to a pandemic that destroyed economies and personal wealth. Even though it was scientifically established within a few months of the outbreak that only the elderly were at serious risk, they forced the productive part of the population, the ones least susceptible to a serious infection, to stop working, while simultaneously not properly protecting the highest risk group: retirees and the elderly. Then they compounded their perverse response by printing trillions of dollars to “stimulate” the economy and “help” people affected by their stupid policies (including millions who still had jobs and were doing fine). As every armchair economist knows, conjuring money out of thin air and dramatically increasing the money supply dilutes the value of each dollar, causing it to decrease. In other words the price of everything went up because there were more dollars available to spend on the same amount of goods and services. Thus, steep inflation which adversely affected everyone and impacted the poorest the most.
Back in 2008 it was a combination of bad government policies that killed the economy; subsidizing riskier mortgage lending and keeping interest rates artificially low. Both were designed to encourage home ownership but instead resulted in widespread risky borrowing, speculation, and a tidal wave of mortgage defaults. Progressives thought home ownership would encourage more socially responsible behavior like taking pride in your neighborhood, accumulating assets (a home), saving, planning for the future, etc. It never occurred to them that they had the behavioral choices and the consequences reversed. People who make responsible choices like delaying gratification are the ones who work, save, plan for the future, buy homes, pay off mortgages and increase their assets and their social capital.
Politicians with big dreams of changing the world never learn the lesson that government interference in the economy is the greatest cause of instability. The best kind of government economic policy is the one that intrudes the least.
You’ve got to be way out in left field when your left of Maxine.
Waters: I Can’t Say Trump Rollbacks Caused SVB Collapse, It’s Too Early and They Were Invested in a Lot of Startups (breitbart.com)
I am set to inherit bank stock in a regional bank that was valued at nearly $90,000. My plan was to sell it back to the bank and buy physical gold as a hedge against inflation and as a back up incase things really go to hell.
Looks like that plan will be on hold for awhile because I don’t need to show a loss.