The demise of Silicon Valley Bank and Signature Bank was just the tip of the iceberg. As it turns out, hundreds of banks are at risk. This explains why the Federal Reserve and US Treasury rushed to provide what is effectively a bailout for the entire banking system.
In the first week, the Federal Reserve handed out more than $300 billion in loans through its newly created Bank Term Funding Program (BTFP).
According to a Washington Post report, banks would face unprecedented losses if they were forced to liquidate their bond portfolios as SVB did.
According to the Post, the total capital buffer in the US banking system totals $2.2 trillion. Meanwhile, total unrealized losses in the system based on a pair of academic papers is between $1.7 and $2 trillion.
In other words, if banks were suddenly forced to liquidate their bond and loan portfolios, the losses would erase between 77 percent and 91 percent of their combined capital cushion. It follows that large numbers of banks are terrifyingly fragile.”
A second report by the Wall Street Journal cites a study from Stanford and Columbia Universities that found 186 US banks are in distress.
As economist Peter St. Onge put it, “In other words, we were already right up against the edge.”
This is precisely why the Fed had to create a way for banks to borrow against their devalued bond portfolio. If banks were put in a position where they had to sell those bonds to raise capital, they would have fallen like dominoes.
The Fed bailout may have plugged that hole in the dam, but there will almost certainly be more cracks in the future.
So, how did we get into this situation?
Peter Schiff summed it up during an interview with Liz Claman.
It’s because of the government that Silicon Valley Bank was in the position that it was. The reason it owned so many long-term, low-yielding US Treasuries and mortgage-backed securities was because the Fed kept interest rates at zero for so long. And the reason that it chose those assets was because bank regulators kind of pushed banks into Treasuries and mortgage-backed securities because they give them favorable accounting treatment. They don’t have to take any haircuts. They don’t have to mark them to market. So, the government created the problem.”
St. Onge went into more detail in an article published by the Mises Wire.
In short, while tech bros and loose bankers hog the headlines, what drives hundreds of banks to the edge is our crony banking system.
In this case, rapid Fed rate hikes crashed into a banking system that fractional reserve banking and the Fed’s “Lender of Last Resort” (LOLR) permanent bailout have driven to permanently drive as fast as possible, as close to the edge of the cliff as possible.
Together, the moral hazard has given a green light to those reckless tech bros, to those loose bankers who hand out millions—it turns out hundreds of billions. And it drives the entire banking industry to use opaque accounting tricks to hustle sleepy regulators and innocent taxpayers and dollar-holders who get stuck with the bill. The bankers themselves sleep like babies because they know you’ll cover their losses, but they keep their wins.
What turned this rigged casino into a crisis is in the past year the Fed hiked rates at the fastest pace in 50 years, from 0 percent last March to 4.5 percent to 4.75 percent today. They did this in a desperate bid to cancel the inflation they caused by financing $7 trillion in deficit spending and Covid lockdowns. Indeed, those of us who wondered why voters stood by meekly had only to look at the flood of money going out the door.
These reckless hikes savaged long bond prices, by far the most popular asset in bank vaults: Across the board, long bonds fell 20 percent, feeding an estimated 10 percent plunge in all bank asset values. In essence, the bank thought it had a dollar in the vault, but turns out it only had 90 or 80 cents. In the case of high-flyers like Silicon Valley and potentially hundreds more, it was more like 60 cents. Few banks can survive that.
So, what’s next?
St. Onge said probably “a lot of pain and a lot of inflation” caused by more bailouts even as the economy spirals into a recession.
In other words – stagflation.
We the People will survive—after all, the real assets don’t vanish: the food, cars, and electricity are all there. It’s a paper crisis, but unfortunately that paper crisis has sucked real Americans in, suckered them into putting their life savings into the care of a bunch of degenerate gamblers in expensive suits. And it can bring enormous collateral damage to the wider economy that, yes, provides that food, cars, and electricity if government steps in, as it usually does.”
Schiff sees a similar future.
This is going to cost Americans a lot of money, not because their taxes are going to be raised, but because the Federal Reserve is financing this massive bailout by creating even more inflation. So, Americans are going to pay for this at the supermarket, at the gas station. Their cost of living is going to go way up. If you thought inflation was bad last year, it’s about to get a whole lot worse.”
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