Essay by Eric Worrall
Here I make the case that the financial crisis engulfing the USA’s banks and financial sector can be traced straight back to Biden’s inflationary green energy push.
Breitbart Business Digest: Markets Humiliate Jerome Powell
JOHN CARNEY 4 May 2023
When Banks Talk About Solid Liquidity, Look Out Below
To put it lightly: Jerome Powell is not having a good week.
…
The market seems to be in full panic mode. What set off the sell-off on Wednesday evening was a relatively anodyne report that PacWest was “weighing strategic options,” which could include a sale of the bank or even a break-up. Normally, news that a company is considering a sale pumps up its share price. But in the midst of a crisis on confidence for banks, this has the opposite effect. Investors figure you are not selling because you want to, but because you have to.
Similarly, the market seemed to have interpreted PacWest’s attempt to be reassuring as a sign of weakness.
“The bank has not experienced out-of-the-ordinary deposit flows following the sale of First Republic Bank and other news,” PacWest said in a statement. “Our cash and available liquidity remains solid and exceeded our uninsured deposits.”
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Memories of 2008
Many on Wall Street recall that on March 13, 2008, Bear Stearns Chief Executive Alan Schwartz went on CNBC to dispute widespread speculation that the investment bank faced a cash shortage.
“We don’t see any pressure on our liquidity, let alone a liquidity crisis,” he said.
That was a Wednesday. Over the following weekend, Bear Stearns had to be rescued by JPMorgan Chase with support from the Federal Reserve.
…
Read more: https://www.breitbart.com/economy/2023/05/04/breitbart-business-digest-markets-humiliate-jerome-powell/
Why do I think this is Biden’s fault? The reason is Biden’s attack on fossil fuel and reckless borrowing to push forward the green transition is a major driver of inflation.
Green energy transition will further fuel inflation: Bank of America
Matthew CranstonUnited States correspondent
Nov 17, 2021 – 3.45pmWashington | The rush for resources and labour to build renewable energy capacity could add more than 3 percentage points to inflation, according to economists at Bank of America, who have used estimates from the International Energy Agency and International Monetary Fund.
Ethan Harris, the bank’s chief economist, said while demand for technology to mitigate climate change could add up to 0.4 of a percentage point per year to GDP, this “could be held back by a lack of productive capacity, labour shortages and inflation”.
“This in return can come above the 1-3 per cent inflation IEA estimate,” Mr Harris said.
The IEA estimates in a joint analysis with the International Monetary Fund that the net zero energy transition will cost about US$150 trillion ($204 trillion) in total investment over the next 30 years, or $US5 trillion per year.
“[Inflation] could be higher and uneven, as financing of $US5 trillion will increase investments, demand for employees would push wages and supply disruptions could increase prices,” Mr Harris said.
…
Read more: https://www.afr.com/policy/energy-and-climate/green-energy-transition-will-further-fuel-inflation-bank-of-america-20211102-p5954d
Why does inflation impact bank stability? The reason is inflation, and the interest rate response, creates instability in bank investments. Banks tend to invest customer’s money in bonds, in fixed interest rate IOUs issued by reliable payers like the US Government. The bonds (IOUs) can be sold on, but the price you can get for those sold on bonds varies depending on the current interest rate, and can dip below the original price paid for the bonds. When interest rates go up, the value of fixed rate bonds which were sold when rates were lower tends to drop.
Buying bonds from rock solid payers is normally a great strategy for keeping your money safe. But the surge in inflation has hammered the value of those bonds. That drop in bond price is causing banks to suffer cash shortages, and is eroding their ability to cover account holder withdrawals.
The value of the bonds doesn’t exactly track interest rates, other factors such as the duration of the bond, the length of time until the money is paid back, and future expectations of interest rate and inflation rate changes can affect perceptions of value. But as interest rates go up, as the Fed puts up rates to counter the damage caused by Bidenflation, the value of existing bank holdings of bonds takes a beating.
Bonds were seen as a safe haven – but they are central to this bank crisis
Toby Nangle
Tue 21 Mar 2023 00.11 AEDTFirst published on Tue 21 Mar 2023 00.10 AEDTTroubles at Silicon Valley Bank and Credit Suisse are due partly to impact of rising interest rates
If you’re a banker, it’s been a month to forget. Two regional US banks have gone to the wall, central banks on both sides of the Atlantic have been forced to provide hundreds of billions of dollars in emergency lending to shore up the financial system, and the Swiss financial group Credit Suisse has been ignominiously absorbed into the larger UBS at the behest of its regulator. About half a trillion dollars have been wiped from banks’ stock market valuations.
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Inflation is high in the UK, mainland Europe and the US. The standard macroeconomic policy to arrest high inflation is not to strike hard public sector pay deals; it is for central banks to increase interest rates. Higher rates mean a higher cost of borrowing for everyone, reducing the propensity of households and businesses to spend money on credit and reducing aggregate demand versus supply. Doing this in a way that cools inflation without inducing a recession is a hard balance to strike. This is precisely what the Bank of England, European Central Bank and the US Federal Reserve have been trying to do for the past year.
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In the US, Silicon Valley Bank (SVB) collapsed this month after a depositor run – the second-largest US banking failure by assets in history. The run followed an admission of a near-$2bn (£1.6bn) loss on its long-dated government bond holdings, putting it in need of recapitalisation. Signature Bank and the tiny Silvergate – the two banks who were by reputation the most closely linked to the cryptocurrency industry – were also shuttered as depositors fled.
Read more: https://www.theguardian.com/business/2023/mar/20/bonds-bank-crisis-silicon-valley-bank-credit-suisse-interest-rates
Obviously Biden’s green energy policies weren’t the only source of inflation. The war in Ukraine has disrupted fuel and food supplies. But if the USA had maintained a pro-fossil fuel energy policy, and prioritised energy independence over Net Zero, the USA would not have been so vulnerable to global fuel price shocks. Perhaps the US Secretary of State would not have had to shake the hand of a an oil rich dictator who is on the DEA’s most wanted list, in the hopes of winning access to his oil.
Biden could still fix this. Even a credible attempt to change course on energy policy, right now, would have an immediate impact on US markets. Interest rates would fall, in anticipation of inflation dropping, and bond prices would rise, providing immediate relief to those banks which are quietly on the brink of an insolvency crisis. Remember I said bond prices are partially driven by expectations of future inflation. A business friendly policy pivot would feed into those expectations, and create confidence that inflation was on the way down.
A relaxation of harsh environmental crackdowns, which are driving up business costs and helping to drive up retail price inflation, would also help restore confidence.
But countering the financial forces which are driving the US banking crisis would require Biden to renounce his Net Zero green energy fantasies, and copy President Trump’s energy policies, to alleviate pressure on energy prices and food affordability, two of the major US measures of inflation.
Why is food affordability affected by energy prices? Because food production costs are heavily tied to the cost of fuel and energy, through the need for large quantities of energy intensive fertiliser and other agricultural chemicals, and all the agricultural equipment and truck miles required to grow, transport and process food.
I doubt Biden will take sensible corrective measures. In my opinion we are as likely to see an outbreak of common sense from the Biden administration, as we are to see a flock of green pigs flying into the sunset.
The window of opportunity to fix this mess is very narrow – even a small delay in changing course could lock in the coming bank crash. Further borrowing and spending, which seems likely as 2024 approaches, is throwing gasoline on the inflation fire, and increasing the pressure on banks.
The only remaining question, how were banks caught so flat footed by the fall in in the value of their bond holdings? Banks have access to financial instruments such as put options and futures, which could have been used to hedge (insulate) their bond holdings against inflation driven loss in value.
There is only one explanation which makes sense to me – the banks which are currently suffering distress miscalculated, they weren’t anticipating that inflation would be so bad. Perhaps some bankers actually believed Biden’s green energy transition would succeed, and positioned their portfolios in anticipation of that success. Or perhaps they thought Biden was lying about his commitment to Net Zero.
Whatever the explanation, the blind faith of bankers in their market forecasts, combined with Biden’s reckless and inflationary green energy policies, have brought the American financial system to the brink of disaster. But sadly this is the nature of systemic banking failures. The hard lessons are always learned after the fall.
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ESG and DEI are counterproductive moves, from the perspective of economics. Social justice is mostly an oxymoron.
The greens have a stated goal of destroying the capitalist system, so this is a feature, not a bug.
The greenies are on a monstrous, misery-loves-company guilt trip, and are bound and determined to drag the whole world down with them.
The left believes that any system that doesn’t result in themselves being on top, is inherently broken, and only massive government intervention can fix it.
Social Justice = Mob Rule
Mob rule? You mean like Jan 6?
Sure, and like the BLM riots, Antifa riots, George Floyd riots, all the leftist insurrections at various state houses and capitals going on recently. Jan 6 is small change compared to those. Funny you only picked one that had no real impact.
Don’t recall the last time the left attacked the capital building? Maybe you can help me here?
“Funny you only picked one that had no real impact.”
You clown…. no real impact… How many lives were lost? How many $ worth of damage was done. How many people have gone to prison and will be going? And what cost to the American people in terms of the desecration of what is held as a respected scared place? No real impact…. beyond bizarre.
Squandering the wealth of nations on a moral panic by trying to fix the climate, which ain’t broke. Stoopit? Or what?
Believing that removing a minuscule amount of CO2 from the atmosphere will save the earth is the height of absurdity and a complete loss of common sense
The GREEN Feral Pig just fits so perfectly
Thanks
The FAKE Inflation Reduction Act is in fact, Inflation CAUSING legislation.
It’s the Climate Bill renamed to something that it’s the complete opposite of to blatantly deceive the American people.
$369 Billion of the bill’s total $430 billion in new spending goes toward aggressive, direct, climate actions. About 80% of the $369 B is tax credits for solar, wind and nuclear energy.
What happened was that Biden and company had been trying to sell the Climate Bill by convincing American’s that it would help “save the planet” from the FAKE climate crisis (which is really a climate optimum for most life thanks to the increase in the beneficial gas, CO2 which is greening up the planet).
Then, massive inflation hit Americans and inflation became their biggest concern.
Easy way to fix that.
Take the Climate Bill and don’t change a thing………except for the name.
Rename it the “Inflation Reduction Act” and make up a false narrative that it will reduce inflation.
Comes from the same playbook as hijacking climate science and telling people that the increase in CO2, the building block for life that’s greening up the planet during this climate optimum……..is pollution which is killing the planet.
Telling us that we must eliminate the true green energy, fossil fuels that are massively increasing food production from CO2 fertlization (which is still only 50% of the optimal level for plants) and replace them with this FAKE green energy to save it.
Telling us that we must convert to energy sources like wind and batteries. A diffuse, intermittent energy form that’s killing birds/bats/whales. Destroying landscapes/nature and ripping up the earth to obtain the raw materials. Those monstrosities only last 20-25 years, then they pile up in landfills.
So we need to wreck the planet in order to save it from the FAKE climate crisis!
Oh, just coincidentally, crony capitalists and corrupt politicians/governments will reap tens of trillions this decade from these actions as we wreck the planet to save it.
Making sure that corrupt science will continue to be rewarded with lucrative funding and favorable career opportunities for giving the FAKE climate crisis markets the science that the climate charlatans need to perpetuate the self enriching FAKE climate crisis schemes.
You will all be worrying, but I can assure you that all the Big Man’s 10%s are absolutely safe.
Other things will sort themselves out some day, but there’s plenty of ice cream on stock in the basement and some of Eric’s little worries are really features, not bugs in the big, genius, plan.
Now stop scratching your heads and get back to work.
Well Martin, I am not so sanguine. The Big Guy’s 10% was to be held by Hunter. Isn’t it likely that that money has already been smoked, snorted, and shagged long ago?
Our entire ruling class is making money from so called green policies. Until that incentive collapses they will not change course.
A financial crisis is the only way out and then they will blame everybody but themselves.
How long can a bankrupt country continue to spend money it doesn’t have on a hoax
When something is being funded by money taken forcibly from those who earned it, you would be amazed how long it can continue.
FIrst of all, I completely believe that the US in doomed with the Democrats and Biden in office. We are at great risk of losing our once great nation.
But…
Republicans better understand what it is going to take to win this next election in 2024. I have been a Republican since our greatest president in my lifetime was in office, Ronald Reagan. Economics is not going to win it. We saw that in the midterms. I am now a registered independent.
Inflation was rampant. Disaster in Afghanistan. War with Russia. Sky high energy prices. Illegals flooding our southern border. Our enemies are more emboldened then ever. And we could barely eke out a majority in the house. Inflation is in the past, and will not make a lick of difference in this next election, unless it rears its ugly head again, which I find unlikely.
Inflation cooled off last June. Using CPI-U: Since then, over the last nine months inflation has been 1.86% (annualized to 2.49%). Annualized numbers when June data is reported in July will see year over year inflation under 3%. Yes it will be 2.xx, with my guess around 2.6% year over year. That is not going to be something to run on. Inflation will be the past for this election, just like Afghanistan was not in play in the midterms.
The Republicans best get the message that Trump is going to doom this country if he is the republican nominee. He can not win moderate, independents, or suburban women in the general election. If he is the nominee, we will lose the 2024 election and the green new deal will become reality. You may as well shut down WUWT in my opinion because it will have all been for not.
(Rescued from Spam bin) SUNMOD
You are exactly right GoHome. The only person that unqualified Biden can beat is Trump.
Before 2016, the candidate with the highest favorability rating won.
The political arena has changed a great deal. Now, the deciding factor is based on the person who is hated the most. That person insures a victory for their opponent.
In 2016, NOT Hillary Clinton won.
In 2020, NOT Donald Trump won.
Trump is hated even more in 2023 by people likely to vote in the 2024:presidential election.
His base may not have changed that much, other than losing most of the moderates and
Biden has proven to be unqualified to be president.
Doesn’t matter in this age of voting.
NOT Donald Trump will win if the other person is Trump.
Biden will NOT run. They only claim he’s running as a bs marketing scheme to make us think he’s
qualified to be president today.
The Dems also want Trump to run which is why they are attacking him so tenaciously. They are playing the republicans, knowing this is uniting them for Trump.
DeSantis vs whoever the Dems pick.
If Biden runs against somebody other than Trump, there’s a near 100% chance that NOT Joe Biden would win!
It doesn’t matter who the Republicans nominate, the media will treat that person like they did Trump and try to turn that person into the man most hated by leftists and all “right thinking” people.
Since the process will be the same regardless of who is nominated, I would rather support someone who has shown the willingness to fight back.
Mark… it’s how it works. The left media roast the rights candidate and vise versa. There is no point in getting upset about it.
And….Trump is in the pile of do do’s he is in because he has done some illegal things. It’s why the courts are nailing his arse as we speak.
But I agree 100% with Mike Maguire. If Trump is the republican candidate, it is game over. He cannot win, short of Biden having a major health problem or some huge scandal (although how could he possibly compete with what Trump is facing at the moment?).
But there is another even worse possibility for the right and that is Trump isn’t their nominee and he throws his toys and runs as an independent to stiff the republicans who he will perceive have been disloyal to him. The Trumpeteers will stay with him(they have shown nothing will budge their faith) they will believe on his say so that he can win and the end result is De Santis will be slaughtered. It ain’t out of the question. Trump has shown numerous times that his loyalty is to himself first. Let’s not forget he was a Democrat not so long ago. He will have no sympathy or commitment to the Republican party if they ditch him. Watch….
i know I do not post much, but why was my post treated as SPAM? I could see if it is left wing blog, but come on now. I directly wanted to counter the inflation portion of this post. Inflation is no longer the issue.
(No one moved your post into spam bin, it happened on its own) SUNMOD
Sorry for the inconvenience. We get hit with a lot of spam so we keep filters cranked up, sometimes it catches legit comments.
There are many things that cause inflation but in the end I say you can narrow them down to two things. Too much money chasing too few goods or government adding too much money to the economy. I discount the first option in this case. In my view all of the blame lies in Washington DC. It started with Biden screwing with energy production, limiting money for fossil fuel and dumping money into renewables. That was bad. Next he sent nearly the entire country home and shut down their businesses and their jobs. Next he sent money he didn’t have to those he just sent home. That was bad. Worse he was sending out checks at a time when money was not coming into Washington because Biden sent everyone home. How stupid can you get? These actions drastically wounded the whole supply chain, I’m not sure we have recovered from that yet. Bankers, economists, academics and other experts and professionals can go on and on about how banking works or Ukraine or pandemics or anything else they choose but what I have laid out here is why we are all suffering today.
How stupid can you get?
In the throes of a self-destructive moral panic? Led by a senile grafter?
Much, MUCH stupider. That’s how stupid.
Your two options are actually the same thing.
Yes, but, Bob is correct that reducing supply of goods will create inflation without adding any money to the economy.
True, however most “things” in the economy are durable. Once created, they continue to exist until someone destroys them.
What we saw 50-60 years ago is that rising interest rates are also inflationary. They boost costs which result in higher prices rather than lower inflation. It wasn’t until interest rates hit high teens and the economy crashed that inflation ended.
You are confusing cause and effect.
High inflation caused high interest rates.
It was the collapse of inflation, that occurred along with the collapse of the economy that caused interest rates to fall.
Correct.
Joe Xiden said in his first speech after becoming nominee for Presidential candidate that everyone who supported Trump had to be punished, and here we are.
“Joe Xiden said in his first speech after becoming nominee for Presidential candidate that everyone who supported Trump had to be punished, and here we are.”
Bullshit. You talk complete crap….Quote please or just go away.
Ahh, poor widdle simpleminded! Did evil Co2 put sand in your mangina again, sweety?
So another lie from the guy who bleats about people lying. And the worst part is you have no concept of the damage you do to your team when you spout this nonsense.
My team? Hahahahaha. We get it, you are a liar, don’t have to keep proving it, simpleminded.
Where’s your quote Mr Honesty. Oh that’s right truth it lives in your head.
Oh and how do you feel now your man is a convicted sex offender. I guess you are proud of Mr Trump for that one being the scumbag you are?
And when are you going to prove I am lying, simpleminded? Wow, you admit you were convicted of rape, unlike DJT who was not convicted of rape. That is pretty stupid, simpleminded, even for you.
Where’s your quote that Biden said “everyone who supported Trump had to be punished?” It’s a simple request that will show the world you are not lying. But we both know you are . It’s what you do. Then you run around like a spoilt child declaring everyone else lies. So where is it?
Prove he did not say it, simpleminded. I command you to.
What a complete olympic level fool you are.
The U.S. economy is slowing down, with several good signs that recession is rearing its ugly head, so that may do something to lower inflation, but then we have a tanked economy. No good options.
Biden is a fool. Even his own advisors said these bills were inflationary, but Biden, being Biden, paid no attention to them, similiar to the way he ignored the experts on the “withdrawal” from Afghanistan.
And we should keep in mind that Senator Joe Manchin was the swing vote for this inflationary spending. Manchin is up for election in 2024. He may be looking for another job as he has a new, formidable Republican running against him.
The first bank that failed, the Silicon Valley bank, was warned several times that its investments were on shaky ground, but the managers of the bank took no action to fix this risk, even though one of their directors was a member of the Fed for that area. So the warming signs were there for this bank, but its officers took no action.
If you have more than $250,000 in one bank, your money is at risk. The $250,000 is guaranteed to be paid, but anything over that amount is not guaranteed, so, arrange your finances so that you don’t have anymore than $250,000 in any one bank.
The War on Fossil Fuels has created inflation, since transportation affects the prices of all goods, and everything we use has to be transported.
And flooding the market with money, as Biden, with the help of some very stupid Republicans, has raised the cost of everything because there is too much money chasing too few goods, so the price of the goods goes up.
Democrats have no sense of money. Their solution to everything is to spend more money. Of course, as we can see, this is not a solution to anything, it is the cause of our problems now.
Well, at least Republicans control the House of Representatives. Maybe that will help the situation a little bit. There won’t be any more bills like the Inflation Reduction Act. But a lot of damage has already been done.
We can fix this in 2024 by kicking the ridiculous Democrats out of office.
Price push inflation does not exist.
When a person has to pay more for one item, he has less to spend on everything else.
This drop in demand causes other prices to fall.
The problem is that the one item that’s going up rapidly is easy to see.
However the other 95% of what people spend money on, the drop in demand is small and the drop in price is likewise small.
People tend to fixate on the large and easily visible, while ignoring the small and hard to see.
There is only one thing that can cause inflation, when the supply of money grows faster than the supply of goods in the economy.
Moreover,
There is one other factor that usually gets left out of these discussions. I’m guilty of doing this as well.
It’s a concept that economists refer to as the velocity of money. That is, how many times does a single dollar change hands during a particular time span.
A dollar that sits in a bank account and stays there, acts like a single dollar.
However when that dollar gets spent, and then the person who receives that dollar in turn spends it. This allows a single dollar to act like multiple dollars.
When the economy is going great guns, the velocity of money goes up and the “apparent” size of the money supply appears to go up.
When the economy goes into recession,, the velocity of money goes down, and the apparent size of the money supply appears to go down.
Regulating the number of dollars that have been printed is relatively easy.
Predicting what the velocity is going to be in the future, is much harder.
Good point and something to keep in mind.
Yes, WE CAN FIX THIS. By electing (for the third time)
DONALD J. TRUMP!
Women who think (many of whom live in “the suburbs”) — including this one 🙂 — are voting for TRUMP!
!*!*!*!***TRUMP 2024***!*!*!*!
I’m voting for Trump. I want to see him knock radical Democrat heads together.
It does seem as those these dodgy banks spend more time focusing on gender weirdos and equality as opposed to risk management.
Sorry, but the article is simply incorrect.
Inflation is not the problem for banks – it is interest rates.
Let’s start with how banks operate: they take deposits and lend them out. The deposits are short term callable – they can go anywhere, anytime for any reason. The loans are always at least medium term (car, business) and are often long term (30 year house loans). All banks are therefore always vulnerable to bank runs – i.e. more deposits leaving than the bank has cash to meet. This is precisely the plot in “Its A Wonderful Life”. Add the wrinkle that money which is not loaned out by banks these days, some is invested into US Treasuries or US Federal Reserve insured mortgage backed securities (MBS).
JPow has raised interest rates 5% in 1 year. This has caused money market funds to be able to generate real income again; somewhat more than half of the massive deposit outflows that the entire US banking system is experiencing is money going into money market funds. Other deposit funds are going into CDs and similar investment instruments. This is a systemic deposit outflow that is heavily stressing the banks.
But the worst impact is that the interest rate hikes cause the mark-to-market, this instant value of the above US Treasuries and MBS’s to fall. Note that these investments would not lose money if they were held to maturity – but the deposit outflows are such that banks are being forced to sell these investments in order to meet deposit outflow demands. SVB was an extreme case; First Republic was another. Signature and Silvergate were crypto or significantly affected by crypto so are a different issue, but the total “unrealized” (i.e. on paper) losses across the US banking system in these investments is surely over $750B by now.
And yes, the question is why did these banks not shift out of these lower interest rate investments as soon as it was clear JPow was going to go Volcker? Well, at least part of the reason is that it would have caused them to lose a lot of money right away…and clearly the Federal Reserve didn’t force them to either. It is also very arguable what the effects would have been if much/all of these investment instruments were dumped in the 2nd half of 2022 – i.e. trigger a mini-panic.
So while the Federal Reserve is at fault for letting interest rates stay at 0% too long and for not regulating banks and for jumping interest rates so high, so fast and for aiding/abetting Biden’s COVID and post COVID drunken sailor spending spree – it isn’t inflation itself that is the cause of the present financial crisis. Both crisis and inflation are emergent effects from bad policy – and it is the bad government policy that is the problem.
Interest rates always follow inflation rates.
You can’t separate one from the other.
The reason for this is really quite simple. It’s just two parties, each acting in their own best interests.
People who borrow money will always negotiate for the lowest possible rate.
However, in a free market, you can’t have a transaction without two willing participants. The borrower wants to pay as little as possible for the money he is borrowing. The lender won’t lend money unless he can make a profit. When the interest rate being paid is less than the rate of inflation, the borrower loses money, so it is in his interest to hold out for an interest rate that exceeds inflation.
This is incorrect because base interest rates are set by a 3rd party: the Federal Reserve. The negotiation you reference is only a quibble with respect to the Federal Reserve set Prime Interest rate.
Nor is your depiction of a “free market” affecting lenders, correct. They make money regardless of inflation if the interest rate they receive payment from on a loan is higher than the interest rate they have to pay to depositors, or the interest rate cost of borrowed money.
Prime Interest Rates have been under well under inflation for most of the past many years – zero percent during the ZIRP era and even worse under the 2021 and ongoing inflation jump. Sure, the interest charged on loans has been higher than inflation, barely, but again this doesn’t matter as it is the cost of money – not the purchasing power of money – that matters for a bank.
Interest rates are used to fight inflation, but this only works in some cases.
There are many examples, both in the past and today, where interest rates do not follow inflation because governments have made different policy choices.
In this case, there are those like Zoltan Pozsar who note that the causes of this inflation are different than in the past – and so interest rate hikes won’t fix this inflation.
Your analysis is incomplete. What happens to the money paid over to money market funds?
Money market funds are, by definition and law, not usable as deposits are. A money market deposit is basically a security whereas deposits are cash. One of the failures during the GFC was that some money market funds were “breaking the buck”: $1 deposited was no longer represented by $1 of fund value.
“Inflation is not the problem for banks – it is interest rates.”
Aaaand, why are the interest rates going up? As Mark said, one is the cause of the other. They can’t be uncoupled in this case.
Interest rates are going up because it is a reflexive action to “fight inflation” – in this case, by causing a recession (Fedspeak term: reduce demand). Note yet again that there was no issue with inflation of 2% to 3% exceeding the pre-COVID 0% base interest rate.
In normal times: an increase in interest rates causes a fall in lending, which in turn causes less growth/less inflation.
But we’re not in normal times. The entire periodic table is going up in price – the cause this time around is a decade-plus lack of investment in commodities plus growth of the rest of the world far exceeding the US’/EU’s. JPow thinks the West is still the head of the global economy when it is more like the tail these days.
Yes, c1ue is correct. By using mark-to-maturity to hide the value of the declining assets banks found themselves insolvent when using mark-to-market. This is a real problem for companies with uninsured funds which are used for things like meeting payroll.
Bank runs are a real possibility.
Ed Dowd, a former Blackrock portfolio manager thinks that it will lead to currency wars followed by kinetic wars.
Stanford Business School published an analysis of US Banks which clearly showed the problem.
This is a global problem and is out of control.
Here is a link to the Standford paper.
In particular: US banks use their stock market capitalization as a big part of the “reserve” against liabilities (deposits) when balancing obligations vs. assets. They don’t carry much cash anymore.
So a large “unrealized investment loss” as you note, Yirgach, is a Sword of Damocles because it not only represents a mark-to-market risk but also can precipitate a stock price fall. This is exactly the dynamic that took down SVB, First Republic and now is working on PacWest.
I also should point out that this time around – there are major fundamental differences than 2008/GFC. In the GFC, there were massive MBS losses as the fraudulent nature of ratings and NINJA loans became apparent.
This time around – there are massive “mark-to-market” losses by banks being forced to sell bonds before maturity, but there will be offsetting massive gains by acquiring entities that are able to afford to hold the same exact bonds to maturity.
Depositors – insured and uninsured both – are clearly being guaranteed too, so the only “losers” in these bank failures are the bank investors and bank management.
Yes, overall lending will fall but the Fed wants this.
Yes, bank industry consolidation will take a massive step forward but this is a trend going back to 2000.
A fascist (i.e. state/corporate) model with promises of future performance unrealized, redistributive change to mitigate feedback, capital depletion/dilution to leverage shared responsibility/progressive prices, and labor and environmental arbitrage at risk with regime change and wars without borders (e.g. ethnic Springs).
The left wants the economy to collapse. After such a collapse, they can justify having the government take over and run everything, which has been their goal, all along.
The banks will manage to hang on until a few months into the next administration.
When the collapse does occur, all of the papers will blame President Trump for the crisis.
Banks have access to financial instruments such as put options and futures, which could have been used to hedge (insulate) their bond holdings against inflation driven loss in value.
That might be the theory, but the practice is you need to find someone to take the other side of those transactions and take on the risk you are shedding. Perhaps a smart bank might have been able to do that early on. But the whole sector? No way. It would have accelerated the crash in bond values by driving down futures prices and pushing up options costs as market volatility increased. It would have been an admission that the emperor was naked.
The only real hedge would have been adopting sound lending policies, lending to customers in viable businesses and with the real capacity to earn sufficiently well to pay off their obligations. Of course, the ESG bandwagon was supposed to tip all that in favour of green boondoggles. But neither nature nor real world banking can be fooled.