What Does the Fed Have to Break?
While Fed Chairman Jerome Powell appears determined to bring inflation down to their 2% target, inflation is far from under control.
Pundits predict Powell will continue raising rates until something breaks.
Recently Silicon Valley Bank (SVB), (and others) bellied up and depositors were bailed out by the FDIC. What has to break for the Fed to declare victory over inflation?
Immediately after the SVB failure, Treasury Secretary Janet Yellen, trying to prevent a run on banks, assured America that all is under control:
“During the financial crisis, there were investors and owners of systemic large banks that were bailed out,…we’re not going to do that again. But we are concerned about depositors and are focused on trying to meet their needs.”
…. (The) FDIC said the government will be guaranteeing deposits for SVB account holders. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer….”
The soft-spoken, grey-haired lady’s words were suspect; bank stocks continued down. Perhaps investors remember when (then Fed head), Yellen reassured us:
“Will I say there will never, ever be another financial crisis? No, probably that would be going too far. But I do think we’re much safer and I hope that it will not [happen] in our lifetimes and I don’t believe it will.”
Ms. Yellen was a great enabler of easy money with historic low interest rates, leading to high inflation. Her successor, Jerome Powell, is now attempting to clean up the mess to avoid a currency collapse.
Chuck Butler and I spent a lot of time trying to figure out what is going on. My first question was, “What does the Fed have to break to tame inflation?’
He surprised me:
“Dennis, when the pundits predict the Fed breaking something they mean something different. The 2008 bailout was because banks had too many toxic loans and the big banks were deemed “too big to fail.”
Remember the Federal Reserve is owned by member banks, which are now the casino banks (investment firms). They’re no longer in the banking business as we once knew it. They make billions, many times through high-risk investments; knowing if they are wrong the taxpayer will bail them out.
The pundits fear the banks will come under too much stress, and more will fail (break). They feel/hope Powell will lose his courage, pivot on interest rates, facilitate more bank bailouts and inflation will soar.
Remember Paul Volcker held interest rates high until he broke the back of inflation.
Until Powell breaks the inflationary spiral, whatever else breaks is not going to fix the inflation problem.”
Chuck called it…. Business Insider quotes market guru Larry McDonald who appeared on CNBC:
“The Silicon Valley Bank meltdown may incite the Federal Reserve to cut rates by 100 basis points by December to prevent contagion in the financial system.
…. That would mark a sharp reversal from the central bank’s current course of aggressive tightening to rein in inflation.
Rate hikes totaling 450 basis points over the past year have made returns on short-term Treasuries more attractive, draining deposits from banks like SVB….
‘In essence, the Fed is causing this bank run.'”
Ummm, Larry, the Fed caused the inflation problem….
US Inflation Calculator reports:
“The annual inflation rate for the United States is 6.0% for the 12 months ended February 2023….”
Something broke, but not inflation.
Speaking about credibility, CNBC’s “Mad Money” host Jim Cramer is being skewered on social media for urging viewers to invest in Silicon Valley Bank in February:
Wonder where he is collecting speaking fees? ….just saying!
What Caused This Mess?
The Fed created trillions in cheap money, flooding banks with investment capital. The market soared; high-risk loans were commonplace without regard for credit risk. The investment banks made billions.
What has changed?
Jeffrey Tucker of the Epoch Times tells us:
“…. The Silicon Valley Bank (SVB), (held) $212 billion in assets until only recently…. Its fixed-rate bond holdings declined rapidly in market valuation…. Its portfolio crashed further due to a depositor run.
…. It’s all an extension of Fed policy to curb inflation, reversing a 13-year zero-rate policy. …. The high-flying institution that specialized in providing liquidity in industries…suddenly found itself very vulnerable.
In addition, the bank was exposed with a portfolio of collateralized mortgage obligations and mortgage-backed securities. …. (also) coming under stress as high leverage in housing and real estate become untenable amidst falling valuations.
…. And where did SVB, and the entire banking industry, get the funds to bulk up their portfolios with such debt holdings?
You guessed it: stimulus payments.
Billions flooded in and it had to be parked somewhere making some return. At the time it seemed like a good deal, until Fed policy changed.
…. Their asset portfolios were tied, as usual, to a continuation of the status quo that stopped continuing, so investors and depositors are fleeing to safety.”
The Music Stops – All Heck Breaks Loose
SVB’s assets tripled to over $200 billion in a 3-year period. What did they do with all that cash? They bought bonds, interest rates rose, the value of their bonds fell.
Wolf Street tells us:
“…. SVB lost $1.8 billion on the sale of $21 billion of ‘available-for-sale’ securities. It sold them because it needed to raise liquidity.
…. Those startups are burning cash like there is no tomorrow,…they’re draining their deposits from the bank. And the bank has to fund those cash withdrawals.
…. SVB has lots more bonds it can sell at even bigger losses.
…. If they don’t have to sell those bonds but can hold them to maturity, they will not lose anything…they collect interest along the way, and nothing happens.
But if they need to sell now to raise liquidity to fund the outflow of deposits, all heck breaks loose.”
I asked Chuck, “Aren’t banks required to have reserves to cover withdrawals?”
He said, “Not anymore. Had the Fed required as little as 10% reserve requirements, they could have covered $20 billion of their withdrawals without having to sell anything.”
I pressed, “Treasures were paying little interest, why didn’t they just go very short?”
He continued, “The banks tried to squeeze every penny of profit they could. If that meant going longer term, they did. Works fine until they need the liquidity to cover a run on the bank.”
2023 is shaping up to be the most expensive year ever. The Fed’s response is too little, too late and prices continue to soar!
How do investors protect the value of their nest egg?
How do retirees pay their skyrocketing living costs?
Luckily there’s a proven way for you to stay ahead of inflation, just like 20,000+ investors are doing right now…
Here’s how you can be one of them. Click HERE for more information.
The Great Enablers
Wolf Street reports: “SVB had a good investment grade rating, dropping one notch by the rating agencies when they sold their bonds at a $1.8 billion loss. It wasn’t until after the bank collapsed that they moved their bond ratings into ‘junk’ territory.”
Wall Street on Parade tells us:
“…. This was a Wall Street IPO machine that enriched the investment banks on Wall Street by keeping the IPO pipeline moving;…and minted startup millionaires for ideas that often flamed out after the companies went public.
These are the functions and risks taken by investment banks.
Silicon Valley Bank – with this business model – should never have been allowed to hold a federally-insured banking charter and be backstopped by the U.S. taxpayer, who was on the hook for its incompetent bank management.
Adding further insult to U.S. taxpayers, the Federal Home Loan Bank of San Francisco was quietly bailing out SVB throughout much of last year. Federal Home Loan Banks are also not supposed to be in the business of bailing out venture capitalists or private equity titans.”
Bad business decisions enabled by the rating agencies and the Fed…
Enough is enough!
The public is fed up with the damn bankers….
Morning Five with Fitz reports:
“The SVB situation would be a comedy of errors if it weren’t so sad.
- SVB execs apparently sold blocks of shares before everything came unglued.
- SVB employees received bonuses hours before regulators shuttered everything.”
Fed Chairman Alan Greenspan, pushing for repeal of the Glass-Steagall, said:
“The Fed does not believe that allowing banks and securities firms under the same corporate roof would lead to improper concentrations of power.”
Paul Craig Roberts discusses concentration of power:
“Treasury Secretary Yellen last Friday…reassured the public that the American banking system is resilient and well capitalized.
But is it?
The five banks labeled ‘too big to fail’ have $188 trillion in derivatives. The brutal fact is that 5 US banks have risk exposure that is twice the size of the GDP of the entire world.
It is incomprehensible that 5 US banks have sufficient capital to back derivative bets that are twice the size of world GDP.”
Reinstating the gold standard and Glass-Steagall is mandatory if we want to break the concentration of unaccountable power at the Fed and in government. Until that happens, expect more of the same.
The Fed/government must fix the cause to solve the inflation problem.
- Knock off the trillions in deficit spending.
- Insist on adequate bank reserve requirements. The taxpayers want no more bailouts of banks or depositors.
- The rating agencies should be held accountable and punished. There are two major agencies – two wrongs do not make a right!
- Reinstate Glass-Steagall immediately.
- Until the Fed/government BREAKS up the “too big to fail” banks, this will continue.
- Money should be clawed back and bank executives punished!
Something has to change….
As Chuck always asks – Got Gold?
A little help means a lot!
Eight years ago, I vowed to keep our newsletter FREE! I plan to keep my promise.
It’s an expensive, time-consuming hobby, but also a labor of love.
Recently a reader asked why I didn’t charge for our weekly letter. I explained that I want it available for everyone. Some readers may be on limited budgets and may benefit the most from our advice.
He pressed on with his questions. How much does your letter cost? How many readers do you have? He concluded, “If each reader paid $10/year, you would be fine.
I responded, “Yes, $10 per reader would work, BUT I am committed to keeping it FREE even if it costs me money.”
Several readers suggested we add a donations button to help us offset the cost of our publication. It helps when people pitch in and we certainly appreciate it.
If readers want to donate, it sure helps out, however, it’s strictly voluntary – no pressure – no hassle!
Click the DONATE button below if you’d like to help.
You do not have to sign up for PayPal to use your credit card.
And thank you all!
On The Lighter Side
NCAA basketball March Madness is underway. Several high seeds were eliminated in the first round.
I watched Princeton beat highly-seeded Arizona. The camera work was terrific, showing the unbridled emotion of the fans, both in victory and defeat. I think that is part of the fun of the entire process.
The word FAN is short for FANATIC, and, when it comes to college sports in particular, there are sure a lot of fanatics.
Tiny Furman university (enrollment 2970) upset #4 seed, Virginia with a three-point heave from near mid-court to give them the lead with 2 seconds left in the game. That is just plain exciting.
I found myself checking scores all weekend. Even for a casual basketball fan, it’s easy to start rooting for a team; particularly the underdog.
Quote of the Week….
“What has been holding this Wall Street house of cards together this long is the New York Fed’s willingness (even eagerness) to throw trillions of dollars at the problem at the earliest sign of a hiccup.
The fly in this ointment is that the New York Fed is literally owned by these same Wall Street mega banks while simultaneously creating emergency bailout programs and then outsourcing the work to the banks being bailed out. If ever there was the perfect design for a replay of the Hindenburg, this is it.” — Pam and Russ Martens, Market Bubble Set to Explode, June 21, 2021
Lifelong friend Tom G. shares some clever Paraprosdokians. I never heard the term either… Paraprosdokians are figures of speech in which the latter part of a sentence or phrase is surprising or unexpected and is frequently humorous.
- Where there’s a will, I want to be in it.
- Since light travels faster than sound, some people appear bright until you hear them speak.
- If I agreed with you, we’d both be wrong.
- We never really grow up – we only learn how to act in public.
- War does not determine who is right, only who is left.
- You do not need a parachute to skydive. You only need a parachute to skydive twice.
- I used to be indecisive, but now I’m not so sure.
- Going to church doesn’t make you a Christian, any more than standing in a garage makes you a car.
- I’m supposed to respect my elders, but it’s getting harder and harder for me to find someone older than me.
And my favorite:
- You’re never too old to learn something stupid.
Until next time…
“Economic independence is the foundation of the only sort of freedom worth a damn.” – H. L. Mencken
Affiliate Link Disclosure – This post contains affiliate links. If you make a purchase after clicking these links, we will earn a commission that goes to help keep Miller on the Money running. Thank you for your support!