Choosing the easiest path often leads to dire consequences. Much like the derelict Alexandria Hotel in Los Angeles during the 1990s, some destinations are best avoided altogether. Unfortunately, a few individuals, by continuously opting for the simpler and less arduous route, find themselves trapped, spiraling into despair within their shabby single room occupancy units.
This notion applies equally to monetary policy. Short-sighted policies that prioritize immediate convenience end up complicating society with a myriad of long-term issues. Central banks’ interventions in credit markets to keep interest rates low through asset purchase programs come with significant repercussions.
Once initiated, these repercussions are not easily reversed. Periods of abundant credit inevitably give way to phases riddled with unmanageable debt. This cycle is unavoidable.
As time progresses, the simpler choices often lead to mounting pain, distress, and chaos. Problems with debt that could have been resolved through diligence and hard work become overwhelming, as the accumulation of liabilities spirals out of control.
Eventually, at the most inopportune moment, economic realities set in. Prices soar relative to depreciated currencies, rendering cheap credit more costly. The layers of poor choices become exposed, spiraling debts ensue.
As increasing amounts of debt fall into default, the entire structure becomes unstable. Banks falter, individuals and businesses go bankrupt, and governments also find themselves in jeopardy.
Determining when the threshold has truly been crossed often becomes clear only in hindsight. The effects of artificially low credit take time to manifest, and by the time they do, it’s usually far too late to act.
Cut the Nonsense
Quantitative Tightening 2 (QT2) officially began on June 1, 2022, but it appeared to come to a swift halt during the panic surrounding Silicon Valley Bank. After reducing its balance sheet by $626 billion through late February 2023, the Fed quickly injected nearly $400 billion back into the financial system in an effort to stabilize it. This new credit was essentially conjured out of thin air.
However, QT2 might not be finished after all. Recently, the Fed released its weekly H.4.1 balance sheet update, revealing a reduction of approximately $28 billion. At this pace, the Fed’s balance sheet could return to its February levels in about 14 weeks.
Could it be that QT2, after a momentary lapse, is back on track? Only time will tell.
Regarding the recent expansion of the Fed’s balance sheet, a dedicated monetary policy enthusiast might argue this merely represents discount lending through the new Bank Term Funding Program (BTFP). Since the Fed isn’t purchasing actual securities, it technically wouldn’t qualify as quantitative easing.
While delving into these technical details is acceptable, being right does not necessarily equate to being correct.
Perhaps, in a strict sense, the Fed’s recent balance sheet boost doesn’t fit the traditional definition of quantitative easing. Nevertheless, BTFP functions as a bailout for banks, regardless of any rhetoric from officials, including Joe Biden.
Let’s be clear. Even if taxpayers aren’t directly footing the bill for the Silicon Valley Bank bailout, the financial burden will fall on everyone, including you, in the form of persistent inflation over the coming decades.
Mass Fraud and Theft
It’s important to note that the Silicon Valley Bank bailout goes beyond just lowly deposits that are already insured by the FDIC. It’s essentially a lifeline for the ultra-wealthy and their various enterprises—people and organizations capable of managing their own risks, yet they chose not to do so.
As a result, you’re now partially responsible for California Governor Gavin Newsom’s wineries and billionaire Mark Cuban’s drug company, along with numerous other Silicon Valley affluents. This exemplifies the ultimate form of welfare: socializing losses while privatizing gains.
The BTFP further entrenches the moral hazards that bankers have enjoyed over the past several decades. When there are no consequences for reckless behavior, why would one bother to act prudently?
Consider that not a single banker or mortgage broker faced criminal charges for the mass fraud that led to the 2008-09 housing market collapse. Even Angelo Mozilo, who profited handsomely with $45 million in ill-gotten gains, evaded accountability. And that was just the tip of the iceberg.
Between September 2019 and April 2022, the Federal Reserve issued over $5 trillion in ghost money, which was subsequently injected into the economy by the U.S. Treasury. While this influx of easy money came at a steep price, it has been followed by relentless price inflation.
In turn, rate hikes intended to combat the consumer price inflation generated by this monetary expansion have also increased. Bankers, who should have been cognizant of the implications of rising interest rates, found themselves unprepared.
Is the Bank Crisis Already Over?
Believing that the worst of the banking crisis is behind us is nothing more than hopeful thinking. Incidents like those at Silicon Valley Bank and Credit Suisse aren’t isolated events. The issues that plagued these banks have spread to numerous others, though the full extent may not become evident for another six months.
Remember when Bear Stearns collapsed in March 2008, startling CEO Jimmy Cayne mid-bridge game? The economic experts dismissed this as an isolated incident. The Federal Reserve Bank of New York quickly arranged an emergency sale to JPMorgan Chase.
On June 8, 2008, then Fed Chair Ben S. Bernanke stated, “The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.”
Only a few months later, on September 15, 2008, Lehman Brothers collapsed, plunging the economy into chaos. This incident illustrates how around six months can pass between one financial disaster and another.
We’re not suggesting the current banking crisis parallels the one experienced in 2008-09. We’re merely highlighting that protracted periods of artificially low credit lead to rampant speculation and inflated asset prices, swiftly followed by rising rates and negative consequences.
When this cycle occurs, asset values decline, and the entire debt structure can collapse. Events like those involving Bear Stearns and Silicon Valley Bank are not random; they represent systemic vulnerabilities. The eventual fallout takes time to materialize—sometimes months, or longer.
Meanwhile, depositors are increasingly withdrawing their funds from smaller regional banks. As recently highlighted by the Wall Street Journal,
“The 25 largest U.S. banks gained $120 billion in deposits in the days following the collapse of SVB, according to Federal Reserve data. In the same period, all banks below that level lost $108 billion, marking the largest weekly decline in smaller banks’ deposits on record.
“Throughout this time, over $220 billion has flowed into money-market funds.”
No, the banking crisis is far from over.
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Sincerely,
MN Gordon
for Economic Prism
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