My view is that, if there is a plan, it would be this: Manufacture a crisis to justifying imposing more regulations on the banking industry. Only the large banks could afford the compliance machinery that will become necessary. Small community banks (you know the ones that did not mess around with mortgage backed securities and have not stupidity invested a large percentage of their liquidity in long term low interest debt instruments) would become extinct. This would further centralize the US banking system and make capital less accessible to the independent small business owners that the ruling class is trying so hard to eradicate. Government dependence and the resulting government control would be the end goal of any such plan.
Plain stupid or planned, depends on the angle you look at it from. As you say these risks have been known by yourself and others, the Fed included. They surely know what their actions are causing. I still think this is all being done in part to consolidate wealth and usher in the CBDCs. Linking as usual @ https://nothingnewunderthesun2016.com/
The clowns running certain banks, as well as much of the tech industry seemed to think that ZIRP would last forever, when it obviously could not. Interest rates below the real rate of inflation produce a negative time-value of money, which is clearly wrong and results in tremendous distortions in an economy. They also believed their favored (donkey party) politicians' claims that inflation was "transitory", and thus didn't expect the Fed to keep pushing rates up. They bet on the wrong horse and they lost. Sadly, the powers that be are once again going to try to socialize those losses. :(
It is easy to blame policy makers for these bank failures. They have certainly made a mess of things. But, as someone who is tangentially involved in the banking business, my humble opinion is that these failures are the direct result of incompetent management. Of course, every time you encounter one or more of these “dynamic” managers they are touted as the smartest people in the room.
The bank runs of the 1930s have become the bank *stock* runs of the 2020s. (Hurry, Mr. Broker, get me *out* of bank stocks *now*!) The question is, will investors at some point turn from fear to greed (as they historically have done), and buy up the bargain-basement-price bank stocks, and will it happen *before* the 1 quadrillion(!) derivatives implode? The possible consequences of today’s situation are astonishing!
And your analytical brain continues to impress me, Mr. Kust. I wish *you* were in charge of the Fed....
Mar 18, 2023·edited Mar 18, 2023Liked by Peter Nayland Kust
I am just an electronic technician and computer programmer with no formal qualifications in any field. My efforts to understand large scale, international and corporate, finance, debt, fractional reserve banking, shadow banking, the tangled world of derivatives, CDSs, futures, stocks in general, exchange traded funds, central banks, currencies and their creation etc. has lead me to an ever-increasing number of questions which dwarfs what actual understanding I may have gained.
I believe a handful of people have a pretty good idea of how the parts of the whole system are related. They also presumably have a pretty good idea of what will happen to everything else when particular action is taken to affect one element of the whole system. However, this doesn't mean they can reliably predict what will happen with second to nth-order effects. Nor is there any reason to believe that many such people are in positions of responsibility and power, or that even if they were, they would act in a manner which is "responsible" regarding the health of the entire economy and society, however this might be defined.
Recent events suggest to me that the following is true, though I have never seen it stated so tersely as this,
Central bank currency emissions and/or government and corporate debt (turbocharged by the COVID-19 pandemic response) have lead to pervasive inflation. Central banks have only a few levers to pull in order to quell inflation.
The most obvious is raising interest rates in order to strangle personal, business and perhaps government expenditure by making it harder to obtain credit. This also has the effect of strangling banks, at least by way of reducing the real value of long-term bonds they keep as reserves.
Even if the banks don't need to make that loss of value physical, by selling said bonds, everyone knows the banks' reserves have lost real value as a result of rising interest rates. This makes banks, in general, not just less profitable (since when the bonds reach maturity they won't receive the real value they initially thought they would get, and will have to spend real currency at the time to buy the same real value of bonds to maintain their real level of reserves, but more prone to failure, this decline in reserves value also threatens their ability to pay depositors if more than a normal number of them withdraw their funds in a given time period.
Thus, rising interest rates makes the banks much more prone to bank runs - and one bank run naturally inspires runs on other banks in general, with spooked depositors not necessarily evaluating the particular risks of any one bank failing with respect to others - just the bank they happen to have their currency deposited in. In a panic, such evaluations are not likely to be particularly rational, so the contagion risk tends to affect all banks without regard to the prudence of their management.
As you and/or others have written, each attempt by the government or others to backstop one or a few banks does not relieve the fears of depositors in other banks, since everyone knows that such efforts can at best only help a few banks in total - and even then it is not at all guaranteed that such backstops could save the bank if there was a run on it.
Depositors, from individuals to corporations, view banks like a public service - they should never fail - AND they often choose to deposit their currency in banks which pay higher than average interest rates. This makes sense if there was no increased risk of not getting the currency back, but such banks generally take greater risks with their depositor's funds in order to maximise their profit, and to attract more funds with marginally higher deposit interest rates.
So banks are rewarded, in the short to medium turn, for taking risks - by the very depositors who may lose much of their deposit if the bank fails.
Meanwhile, depostitors and many other people tend to assume that the entire business and societal system depends on banks never failing, to the point of calling not just for better regulation, but for government support to support failing banks.
Here is the brief bit:
Central banks must strangle individual and business spending (and so activity in general, including the creation of employment and profits) in order to suppress the inflation they caused with their currency emissions and governments' addiction to deficits (this driven largely by the public's addiction to the idea of governments borrowing or printing currency in order to do whatever it is they want the government to do).
Such strangling - raising interest rates and soaking up currency rather than emitting it - also strangles banks. Yet while most people expect their bank to be protected by public expenditure, while they reward the riskiest banks by depositing currency in them.
This makes the most vulnerable banks (such as SVB, with an excessive proportion of its reserves in longer term government bonds) most likely to be picked off first by a bank run. Once someone has broken the ice on this potential popular contagion, all the other banks are at higher risk, and the chance of the runs snowballing rise, despite government efforts to damp down concerns.
Raising a country's interest rates tends to raise the value of its currency with respect to those of other currencies. This reduces inflation in that country by reducing the cost of imports, but it also weakens the whole country by making manufacturing industries (and tourism, and internationally saleable service industries) less competitive.
When the strangling destabilises a country's economy in a spectacular fashion - and bank failures, especially in just a few days are impossible to ignore and naturally inspire fear - the country's currency can fall, so increasing inflation (which, over many years, provides an increased chance that manufacturing, and so fundamental economic strength can be restored.
While inflation strangles everyone but the ultra-wealthy (who are, or should be, just as happy with a billion dollars as with two billion), central bank and government efforts to constrain it strangle everyone as well, and can make the house of cards economic system unravel rapidly by self-amplifying mechanisms such as bank runs.
My view is that, if there is a plan, it would be this: Manufacture a crisis to justifying imposing more regulations on the banking industry. Only the large banks could afford the compliance machinery that will become necessary. Small community banks (you know the ones that did not mess around with mortgage backed securities and have not stupidity invested a large percentage of their liquidity in long term low interest debt instruments) would become extinct. This would further centralize the US banking system and make capital less accessible to the independent small business owners that the ruling class is trying so hard to eradicate. Government dependence and the resulting government control would be the end goal of any such plan.
Plain stupid or planned, depends on the angle you look at it from. As you say these risks have been known by yourself and others, the Fed included. They surely know what their actions are causing. I still think this is all being done in part to consolidate wealth and usher in the CBDCs. Linking as usual @ https://nothingnewunderthesun2016.com/
The clowns running certain banks, as well as much of the tech industry seemed to think that ZIRP would last forever, when it obviously could not. Interest rates below the real rate of inflation produce a negative time-value of money, which is clearly wrong and results in tremendous distortions in an economy. They also believed their favored (donkey party) politicians' claims that inflation was "transitory", and thus didn't expect the Fed to keep pushing rates up. They bet on the wrong horse and they lost. Sadly, the powers that be are once again going to try to socialize those losses. :(
It is easy to blame policy makers for these bank failures. They have certainly made a mess of things. But, as someone who is tangentially involved in the banking business, my humble opinion is that these failures are the direct result of incompetent management. Of course, every time you encounter one or more of these “dynamic” managers they are touted as the smartest people in the room.
The bank runs of the 1930s have become the bank *stock* runs of the 2020s. (Hurry, Mr. Broker, get me *out* of bank stocks *now*!) The question is, will investors at some point turn from fear to greed (as they historically have done), and buy up the bargain-basement-price bank stocks, and will it happen *before* the 1 quadrillion(!) derivatives implode? The possible consequences of today’s situation are astonishing!
And your analytical brain continues to impress me, Mr. Kust. I wish *you* were in charge of the Fed....
I am just an electronic technician and computer programmer with no formal qualifications in any field. My efforts to understand large scale, international and corporate, finance, debt, fractional reserve banking, shadow banking, the tangled world of derivatives, CDSs, futures, stocks in general, exchange traded funds, central banks, currencies and their creation etc. has lead me to an ever-increasing number of questions which dwarfs what actual understanding I may have gained.
I believe a handful of people have a pretty good idea of how the parts of the whole system are related. They also presumably have a pretty good idea of what will happen to everything else when particular action is taken to affect one element of the whole system. However, this doesn't mean they can reliably predict what will happen with second to nth-order effects. Nor is there any reason to believe that many such people are in positions of responsibility and power, or that even if they were, they would act in a manner which is "responsible" regarding the health of the entire economy and society, however this might be defined.
Recent events suggest to me that the following is true, though I have never seen it stated so tersely as this,
Central bank currency emissions and/or government and corporate debt (turbocharged by the COVID-19 pandemic response) have lead to pervasive inflation. Central banks have only a few levers to pull in order to quell inflation.
The most obvious is raising interest rates in order to strangle personal, business and perhaps government expenditure by making it harder to obtain credit. This also has the effect of strangling banks, at least by way of reducing the real value of long-term bonds they keep as reserves.
Even if the banks don't need to make that loss of value physical, by selling said bonds, everyone knows the banks' reserves have lost real value as a result of rising interest rates. This makes banks, in general, not just less profitable (since when the bonds reach maturity they won't receive the real value they initially thought they would get, and will have to spend real currency at the time to buy the same real value of bonds to maintain their real level of reserves, but more prone to failure, this decline in reserves value also threatens their ability to pay depositors if more than a normal number of them withdraw their funds in a given time period.
Thus, rising interest rates makes the banks much more prone to bank runs - and one bank run naturally inspires runs on other banks in general, with spooked depositors not necessarily evaluating the particular risks of any one bank failing with respect to others - just the bank they happen to have their currency deposited in. In a panic, such evaluations are not likely to be particularly rational, so the contagion risk tends to affect all banks without regard to the prudence of their management.
As you and/or others have written, each attempt by the government or others to backstop one or a few banks does not relieve the fears of depositors in other banks, since everyone knows that such efforts can at best only help a few banks in total - and even then it is not at all guaranteed that such backstops could save the bank if there was a run on it.
Depositors, from individuals to corporations, view banks like a public service - they should never fail - AND they often choose to deposit their currency in banks which pay higher than average interest rates. This makes sense if there was no increased risk of not getting the currency back, but such banks generally take greater risks with their depositor's funds in order to maximise their profit, and to attract more funds with marginally higher deposit interest rates.
So banks are rewarded, in the short to medium turn, for taking risks - by the very depositors who may lose much of their deposit if the bank fails.
Meanwhile, depostitors and many other people tend to assume that the entire business and societal system depends on banks never failing, to the point of calling not just for better regulation, but for government support to support failing banks.
Here is the brief bit:
Central banks must strangle individual and business spending (and so activity in general, including the creation of employment and profits) in order to suppress the inflation they caused with their currency emissions and governments' addiction to deficits (this driven largely by the public's addiction to the idea of governments borrowing or printing currency in order to do whatever it is they want the government to do).
Such strangling - raising interest rates and soaking up currency rather than emitting it - also strangles banks. Yet while most people expect their bank to be protected by public expenditure, while they reward the riskiest banks by depositing currency in them.
This makes the most vulnerable banks (such as SVB, with an excessive proportion of its reserves in longer term government bonds) most likely to be picked off first by a bank run. Once someone has broken the ice on this potential popular contagion, all the other banks are at higher risk, and the chance of the runs snowballing rise, despite government efforts to damp down concerns.
Raising a country's interest rates tends to raise the value of its currency with respect to those of other currencies. This reduces inflation in that country by reducing the cost of imports, but it also weakens the whole country by making manufacturing industries (and tourism, and internationally saleable service industries) less competitive.
When the strangling destabilises a country's economy in a spectacular fashion - and bank failures, especially in just a few days are impossible to ignore and naturally inspire fear - the country's currency can fall, so increasing inflation (which, over many years, provides an increased chance that manufacturing, and so fundamental economic strength can be restored.
While inflation strangles everyone but the ultra-wealthy (who are, or should be, just as happy with a billion dollars as with two billion), central bank and government efforts to constrain it strangle everyone as well, and can make the house of cards economic system unravel rapidly by self-amplifying mechanisms such as bank runs.
Sorry, I can't really be brief at all.