1. The government requires banks buy their debt and hold it as reserves because it's considered the safest investment.
2. The government decides that, oops, it printed too much money in 2020/21 and is causing inflation, so it raises rates very quickly.
3. New treasuries yield 4 or 5 times as much in interest as the ones from 1-2 years ago. Why would anyone want to buy those old treasuries near face value now?
4. The old treasuries decline 30-40% in present value. Oops, they're not so safe after all if you need your money back before maturity, which is often decades away.
5. A bunch of VCs decide they'd like their money back today, not in 20 years. A bank doesn't have it on hand, so it goes under.
6. Banks going under is bad look, so the government decides to inject massive liquidity into banks, now finding itself both tightening and loosening fiscal policy simultaneously.
SVB is certainly not blameless here, but the Fed's money printer and the government's wildly excessive stimulus has to be one of the worst policy errors since the 2007/08 financial crisis.
This is a wrong characterization and makes it look like it's the Fed fault all along. Government bonds still have risks (ie: The government not paying) but more importantly, they are tightly linked to the main interest rate. Their prices can fluctuate significantly and do all the time.
Bankers know that. That's kind of the first or second lesson they'd teach you at a basic financial course. Everything is priced in terms of interest rate and time. They have been trading these things for decades.
Another thing that I find funny is that everyone has "hindsight" now. Everyone is surprised how these banks are surprised that interest rates went up!
Here is a quote from that article in 2020:
> Maybe, but it's also possible that these high prices are here to stay.
I honestly was thinking we will stay in this zero-rate regime for the next decade or more. I suspect the people at SVB thought in a similar fashion and plan accordingly. The responsibility of the blow up is fully on them, however.
> now finding itself both tightening and loosening fiscal policy simultaneously
Wrong. This is corruption. Janet is picking winners and losers. Some people are losing their deposits and some are not. You are systemic if you had dinner with Janet yesterday.
> I honestly was thinking we will stay in this zero-rate regime for the next decade or more. I suspect the people at SVB thought in a similar fashion and plan accordingly
I have been working in several trading companies, both as trader and in IT, and the first thing they teach you when trading, is that the market always knows better than you. So hedge your risks and don't trust that you have some kind of vision that knows better than the markets. Actually 'vision' was used jokingly when someone accidentally made a profit by not hedging and ending up on the right side of the market.
Bankers know this. In this case, SVB could have hedged their risk with interest rate swaps, for instance. But for those they would have to pay a premium. Why? Because the market believed there was a real chance the rates would go up. If at SVB they really planned on zero rates to stay for a decade or more, they have simply been gambling.
Yes that’s the point. Treasuries are cash, they are not meant to make money for banks, they are meant to be a place for banks to put money when they don’t have anything else to do with it. Banks are supposed to make money from the premium between the base interest rate and the rate on the loans they make. The implied contract when you deposit money in a bank is that the bank has a dependable business model as a lender. They are not supposed to be gambling.
SVB got greedy. They thought that zirp would continue forever and they made long term bets on that basis and lost. Banks should not be making long bets on macroeconomic conditions: that’s not a bank, that’s a hedge fund.
The trouble is that other US government interventions also eliminated a big chunk of the "anything else to do with it". In particular, most mortgages in the US are fixed rate for the entire duration of their term through government backing, which almost entirely eliminates one of the big sectors of loans that banks in other countries can use to make money on the premium from interest payments with less duration mismatch than 10-year or 30-year bonds. In most other countries, mortgages are either variable rate or only fixed rate for a relatively short period. Also, a substantial proportion of all US mortgages in existence apparently locked in their interest rates during the time period in 2020 and 2021 when they were at record lows.
I'm not as familiar with how mortgage markets work in other countries, but at least in the US fixed rate mortgages are almost always risk balanced against fixed rate investmentsor wrapped up in securities that move risk off the banks' books.
A bank would indeed be crazy to hold onto fixed rate 30-year loans with interest rates at near zero.
Yeah, in the US fixed rate mortgages are handed off to the government who guarantees them and bundles them up into securities... that SVB then ended up buying a bunch of because it's not like there was exactly a wide variety of investment options available that they could back their deposits with that actually paid meaningful interest.
At least based on this article, it even sounds like this is what they wanted banks to do! The reverse-repo market was created because the Fed wanted banks to buy securities directly from them when interest rates where increased, sounds like SVB and others just followed that playbook
Maturity transformation (borrowing short and lending long) is still a core function of banking (and historically one of the key sources of profit. Manhunt this risk in a bank portfolio is one of the central jobs of management.
The naïveté was thinking the deposit base wouldn’t shrink (after growing 3x in as many years)
Some brokerages break down various types of position (equity, bond, etc). Mine in particular has a "Cash and equivalents" section. Money market accounts go there, but so do treasury funds and such.
I suspect the upvotes are because you're technically correct, treasuries are not literally cash. The downvotes are because grandparent obviously meant that treasuries are considered cash equivalents (whether or not they actually should be, given liquidity concerns).
Treasuries (without further qualification) are not cash equivalents. (And it’s not because of liquidity concerns.)
Treasury bills may be cash equivalents. They present (almost) no interest risk.
Long-term treasury notes/bonds is what was being discussed. There is interest risk in that case and neither your broker nor anyone else would consider them cash equivalents (unless they are already close to maturity).
You don't need to hedge out all the risk. You can for instance hedge the risk that rates go up more than one percent and take the risk when it changes less, in return for a moderate yield. This way you limit your losses when things go wrong and probably you'll avoid bankruptcy.
Besides that, financial institutions don't only make money on re-investing deposits. They charge all kinds of fees as well, which make for a steady income.
Oh you can get a lot more creative than that. You can hedge out "catastrophic" interest rate rises while taking your chances on smaller increases. In this case, catastrophic can easily be estimated by taking the duration of the book and the equity cushion and applying a margin of safety. Or you can simply ladder Treasury durations that inherently don't have enough duration to cause problems. SVB apparently did none of that.
There is exactly one investment strategy that presents no risk of ruin for a bank: depositing all customer deposits in the bank's account at the fed. That investment strategy is so discouraged by regulators that they literally denied the application for a charter from an organization whose stated investment strategy was exactly that. (google the narrow bank if this is unfamiliar to you).
For any other investment of any amount of your deposits, a run of sufficient size combined with an investment loss of sufficient size will ruin a bank.
That being said, SVB had by a wide margin the flightiest deposits and the most IR risk. But it was an error of magnitude, not category. There is no run-proof fractional reserve bank.
I appreciate the correction but that probably doesn't change the point being made, as the economy of Switzerland is obviously closely tied to that of the EU (when I read EU I normally think Europe, not just European Union, which is my mistake, but in conversations like this I think "Europe" would be the better term after all).
Yeah, I almost added CS to the original post, but their problems were relatively unique to them, rather than being an extreme case of a common problem, like regional banks in the US (who didn't need to hedge interest rate risk).
If you bought treasuries at the prevailing rate and swapped them at the same rate then the market price of the swap will be zero. You'll still have to pay credit and funding premia though. If, however, you only hedge once the prevailing rate moves against you, you'll pay a market premium in the form of a spread.
If the market always knows best then why do I need traders except for market making purposes? Shouldn't everyone just buy the lowest cost passive ETF of a big enough index like S&P 500 then?
I think "the market always knows best" is correct in most cases and if you think you know better you are probably wrong but there are empirical counterexamples like the Buffets of the world (unless one would claim that his gains come from some sort of other unfair advantages like the deals only he gets to make). I also think that human behaviour isn't always rational and herd effects and the like are a thing and not always priced in correctly. And while the flow of information feels pretty efficient in this day and age, I also think that there have to be some pockets where individuals can gain informational advantages.
I do like Sorros' book (Alchemy of Finance) which is dense and hard to get through but vibed well with me philosophically.
> Shouldn't everyone just buy the lowest cost passive ETF of a big enough index like S&P 500 then?
Yes, this is very best the advise to invest your money (except if your name is Warren Buffet). Buy it and hold it.
There have been so many papers published that show this. You cannot predict the market, what you can do is save yourself some risk and some transaction costs.
Any investment advisor that tells you different is plain wrong and probably has a second agenda.
You can also save yourself time. I see so many people use enormous amounts of time reading headlines about companies and consuming videos about the economy and all that jazz to stay up to date and make "informed trades". But in the end a lot of that time is wasted. And you might say that's ok if that is their hobby, but lets be honest, the reason people do this is because they got sold on the idea that they can get rich from it.
If everyone invested in index funds, then there would be a lot of money to be made from you alone looking at the market. There are often companies that announce some new product that will (at least for a few years) outsell their competition. Index fund have no way to know that the company will thus be worth more money than their competition, but you do.
The problem is the above is similar to a zero sum game in that there is a fixed total profit to be made in that way, and that money is shared between everyone who is correct (including index funds!). Since there are a lot of people trying to make the above trades the total profit you can make is reduced as they have already moved the price above what a pure index fund market would have it at. (a true zero sum game every winner is paired with a loser, while the above doesn't actually have losers in the same way, but I don't know any other way to explain it)
I concluded long ago that if I made studying the market my full time job and hobby I could make a good income doing it. However reading all the reports is boring, while writing code is fun, so I just invest in index funds.
> I concluded long ago that if I made studying the market my full time job and hobby I could make a good income doing it
I'd be curious how you reached this conclusion. The outside view (lots of academic papers on this) is that nobody beats the market over a long time frame. I've often thought this assumes scale-invariance; as I look to make lower volumes of money, I'll see things that aren't worth a real trader's time. Another way I can see this as true is if you don't need to have the money invested all the time - if you strategically pick 1 investment every 5 years, can I expect to beat the market by picking the absolute best trade?
Despite those ideas, I concluded long ago that nobody can beat the market over time, with maybe 1-2 exceptions.
There are a handful of people - Peter Lynch, Warren Buffet... That over the years have proven that thesis false. The vast majority do not beat the market, but the vast majority are investing on emotion and fads.
I would have completely missed amazon and google, but there were other companies that would for a while grow at better than market rates that I would have found (or so I think!), and would have been able to get out of in time (this isn't hard because I don't need to call the top, I can be off by many months and still have a nice return). These companies carry much less downside risk vs dot coms - most of which failed, and part of doing well long term is ensuring that your losses are not good because you will have them from time to time.
Note that you don't have to beat the market by much to pull this off so long as you live cheap those first years.
> nobody can beat the market over time, with maybe 1-2 exceptions.
Apologies for the poor wording. Agreed there do appear to be a few people who beat the market regularly. My perspective is those people are not using the same tools available to even elite traders - Buffett gets really good deals because of who he is. That kind of thing isn't available to anyone else and in the context of "could GP beat the market if they worked really hard and were really smart", it rounds to "nobody can beat it".
I haven't read those academic papers you mentioned so I might have missed some insights, but after thinking about it on and off for a while my thoughts on it are:
1. Many people trading on the stock market are professional traders who do it as a full time job, and they have access to information and tools that you don't. So unless you expend similar amount of time in studying the markets, it's highly unlikely you'd beat them.
2. Even the best traders generally beat the market by a couple percent on average. So in order to compensate for time cost of equivalent to a full time job on studying the markets, the fund you're investing needs to be: (your salary / x%) -- Let's say you expect 100k salary, and somehow you can beat the market by 5% if you put in the time, then you need a fund of 100k/0.05 = 2000k for the enterprise to "break even" so to speak.
3. Most people don't have 2 million to invest. And even if they do, they don't want to spend 40+ hours a week studying the stock market. So, since trading is basically a zero sum game, most people who invest small amounts of money perform worse than the market.
This doesn't even go into the tricky details of determining whether your performance is due to skill or luck (or lack thereof). The 5% is subtle enough, but not having any degree of certainty at all makes reviewing your decisions and trying to improve your trading skills even harder.
That said, there's probably more than a couple people besides the big names who can pull this off. It's just that even if you consistently beat the market, it takes a long time for people (including yourself?) to notice, because the effects are so subtle at first. In a sense Warren Buffet owes his fame not only to his skill but also to his age, and his willingness to engage in the activity even when he has all the money in the world. I suspect most other people find other interesting things to do once they earn a hundred million or so since it's more money than they ever need...
This is a reasonable summary of mutual funds not beating the market. I think it's maybe a single-digit number of individuals can do it, but the reasonable default should be something like "a number that rounds to 0% of money managers in any format are able to beat the market over a long time frame".
I thought the market knows best was kind of a joke. As in all your best reasoning and prayers, but it can still go against you, the market knew best. Is it in the same vein as a wizard being neither early or late, he arrives precisely when he means to (nothing’s ever priced incorrectly)? Or, like a loving mother who beats you (you didn’t properly factor in jupiter)? Depends how you’re feeling, but the market always knows best.
> If the market always knows best then why do I need traders except for market making purposes?
You may not. It doesn't follow that the market doesn't. Long term US stock investment isn't the only reason people use capital markets. And even for passive etfs, your counterpart is likely hedging their exposure with someone who you didn't buy the etf from.
Seems to me you're missing the forest for the trees.
"The Market" is the spontaneous order generated by millions of individual transactions seeking equilibrium.
Individual traders can fail, be greedy, or succeed, and the market as a whole still balances out.
Think of it like a biotope pond, which exists and naturally adjusts to all sorts of conditions, and think of the Federal Reserve and Banks lending practices as a corporation dumping 40 metric tons of mislabled organic fair-trade ketchup into that pond.
Too much of even a good thing, still poisons the system.
Their exuberance at the state of the economy in 2020 and early 2021 can be seen in their interview with Bloomberg. They expected the growth of tech to continue to grow at the rate that it did with the start of the pandemic and that that was going to be stable afterwards.
Wouldn't that be equal to holding short-term treasuries. In that case, they'd be sitting at billions of "worthless" money. Question is, who is the other bank that took that risk. Because of the nature of the market (ie: competition) they had to produce yield comparing to their peers.
So either their peers were smarter or the big unfolding is yet to happen.
Imagine how different the calculus would have been through the pandemic had the Fed been raising rates in 17-19? They would have had runway to lower interest rates before going to zero. In hindsight, the zero interest rate regime was aberrant-unprecedented and forced the market to magic up lots of “accommodations.”
Anyway, the problem with svb was exactly that they decided to not hedge against the possibility of raising interest rates. And for much of the market, that was a bad call. So anyone defending them needs to explain the rational of keeping the zero interest rate regime post-Covid. And it’s got to be better than “line goes up and to the right” for your chosen asset
> Wrong. This is corruption. Janet is picking winners and losers. Some people are losing their deposits and some are not. You are systemic if you had dinner with Janet yesterday.
Big call. Huge. Got some data or similar to back it?
Edit: If there's clear picking of winners, or even plausibly so it's gonna look pretty bad. [1]
Yellen says unsecured depositors at TBTF banks will always be bailed out, but those at smaller banks are on their own. It's one of the most incredible moments I've witnessed. I'm not sure if there's some hidden agenda being pursued, or if Yellen is just so far removed from the real world that she doesn't understand the consequences of her statement.
I'm not sure why any company or individual would hold >$250k at a non-TBTF bank after this. It borders on financial malpractice.
I never understand things like this. She looks like a deer caught in the headlights when he asks her the most predictable and basic question about her decisions. How can you be in such a position, make such decisions, and be unable to offer a compelling answer to the most basic questions?
Even if it some sort of a hidden agenda and [further] centralizing banking is just seen as a convenient stepping stone towards CBDCs or whatever, you'd come up with some passable explanation ahead of time. I mean it's not like the Senator there pulled out some gotcha she couldn't have expected.
There is a concept in the armed forces for making decisions in a given timeframe (struggling to find a source for this). Essentially you do the best you can in the time you are given. Then you move on and iterate. If you dither too much you probably don't have to make a decision anymore as the enemy has made it for you. In that framework it is accepted that a solution is not perfect.
I think about these crises the same way. They had 48h to sort it out and they had to make a decision. The decision has side-effect-like consequences. Should she now lie about this?
So now, why did they only have 48h to make a decision? I don't know. I doubt nobody has thought about this before. But I assume that regulating banks is particularly hard, because of lobby pushback and the banks ability to exploit any loop hole quickly. They are literally organisations that look out for how to make money by exploiting asymmetries. These organisations work against the slow democratic decision making that involves non-aligned actors (who are also often not trained in this particular issue) in the upper and lower houses of parliaments of different countries.
Another question is. Why are small banks treated differently than big banks. I have read somewhere that small banks have less regulatory oversight. Maybe the decision is much more to support heavily regulated banks and not so much those which are for various reasons not as much regulated. Why would the government want to hold the bag that it was not allowed to look into?
They had 48h in this case, but who gets bailed out and on what terms is a massive strategic decision that should not be made on the hoof. I must be naive because I thought planning for this kind of problem was part of her job.
First up, I do not have any particular insights what happened behind the doors and how government planning _really_ works. But if business / engineering management is in any way similar, there would have been a huge amount of uncertainty at the moment the hand was forced.
One would hope that there were some specialists at hand that know parts of the system, laws, implications on the overall economy etc.
There are likely a couple of plans available how to deal with this kind of situation. But likely not for this exact situation. Plans that exist but have not been implemented as policy likely are too rough around the edges or have significant opposition for different reasons.
On top of this, at this level of complexity and abstraction everything is kind of an opinion until tested and proven (but no time for that). Because no one truly understands all details and system connections.
On top of this in government you never know 100% what the motivations behind all these suggestions and plans is. What is factual, and what is politically tainted.
So all of the sudden things turn from certain to probabilistic. The leader has to figure out how to weigh the opinions and how to make a coherent enough decision (remember this is a system, and individually good decisions can be bad when taken together) to be net positive until the structured decision making can catch up.
Hopefully this is what is happening now and a general policy is decided on based on structured analysis. And hopefully it is quick enough to be ready before the next crisis hits.
>> you'd come up with some passable explanation ahead of time
Central bankers are appointed based on two criteria:
1. A willingness to print money for the government so it can spend more than it raises in taxes.
2. Looking presentable, sounding sophisticated and emitting enough bafflegab that (1) seems scientific instead of ideological.
Thinking deeply about economics and the role of banking/central banks in society is an anti criteria, because if you did think about those things you'd end up concluding that the only fair and stable solution is way less money printing and quite possibly none. That would directly undermine the government that appoints you. Your salary depends on you not understanding your own area of specialism.
I do feel like the defining characteristic of the 2020s is turning out to be people's struggle to accept the horrible truth that government officials/scientists who claim to be experts systematically have no idea what they are doing.
You can make a point about the administration, but if you’re talking about nepotism, specifically, you’re making a point about the wrong administration. There’s a much better example of a recent administration engaging in “peak nepotism”, a recent one that had the president’s children working in the White House.
I’m assuming the point you’re trying to make isn’t actually about nepotism and you’ve simply misunderstood what the word means.
Sure. I wasn’t trying to declare which administration was “peak nepotism”, only that calling the current one so is disingenuous when you have only to look as far as the previous one to find one that was more so.
You keep using that word nepotism. I do not think it means what you think it means. It’s not like Biden hired his daughter and son-in-law to bring peace to the Middle East and modernize the US govt among other tasks.
This is accurate. Don't you know his son had an infamous laptop that exposed all of his illicit dealings with Ukraine, never mind the straight up insane things regarding their family affairs.
I mean, if there was ever a time to know the people supporting the current regime are in a cult, look no further.
> Yellen says unsecured depositors at TBTF banks will always be bailed out, but those at smaller banks are on their own.
I agree SVB and Signature uninsured deposits shouldn't have been guaranteed, but that's not quite what Yellen said. The $250K guarantee applies to deposits at all insured banks. Having clarified that, Yellen said:
> A bank only gets that treatment [guaranteeing all deposits] if a [super] majority of the FDIC, a super majority of the FED board, and I in consultation with the president determine that the failure to protect uninsured depositors would create a systemic risk and significant economic and and financial consequences ...
Exactly. The subtext to this clip is that she cannot do what the congressman is acting without an act of congress, and he should know that. It’s well executed grandstanding.
As I understand it, the piece you are missing is that she legally/procedurally cannot guarantee depositors prior to a bankruptcy - that would require an act of congress. The congressman know this as well, so it’s just grandstanding.
> Treasury Secretary Janet Yellen told senators that government refunds of uninsured deposits will not be extended to every bank that fails, only those that pose systemic risk to the financial system.
If you’re too big to fail, you’re too big to exist. We should either let them fail (my preference, despite the pain) or bail them all out. But I also think that if we’re going to insist that there is a private entity that is too big to fail, it should be broken up until the pieces are not too big to fail.
Actually svb did fail. And flunk. The shareholders are wiped out. The employees are gone. Saving the depositors is an act of charity.
And if you save one bank, it restores confidence in the other banks against a bank run. Otherwise I was thinking of removing money in all banks combined.
The government outsourced this responsibility to the Federal Reserve at the same time that a federal income tax began.
There are 3 main ways to balance a government budget. Spend less, raise more funds through taxes, or make the scale of debt decrease through inflation.
Yellen just repeated the exact federal reserve policy, like every treasury sec/federal reserve chairman has done since forever. Kinda wild to define that as corruption, but to each their own.
Instead, why don't you look at how many people have lost uninsured deposits since the FDIC was created in 1933? You'll find its extremely low to nonexistent. Thats because while the FDIC has a 250k insurance limit, it does its absolute best to not use it- Usually by coordinating a bank sale or private-public rescue plan.
Finally! People calling it what it is. Corruption.
And the domestic angle isn’t even the worst. Breton-Woods put America in a sort of custodianship which they have betrayed. Raising and lowering rates to promote your domestic economy without even considering the global impact is fucked up if you promised the world that your currency can serve as a trusted foundation.
World order is still fluctuating all as a result of these betrayals.
>if you promised the world that your currency can serve as a trusted foundation.
How do people get this backwards?
The US didn't say, "use our currency as the global reserve currency!" Countries chose and continue to choose to use the USD for global commerce. No one is forcing them, the USD really is valuable.
>World order is still fluctuating all as a result of these betrayals.
So raising rates is a betrayal, but allowing inflation to eat away at savings of those with USD holdings is not betrayal?
And all the 'democracy spreading' in countries that considered selling resources for something else than dollars is just encouragement for other countries to make the right decission?
>Raising and lowering rates to promote your domestic economy without even considering the global impact
This is an honest question, that may be naive. But, what are institutions formed, founded, and ran inside of the US, overseeing the US government and policy, supposed to do instead of considering what is best for their own country?
Are you arguing that, because the world chose the US dollar as its de-facto global currency, that the US is obligated to consider the entire world first, instead of its own citizens?
Bretton-Woods is history. Since the Nixon Shock, the USD isn't the global reserve currency anymore. It's still influential, but only because of the giant domestic market in the USA and its status as the only global superpower.
These two things are related the other way round as well: to become a reserve currency, the using country must have a trade deficit. Else the rest of the world would not have enough liquidity to actually use the currency, and the market would grind to a halt. If no liquidity were available, any transaction would have to be secured with other assets. That asset would be the actual reserve currency then.
That's true, but it doesn't make it better in any way. Ideally reserve currency should not be the currency of any single country to avoid this situation where one country basically freeloads on the global economic development by printing paper and can even cause wave of global inflation by arbitrarily deciding to print waaay to much, too quickly.
You might argue that to keep printing this country needs to invest into aircraft carriers to keep everybody else in line and well behaved. But it's still a very profitable arrangement as the recent history of USA shows.
"The upside of MMT and 0% interest rates is that it allows a whole set of businesses to become viable. Businesses with a 1% yield are not viable with a high interest rate as it makes more sense to just buy bonds. People who can generate yield will thrive, since the expected market yield is zero. It's still a question whether this will benefit mainstream; or a bunch of tech companies that have a monopoly of tech and innovation. In this kinda world, tech and innovation are the only possible venues to generate yield, since money is widely available for anything else."
100% agreed. Government bonds are free money given to capital holders for doing absolutely nothing productive. It made sense when the government needed to raise revenue, but with fiat it’s just free money for nothing.
A decade ago I had lunch with a friend through kindergarten (our daughters were friends) he was a financial advisor and things were going good for him. I complained, as people who 'make' stuff often do, that finance was unbalancing everything and taking too big a share of profits (not to be annoying to him, just sharing a viewpoint) and he replied that the reason why finance was getting more of the share was because finance was where the innovation was nowadays.
He later got charges for corruption and there was a big investment scandal where some people who had done well with him before ended up loosing money later.
There is an observation that the real salaries stagnated since seventies for an average American because all the growth went into financial industries. Those rose in the last 50 years from few percents to close to a quarter of economy essentially resulting in a hidden tax paid by everyone to bankers.
I think that a healthy financial system does not need innovations beyond technological advances in operations and security. Anything else is happening at the expense of the economy at large. Banking (especially depository) should be boring as it used to be in the past.
essentially the point I was making. Although I think real salaries also stagnated because every household became a two-income household so people's household incomes rose hiding the fact that they were actually getting screwed over.
I fail to see how larger TV sets equates to huge increase in living standards.
Maybe we could measure living standards by looking at mental health statistics? Percent of population on prescription mind-altering drugs?
Do bigger houses, leading to greater social isolation, actually represent an increase in living standards? I get that bigger house == bigger house, but maybe the metric is flawed.
Even if the standards improved, it came not from the financial industry and probably despite of it. When banking is 25% of economy, it is a heavy tax on everyone. The industry produces nothing and beyond few percents of economy as it was historically it brings just burden if not the outright harm.
People in the 1950s used to buy much smaller houses. Owning a small (13 inch) black and white TV used to be a big deal. A computer costs millions of dollars (not accounting for inflation!) and filled large buildings. Women often didn't get a drivers licenses at all, and even they did there was only one family car so they needed to drive their husband into work if they wanted to use the car. Cars needed a lot of maintenance for things like the points, and they didn't really last long unless you rebuilt the engine which most people did. You had one phone in your house and it was a party line shared with your neighbors.
In the 1970s houses were already getting larger, but not to today's. Nearly everyone had one 19 inch color TV, but few two. Only a few weird people had a computer in the house, and it connected to the TV for a monitor, for the rest a computer took up large buildings but many people had a terminal to use it via some time sharing system. Most women had a drivers license, but families only had one car unless the woman worked outside the house (which was most by this time). Cars with advances like electronic ignition cars need much less maintenance, but if your car was about to reach 100,000 miles you gathered your best friends to go for a drive to see it at all zeros: you had to add oil before you left (in a cloud a blue smoke), rebuilding engines was still common, but not something most people did. You had a private phone in your house.
Today most new houses are the size of what would have been considered upper middle class in the 1950s. Today people consider it normal to have a TV in every room. Today everybody has a computer in their home. Most families have a car per driver, and those cars often last 300,000 miles (though many people don't keep them that long). Everybody has a phone/computer in their pocket, few have them in the house at all.
There are a lot more things I could point out that have advanced. If you were willing to live like 1950 or 1970 you could get by on a lot less money.
That family with one salary probably also only had one car. That car needed a tune-up regularly, and was lucky to make it to 100,000 miles.
They had a house, but it was a small house by current standards - maybe 1000 square feet.
They had one landline phone - no cell phones, and certainly no computers.
The breadwinner could retire at 65, but the median age of death was 68. They could afford medical care, but the medical care that was available didn't lengthen their lives to what we expect today.
So that's where it went - bigger houses, more cars, computers and cell phones, and better medical care. But if you're willing to live in a 1000 square foot house, only have one car, no computers or cell phones, and inadequate (by current standards) medical care, you can probably raise a family on one income still today.
> They had one landline phone - no cell phones, and certainly no computers.
I have no idea why those are mentioned. Do we somehow pay for development and manufacturing of those with exorbitant rents and mortgages?
When people talk about standard of living they talk about living, not various forms of entertainment brought on by sheer technological progress.
If you want to mention technology mention things like washing machines, dryers, dishwashers and fridges. Those contribute to standard of living. Not whether people figured out how to do astral projections or whatnot cheaply.
So many businesses have become financialized now. In the UK, John Lewis, which is/was an upmarket department store (and also owns Waitrose, a grocery store), is a mutual, owned by it's employees, but is now in the built-to-rent property market. Its literally burning the reputation and diversifying in to all kinds of gimmicks as it dies.
Sainsbury's, one of the biggest supermarket chains in the UK, has been in to lending (credit cards, loans) for decades now.
Does Sainsbury's lend directly or does it put its name on credit cards issued by (e.g.) MBNA like many other companies? I've never looked too much at what they're up to.
Not only that, it was in the paper the other day that the CEO of John Lewis wants to sell a chunk of the company to a private investor so it won't even be a full mutual any more.
That would have to be a 1% real yield on top on the massive XX% inflation the free money would cause! So XX + 1% would be the nominal yield to make it a viable business.
> Wrong. This is corruption. Janet is picking winners and losers. Some people are losing their deposits and some are not. You are systemic if you had dinner with Janet yesterday.
No no no, that's not how financial markets work. It's the stuff that happens after dinner over drinks that makes the difference
> This is a wrong characterization and makes it look like it's the Fed fault all along. Government bonds still have risks (ie: The government not paying) but more importantly, they are tightly linked to the main interest rate. Their prices can fluctuate significantly and do all the time.
The government controls interest rates, therefore the fact remains: it has in-fact been the feds fault all along. When you lower the cost of money (interest rates) so, so low, you send a signal to the market that says, "Hey, everyone -- invest, invest, invest!". That signal makes it look as if a lot of things are a good investment, thereby causing malinvestments all over the economy that eventually go bust.
> Wrong. This is corruption. Janet is picking winners and losers. Some people are losing their deposits and some are not. You are systemic if you had dinner with Janet yesterday.
When the government sets up a borrowing program and immediately shells out 300+ billion to banks, and when they bailout the 16th largest bank in the US to the tune of 100+ billion, Janet is certainly picking winners and losers, but at that scale, I think an argument could be made that fiscal policy is loosening, just like it was loosening when Bush and Obama handed out their bailouts.
> I honestly was thinking we will stay in this zero-rate regime for the next decade or more.
=^\
Until when? Until there were only billionaires left and all the poors died off? This is delusional thinking and it was the same thoughts the banks and the Fed had which is really why we are in this situation.
Its hard to overstate how true your point is re-bankers responsibility.
The very basic thing you learn when studying banking is durations and how your primary job is balancing that for your debts and assets.
Bankers also have various tools to short circuit any issues, inclusing raising rates on deposits, getting wholesale funding, matching various duration bonds, etc.
Also, while historical data is not an indicator of future data, the average long term interest rates in the US have always been higher than what it was in the past decade.
Yes, hindsight might be 2020, and this applies to even my comments. But we literally are paying these bankers exorbitant sums to know these and do better than the average Joe
Except that interest rates aren’t the market. They are controlled by the Fed who decides. The Fed was guiding for no raises in interest rates up until they decided to start jacking them at the fastest rate in decades.
This would not have been an issue if the Fed raised rates gradually over years and kept the bonds more or less even because of time value. But they panicked and very possibly because they have been politicized. They should have started raising rates in 2021 but with the election and the Fed seat up for appointment they sat on their hands.
There’s blame to spread around but there’s a reason 100s of banks are in this situation right now. They were all following the Feds regulations and guidance. And now they’re holding all these lousy bonds and the deposits that back them want to be moved into high interest accounts now. Whoops.
Had they guided for this then banks would have went shorter term.
The Fed controls one[1] specific, very short term interest rate. The other rates are determined by the market, though they do take the Fed rate into account.
[1] Normally. Sometimes the Fed does something like Operation Twist or QE or something, where they intervene in the markets of other rates. But that is not the normal way this works.
Fed open market operations are entirely to adjust the market conditions regarding rates to what they want them to be. The Fed is participating in these transactions to the tune of trillions of dollars
> This is a wrong characterization and makes it look like it's the Fed fault all along.
Rates were far too low for far too long. Why was the Fed still aggressively expanding their balance sheet into 2022 when inflation was obviously happening?
This is a problem created by monetary theory academics with access to too powerful of tools. If you have it, you're going to use it.
Imagine if we gave generals the same kind of unrestricted access to weapons and allowed them to wage war at will with no oversight. That is the Fed.
The characterization might be incomplete, but it's wrong to say it's wrong.
The key being, SVB, etc are symptoms. And while we should certain chat about it the focus should be on The Fed. Again. Just like it played a key role circa 2007/2008.
Given The Fed's mandate, how is it once again missing the mark? And where has Congress been? They're mandated with overseeing The Fed, yes?
Yet we're led to believe this is a banking problem? With little of no legitimate dicussion of foundational problems?
I thought we would be trapped at near zero interest rates for even longer, possibly forever, and that the future was in general like Japan. I’m a bit surprised.
Of course I could still be right. These higher interest rates could be a blip.
You /can/ manage short term liability mismatch against long term assets in one sense but it's actually useless when you think about why you have long term assets at all.
Just like you can manage the risk by selling your long term assets and buy short term to make the mismatch not exist.
The cost of managing using swaps will be about the same as selling your long term assets and buying t-bills. If it isn't, you hit it as hard as you can knowing it won't last and it's free money.
Take on /less/ long term assets (sell them and buy t-bills) to remove the existential risk.
It's not going to be much different in cost. You see it? Derivatives aren't magic pixie-dust insurance. They will cost about the same as a rebalance on that scale or you hit them as hard as you can because they're mispriced and represent free money.
I understand your point, and your first sentence is the point I (and probably others) are making too: they either take on less long term assets, or bar that, have to hedge them properly (which is equivalent to taking less assets). The hedge was meant to be done at the same time of taking such a massive risk.
Ok so you take deposits, which are a short term liability and you've got cash money you have to do something with.
1) Buy loads of long term debt and some swaps.
2) Buy less long term debt than that and t-bills.
These two options are exactly equivalent from a financial perspective. Same risk, same reward, quite similar costs.
If instead you've bought loads of long term debt and not hedged, why did you do that? This is the nub of the thing. Why? Because you couldn't make it pay otherwise with the given market conditions? So you took a punt on inflation and the official rate staying low? Could you have done that differently? Should you have? What were the implications for your business if you didn't take a massive bet on interest rates?
Swaps are entirely beside the point here. Swaps here are just "hey let's not actually make the bet we just went out of our way to make." It's likely going to cost you a little more than not exposing yourself to that risk in the first place. It's like betting on both teams in the superbowl. The house takes a cut.
"Should have hedged with swaps" misses: "why did they have an exposure of that size at all?" Recklessness? Idiocy? Should they be prosecuted for extreme negligence? Were they between a rock and a hard place and took a fairly desperate measure? (Which I'm also not excusing either fwiw).
> 4. The old treasuries decline 30-40% in present value. Oops, they're not so safe after all if you need your money back before maturity, which is often decades away.
This is because they fucked up their duration risk handling, no one held a gun to SVBs head and forced them to invest so heavily in long duration bonds. If they bought more short duration bonds none of this would be a problem. Other banks didn’t make this mistake. So why did they do it? Greed, or who knows, maybe it was plain old ignorance/hubris. Still, it was 100% avoidable. SVB fucked up bad and pointing blame at the fed is just not making them accountable.
Like fuck, who are these dumb chimps running this place. When I help my parents plan their retirement I looked at 100 years of history of what normal fluctuations are in the bond or stock market. Looking up data like that takes an hour and should make anyone with basic math skills realize rate and the bond fluctuations that follow at 100% bound to happen given enough time. It was just absolute amateur hour at SVB.
Maybe, but the latest Fed action violates a 40-year downtrend in interest rates, so it was exceptionally improbable from a historical perspective. From 2020 trough to 2022 peak, government interest rates increased almost 1,000%, which means the magnitude also is hard to anticipate or plan for, and the effects extreme from failing to do so. You can do a regression of interest rates from whenever to now, draw a line that's never violated until 2022 (even the 2020 lows were in-trend) and the 2022 highs were almost 50% higher than the trend.
I don't make excuses for dumb decisions, but... someone said recently when the Fed taps the brakes someone always goes through the windshield. This was a far more extreme scenario than tapping the brakes on a car. More like the moon stopped. We all knew it could theoretically, and what do you know, it just stopped.
> Maybe, but the latest Fed action violates a 40-year downtrend in interest rates, so it was exceptionally improbable from a historical perspective.
imo this is very flawed thinking, a once in a 40 year event is almost 100% likely to happen in an average persons life — maybe twice. I think when it comes to either your life savings or gigantic amounts of money like banks manage it’s irresponsible to not consider economic cycles that even only happen once per 100 years because of how likely it is to happen once is your life and be absolutely devastating.
I stand by my statement, this is 100% on SVBs amateur hour monkey level thinking.
I'm not disagreeing that SVB was wrong, but it's easy for us arm-chair folks to second-guess the wisdom of creating a business model that was doomed in a once-in-40-year-catastrophe. But, "Silicon Valley" was in the name and 40 years was a long time ago, so why not.
Risk management is not that difficult. Interest Rate exposure is a first order risk that even juniors should be able hedge out properly - it's not some exotic event where correlations went out of whack or something. These guys were either clueless / had no visibility into their balance sheet or outright criminal.
I'm a child of a bookkeeper with no econ training under my belt and I know about interest rate exposure and risk hedging. And there have been discussions since 2008 about how long QE and low interest rates could last, it's not like that was a new question.
>World order is still fluctuating all as a result of these betrayals.
It seems a pretty basic assumption that someone at SVB did a WHAT IF analysis to game out different scenarios if interest rates started rising. This is not rocket science.
>You can do a regression of interest rates from whenever to now, draw a line that's never violated until 2022 (even the 2020 lows were in-trend) and the 2022 highs were almost 50% higher than the trend
Well, if your bank is relying on analysis like this, it deserved to fail.
Here's how easy this situation was:
"Historically, would 5% interest rates be seen as crazy? What happens to our balance sheet if we see those rates?"
Well 0.1 -> 1.0 is a 900% increase, want to 1.0 -> 4.0 is "just" 300% so I'm not sure if this is a very good way to measures increases in interest rates...
> regression of interest rates from whenever to now, draw a line that's never violated until
I don't think anyone in such position would do a simple regression to guess interests.
In 2020 and 2021, we already had tons of talk of upcoming inflation due to the stimulus pacjages. I myself took some precautions, and I am really not at all savvy.
The management team of a major bank would certainly be aware of the risk of inflation given the massive uptick in money supply and that the fed would be forced to raise interests as soon as the inflation manifests.
I think incompetence is an easier explanation. Years of ZIRP bubbled incompetent or lazy people to the top.
It really didn't take a finance expert to appreciate that when interest rates ranged from less than 1% short term to barely 2% at 10 years, interest rates could only go up, 40 year trend or not. And being invested long, for very little gain, was extremely dangerous should rates go up. It has been clear since the 2008 crash that longer bonds had far more downside than upside when rates were so close to zero, so why take the risk?
Does the government require banks to buy long-term treasuries? [1]
Or did banks choose to buy long-term treasury bills, chasing the highest paper returns (i.e. discounting the risk of potential rising interest rates in the future)?
It's not a rhetorical question, but a sincere one.
Imagine you run a small regional bank. You have marketing and operational expenses you need to cover, and you also need to be attractive enough to depositors to keep them from leaving to your giant to big to fail competitors who have explicit state backing. You’re required to buy from a very limited selection of assets that have government approval, especially government debt.
Interest rates for short term debt are at 0%, at these rates you will run at a loss. Your only choice to keep your bank competitive is to find any yield at all, so you buy long duration treasuries. Yes you take interest rate risk, but your bank is able to operate for another day.
Of course the flaw in this story is that the interest rate risk should have been hedged, and it wasn’t. But viewing this as a straightforward story of “banks greedy, government good” is not reflecting the realities for regional banks.
> Interest rates for short term debt are at 0%, at these rates you will run at a loss. Your only choice to keep your bank competitive is to find any yield at all […] Of course the flaw in this story is that the interest rate risk should have been hedged, and it wasn’t.
If you buy long-term Treasuries for the high yield and you hedge the interest risk rate… what you get is the yield of the short-term Treasuries. Why buy them in the first place then? (There is no credit risk in this case - if you neutralize the interest rate risk there is nothing left.)
> Of course the flaw in this story is that the interest rate risk should have been hedged, and it wasn’t.
How does the banking sector in aggregate hedge its interest rate risk exactly? They have to find a net counterparty outside the sector who wants exposure to interest rate risk. Who exactly would that be at sufficient scale to protect trillions in deposits?
It’s probably easier to think of who wants long duration risk, and I think the answer is 1. Speculators (who like the volatility/convexity) 2. Pension funds (they have very long dated liabilities, and so potentially want to increase the duration of their portfolio)
>Of course the flaw in this story is that the interest rate risk should have been hedged, and it wasn’t.
Oh, so the thing that could have prevented the bank from failing (but, unsurprisingly, costs them money to do), didn't happen? But it's the governments fault?
> Does the government require banks to buy long-term treasuries?
Yes, there are a number of banks that have "Primary Dealer" [1] status which confers to them some benefits, but also makes them legally obligated to make some minimum number of winning bids on government treasury auctions. See the section under "Expectations & Requirements" in the link. Probably the most quantifiable requirement is they have to maintain a minimum of 0.25% market share in winning Treasury bids: "Maintain a share of Treasury market making activity of at least 0.25 percent."
The answer to the parents question is no. While most of the primary dealers are banks these days, they have nothing to do with the conversation at hand, or SVB and it’s problems
There are a number of banks that are Primary Dealers, but it's a fairly small list. SVB wasn't on it. So SVB, in particular, was not required to buy long-term treasuries.
Your analysis is missing this critical piece: duration risk.
The government requires banks to buy bonds/treasuries, but gives the banks full leeway as to whether they buy short-term, mid-term, or long-term bonds/treasuries.
In a low rate environment, long-term bonds have a higher yield but also suffer from interest rate risk (a risk caused by their long duration).
Even an untrained amateur wealth manager knows to stagger the durations of the bonds you hold, ESPECIALLY if you have any reasons you might need to sell those bonds on the secondary market before maturity. Risk managers and investors working in the finance/risk department of a top-20 bank, managing billions in deposits, should especially know this.
Some banks were simply greedy, lazy, or both (SVB).
It's econ/finance 101 that when interest rates rise, bond values go down. They could have held a much larger percentage of short-term bonds/treasuries, and they would have been fine.
I think the big lesson is that the banking industry isn't nearly as smart and self-regulating as many people think it is. Bank finance departments either chase yield, when they can (2021), or they manufacture it, when they can't (2007-2008).
Exactly. I was speaking with my attorney about this the other day because he also advises numerous banks. He explained to me that balancing short and long term investments to handle withdrawals is a basic aspect of modern banking, and SVB should not be viewed as a signal of a more widespread bank collapse.
I buy this outline but honest question, was the massive covid stimulus avoidable? I rode a bicycle around NYC during the early days of covid and it was a ghost town, like not a person on the streets in a city of 8 million. On the weekend I took a ride up state for a hike and virtually every business was closed on the way. It seemed inevitable at that point the economic consequences of this were going to be massive and I am kind of amazed it took this long. It feels easy to say these steps got us in this mess but I am wondering what the alternative was?
When an economy stops producing services and goods, somebody is going to need to reduce their consumption of said goods eventually. The question is just, who that is. Another poster above mentioned three ways a government can balance their budget: spending less, raising more, decreasing real value of debt by inflation. Each of those has a target "audience", which suffers the most when pulling that lever.
For inflation (if not combined with compulsory loans), it's the middle class.
The trouble is that a large chunk of the media has basically lied about this and told people that no, they'd be able to consume just as much as before if it wasn't for the evil profiteering corporations and the mega-rich stealing from them. They've done things like point to the increase in wealth of the super-rich "during the pandemic" to prove that ordinary people have become poorer because the money they deserve was "siphoned off" (never mind the fact that wealth does not represent services and goods that are available to buy and their measurements conveniently start at the bottom of the pandemic-induced drop in share prices) or run breathless headlines about how profits at grocery stores have doubled and this proves profiteering is responsible for price increases when the profit margins of those companies goes from 1% to 2%.
Fact remains that wealth inequality has increased enormously over the last decades. This is a big economic issue that deserves journalistic coverage.
If you don't want to frame it in terms of "evil" or "profiteering" that's fine.
But this issue is important. The expected consequence of inequality is reduced economic output (in terms of utility).
It leads to inefficiency.
I feel this is a perspective that's not stressed enough.
Growing inequality without growing GDP means you became poorer.
Even if we assuming they magically appeared and you did not become poorer: will never own an asset in your life, they can price you own of a house, land, shares, etc.
> Growing inequality without growing GDP means you became poorer.
For example: Bill Gates comes along with Microsoft, and sells Windows to businesses worldwide, who all benefit. Why is GDP not growing? And even if it magically doesn't grow, how has that made me poorer?
Why are you conflating growth in inequality during the pandemic with entrepreneurship?
Did GDP grow during the pandemic? Did dozens of Bill Gates's spawn?
How did you even get the idea that Bill gates has increaeed inequality? Thousands of people were able to get a well paid job or start a business, inequality probably decreased on average.
The ideal market maximizes utility production because economic actors expose their utility gain by pricing commodities. The assumption is that price and utility are similar.
But when there is wealth inequality this assumption breaks down. A person with large wealth can offer higher prices for less utility compared to a less wealthy individual.
This biases markets to satisfy wealthy individuals, overall reducing total utility production.
This is too simple, and misleading, as it leaves out tiered pricing.
A slightly better seat on an airplane is 10x the price of economy seats. Without those seats, economy seats would cost much more each.
A slightly better car spec is 2x the price of the base model. Without the better spec model, the base model would cost much more.
Additionally, just the development of new technology is often for the wealthy first, as it's prohibitively expensive, and then as manufacturing techniques work out the tech filters to a large group of people. E.g. Tesla cars; computers; pretty much everything, really.
Is your point that wealthy people subsidize air travel by paying relatively more for the space on the plane?
That's a perfect example of when inequality biases a market to produce suboptimal outcomes.
Why?
Because if people wouldn't be willing to spend to pay the cost of an airplane ticket in perfect market conditions, then them not buying a ticket is the optimal allocation of resources.
If they then buy a ticket in current market conditions, that's an example of a suboptimal allocation of resources.
> Because if people wouldn't be willing to spend to pay the cost of an airplane ticket in perfect market conditions, then them not buying a ticket is the optimal allocation of resources.
Sorry, you've lost me. How do you define perfect market conditions?
It requires a bunch of idealizing conditions that never holds in practice.
But it's still useful to study what effects deviations from perfect competition has on efficiency.
Think about it like this: subsidies lets you buy something you don't actually want, that's inefficient.
For subsidies to make sense, they need to compensate some other deviation from perfect competition. For example, it can make sense to subsidize green energy because fossile fuels has external costs not accounted for by the market.
But the fact that a rich individual is willing to pay your air ticket is not a good reason to subsidize something.
An intuitive example:
A rich guy enters a bar and yells "free ice cream for everyone!". That's nice. But if the same cash were distributed among the guests, some would've gotten beers and some wine. But when faced with the choice "pay for beer or get free ice cream" everyone choose ice cream despite that being a suboptimal allocation of resources.
Thanks for elaborating. It seems now I don't understand your definition of efficiency. People choosing free ice cream over costly beer doesn't strike me as a loss of efficiency.
Ah! I understand. I agree that if you do that once, it works one time. But as soon as you take the money they all gave to the bartender and redistribute it, to maximise happiness, and they all buy more beer, you might start to spot where this falls down as a useful model, mightn't you?
I haven't said anything about redistributing wealth.
The point is not that redistribution is a good idea. The point is that wealth inequality makes the economy less efficient, and that it is something we should take into consideration.
Redistributing wealth might also make the economy less efficient, that's an argument that can be made.
From where I stand, it seems the inefficiency caused by wealth inequality is too rarely discussed relative to its harmful impact.
The problems caused by redistribution/taxes etc. are otoh extremely often raised.
But I do think your argument of efficiency is not persuasive, as the definition of utility relies on people making choices they never regret, or that don't harm their total lifetime utility.
E.g. some people might want to take that money and save it, and if you come back to the situation in a year's time they now have more money than the people that bought beer. Now there's wealth inequality and they can buy something the others can't. Viewing the original situation in microcosm makes buying beer the "efficient" thing to do, but it also makes the second scenario less "efficient".
> The trouble is that a large chunk of the media has basically lied about this and told people that no, they'd be able to consume just as much as before if it wasn't for the evil profiteering corporations and the mega-rich stealing from them
Not a lie at all, corporate profits are the largest driving factor behind inflation over the past couple of years:
Corporations are always greedy and always trying to maximize the amount of money they can get for their goods and services. This has been true since forever.
Corporations raising prices is a response to inflation, not the cause of it.
When the levy breaks and the town floods, don't blame the river for being a river. Blame the engineers that built the levy.
> Corporations raising prices is a response to inflation, not the cause of it.
Sorry, that's wrong. Corporations are taking advantage of the perception of supply chain disruptions to excuse price gouging. Supply chain shortages led to a 1-2% bump in inflation pushing it to 3-4%. Corporations then bumped prices 3-4% which raised inflation even more, pushing it to 7-9%.
If corporations were raising prices in response to increases in costs, their profits would remain flat or only slightly increase. That's not what the data shows.
What you are describing are the real physical consequences of a global pandemic.
What is QE? How can financial stimulus limit the physical consequences of businesses closing?
QE can only redistribute wealth. This is an axiom. If we are lucky/played our cards well, this redistribution results in a more efficient economy overall. For example, because it alleviates overly risk adverse behavior by market actors.
However, QE also reduces market efficiency by polluting the price signal. For example, by increasing wealth inequality.
I feel this is a common misunderstanding. QE is treated like some magic wand to improve economic measures such as stock market valuations and profits.
When the fed/gov uses tools like quantitative easing it should be obligatory for journalists to ask: "Why do you think this redistribution of wealth results in net positive impact on the economy?".
Probably not. The size of the QE has been too big, and more mistakes have been made but that's only natural. What annoys me is the fact that the CB's feel the need to keep lying about this. The whole sticking "transitory" story, while no one in their right mind thought the inflation was transitory (at least for a short period) is the best example but there are many more.
You simply can't shut down the economy for months without having a recession.
Put a shield around the most vulnerable and their carers, until there was a vaccine for them and leave everyone else, especially the young, to continue their lives as normal.
There'd be no practical way to shield the vulnerable or the carers and beyond that if it's left to run rampant in the wider population eventually the medical system is overwhelmed and collapses.
> The shielding system was an official policy in the UK
Yeah, it still didn't and doesn't work though. Carers will have families, they'll have children in school, they'll potentially have more than one job. You can't shield the "carers" so you can't shield the vulnerable outside of a wider scale lockdown. Lockdown was the only thing that stopped case numbers going up till the vaccine came along.
> The risk of hospitalisation was low around the 30s and younger.
The average age in the UK is 40. So pretty much half the population would need to completely isolate from the other half while the younger half lived their lives as normal.
The age of 40 is interesting - is it from the Economist's model[0]? I don't know how accurate it is, but I would say comorbidities look a lot more serious than a general age-based approach.
People always point to "comorbidities" but many of the comorbidities in covid's case were things like "being overweight", you know, most of the population?
Most wealthy countries are getting fat, and non wealthy countries have tons of other fun things that are common but would be considered "comorbidities" like parasites, or asthma (including pollution induced asthma)
> Lockdown was the only thing that stopped case numbers going up till the vaccine came along.
Really? The graphs I have seen show cases declining even before lockdowns were imposed.
> The average age in the UK is 40. So pretty much half the population would need to completely isolate from the other half while the younger half lived their lives as normal.
The advice would have been the same, work from homes where possible. There was already the concept of "bubbles".
> Really? The graphs I have seen show cases declining even before lockdowns were imposed.
Likely because people were voluntarily locking down.
Unless you deal with schools, there are no "bubbles" or not ones that really work. Do you send teachers into schools who are in the vulnerable group? Or do you close the schools? If you close the schools you may as well do a full lockdown because so many people will have to be at home to look after their children.
The idea you can lockdown half the population by age just doesn't work because society doesn't separate itself out neatly by age.
It's approximately what Sweden did. By most accounts, it worked better than what it's neighbors did (which more closely resembles what most states in the US did).
Peasants have unemployment insurance. If government is supposed to pay something on top of it, why do we even have unemployment benefits to begin with?
Your view of the story is completely flawed.
Your first point is false. There is no regulation that forces banks to buy long term government bonds. There is some regulation that forces them to have a certain percentage of capital tier 1 to safeguard themselves from bank runs, but it was repealed in 2018 by trump for “regional” banks and SVB CEO lobbied strongly for it for years and was ecstatic when it finally happened: https://www.theguardian.com/business/2023/mar/11/silicon-val... .
> 2. The government decides that, oops, it printed too much money in 2020/21 and is causing inflation, so it raises rates very quickly.
Printing money doesn’t cause inflation necessarily. Your thinking is based on Monetarism, which has been debunked a while ago.
In essence, it’s not about the amount of money that is created. It's about the amount of goods we try to consume in relation to the amount of goods produced.
You can only say that once you accept inflation to mean "a single number representing price increases", which is so over-simplified as to be laughable. Not to mention easily manipulated by statistical tricks and more obvious tricks like weighing for "feature increase" or using country-wide medians and not weighing those for population distribution.
If you look at real estate prices vs CPI since MMT really began, real estate grew much faster than CPI, in some cities over twice as fast. That is a direct result of all the excess money that wasn't needed for productive endeavours finding a "safe" place to be parked. Similarly having bonds yield below even the cooked inflation number forces safe traditional investors like pension funds to chase stock market returns which was a large contributor to the gigantic bubble that is now popping.
Redefining inflation to mean consumer price increase was a very sneaky move to be sure. A hundred years ago your statement would have been read as "inflation doesn't cause inflation" since it meant any expansion of the money supply.
The ill-defined nature of inflation is an extremely important and often overlooked fact.
Another interesting problem with the concept of inflation:
Thirty years ago, what would've been the "consumer price" of a modern smartphone? Millions, easily.
Same goes for many other technologies that have fallen in price rapidly. (Big screen TVs, speakers, computers, anything with a screen, a CPU or a wireless communication chip really.)
By comparing median total living costs to reflect what's typical. A cell phone and computer are indispensable today, a land line not so much, for instance.
> If you look at real estate prices vs CPI since MMT really began, real estate grew much faster than CPI, in some cities over twice as fast. That is a direct result of all the excess money that wasn't needed for productive endeavours finding a "safe" place to be parked.
Seems like a post hoc ergo proctor hoc fallacy. There are plenty of safe investments that could also be productive, that doesn't say anything about why real estate specifically.
I don't know, but I do strongly believe that the "conventional wisdom" that deflation is a horrible phenomenon that leads to a decades-long depression is bullshit. The entire process of industrialization was hugely deflationary Yet still the 1800s were the first time in history where quality of life for the average Joe improved by leaps and bounds. Diet, medicine, child mortality, wealth all started improving exponentially.
Meanwhile under the monetary alchemists and "stabilizing" regime of central banks real wages have stagnated, crises still occur every 10 years and the entire system is so fragile that one major event could collapse the whole house of cards.
>The entire process of industrialization was hugely deflationary
Prices definitely lowered, but the difference being that while there was also supplier upheaval as artisan/bespoke producers were replaced by mass production - the industrialists were enormously and sustainably profitable and could in turn employ those displaced from the failed producers.
Aggregate demand arguably increased with the move of labour from rural agriculture to urban manufacturing.
A deflationary cycle annihilates demand by definition and fixed costs then eat producers alive - leading to wealth destruction, unemployment, debt writeoffs and credit tightening. Which in turn leads to more demand annihilation.
There's a pretty excellent and rather indie board game called "Wealth of Nations". If you squint, it's a bit like what you wish Catan was, after you've played Catan for awhile.
Players make resources, then re-invest those resources to expand. There's markets to buy and sell resources, and otherwise money isn't part of the game... until someone makes banks, and starts printing money. At which point everyone watches the prices of everything go up.
The same way you prebunk things in our modern world.
If the information does not fit the narrative, the information must be fake...
How else will we ensure the safety of our elections and democracy? Don't you know democracy dies in the dark? Don't you know that this is extremely dangerous for our democracy?
Edit: BTW, nothing against what you said, economics seems very similar to the Agile cult to me at this point.
As in any other scientific field: you put forward a theory and if there is enough evidence that does not fit the theory it’s debunked.
In economics, "enough" is hard to assess though.
Also, a theory may linger around for a while because it suits the agenda of some people. And I guess many more methodical issues like these.
Exactly. It can also easily be seen via stock indices, the likes of S&P 500 and similar. The general curve is "exponentially upwards", which implies that someone somewhere must make money available in the very same fashion. Now, looking at fiat money I think it is clear how that comes to be, but that also means that all this fake money -- technically massive amounts of debt piled on debt, plus interest on all of it -- is aplenty.
As you wrote, it was the hickups in the actual economy which caused the price hike, and with all that "money" available it was also clear that this inflation wouldn't go down anytime soon as so called "experts" were talking about initially. In fact, it is a wonderful dumping ground for all this junk in the stock market, although by now it is more of a trickle in relation to the amounts piled up there ...
Printing money causing inflation has got to be one of the simplest things in economics to understand. Increase supply of thing, thing becomes worth less. And what's your source on Monetarism being debunked, the people printing currency?
It's pretty strange how, when all the money was being printed, it wasn't that hard to find a plethora of economists warning that it would cause inflation (due to Monetarism principles) and then, now that inflation is rampant, that's not seen as evidence to the theory. Furthermore, change the interest rates to curb inflation is exactly in-line with that theory because higher interest rates cause people to take their inflated currency out of circulation and into savings.
> Increase supply of thing, thing becomes worth less.
So as the supply chain continues to improve, prices should come down?
Inflation is too much money, chasing too few goods. It's the push/pull between money supply and goods in the market that drives inflation. Money can't be talked about in a vacuum.
> Printing money causing inflation has got to be one of the simplest things in economics to understand. Increase supply of thing, thing becomes worth less.
One more easy things in economics to understand is that your second sentence is only true if demand is assumed to be constant.
>The government requires banks buy their debt and hold it as reserves because it's considered the safest investment.
They don't require it, it is the safest investment. What do you consider a safer investment?
>Oops, they're not so safe after all if you need your money back before maturity,
Golly, it's almost like banks are supposed to know how this stuff works.
It's funny that you relate "safe" to "never changes price". The bonds were safe and are safe, which is why the "bailout" is an okay deal (ethics aside); the government will pay your money back.
>SVB is certainly not blameless here
Who on this planet would consider them blameless? They are 95% of the blame of their own situation.
I'm dubious that the "Fed's money printer" had much of an effect on inflation. It certainly didn't cause the SVB or other banks to go under. The rate increases did that... in this case.
I don't think the particular path matters much. People tend to moralize banking, and post failure we tend to hunt for moral culprits. But... the historical fact is that banks fail sometimes, under all possible regulatory and commercial regimes. We have hundreds of years worth of evidence.
Banks have failure scenarios. The concept of a bank which takes deposits and invests them while maintaining 0% risk to depositors does not, and has never existed. We need to decide if money in the bank proverbial gold, or is it more like shares in a company? We just can't have both.
> I'm dubious that the "Fed's money printer" had much of an effect on inflation. It certainly didn't cause the SVB or other banks to go under. The rate increases did that..
The rate increases were an attempt to combat the inflation caused by the massive increase in money supply during the pandemic due to the government stimulus. There were no new goods or services justifying all the stimulated activity. SVB was drunk on the seemingly permanent zero interest rates (like everyone else) and invested in long term government bonds. Then the unthinkable happens—rate increases for the first time in over a decade, and those investments go boom. This is all about people getting used to cheap money.
> I'm dubious that the "Fed's money printer" had much of an effect on inflation
In all of modern history around the world when has printing more money not resulted in inflation. Let's look at Zimbabwe and other countries that went nuts printing money.
Yeah, it's kind of infuriating, and even more infuriating is the fact that at the first sign of trouble they are gonna turn the printer back on. The alternative is a major recession, which obviously sucks, but sometimes forest fires are necessary to make way for new growth. Without the necessary pain of a recession, our economy is doomed to continue in this bizarre state of zombie companies, asset bubbles, and scams.
I'm getting tired of the "those Treasury bonds they bought are completely safe, if they just wait 10+ years until maturity, they will get 100% of their principal back" narrative. There are MANY different types of risk. Credit risk is but one type, and that narrative tries to convince people that it is the ONLY type of risk. In this example, you have both interest rate risk (price of an existing bond moves inversely to interest rates) and maturity risk (long term assets funded by short term liabilities). Risk can be hedged, and it is prudent to do so, but hedging costs money which eats into profit, so in the case of SVB they made a conscious decision to abandon most of their hedges a year or so ago. I suspect that over the course of the next year we'll see more cracks emerge in the financial system, additional financial institutions fail, and a new narrative that will have to be created.
> in the case of SVB they made a conscious decision to abandon most of their hedges a year or so ago.
Just as everyone started talking about inflation coming back? Just as it began showing up in the actual data? That's when they deliberately decided to stop hedging? That's insane. "Deserves to lose" is the only non-profane way I know of expressing how incredibly unwise that decision was.
And maybe how immoral. They may have made that decision then because everyone could see inflation coming, and therefore the price of hedging the risk went up. If so, they threw away the bank (and the stockholders' money) for one year's increased profit. Madness.
Here [1] is a graph of inflation. We've had increasingly accelerating inflation, especially since 1971 [2]. That's the end of Bretton Woods, or the date that the USD became completely unbacked by anything - enabling the freedom to arbitrarily "print" money.
In more recent times, even more rapidly accelerating inflation began in July 2020, shortly following the $2.2 trillion CARES act from late March 2020. The "transitory inflation" narrative would begin in early 2021. The war in Ukraine began in February 2022, and doesn't even register as a visible data point in terms of rate change.
Yip! You need to keep in mind it's a compound interest type problem, because you're speaking of change relative to a new change. Look at it in terms of raw data with fixed time frames to make it more clear. Here are the data from January of each year, alongside their relative change to the initial date:
1952 - 26
1972 - 41 (+58%)
1992 - 138 (+430%)
2012 - 227 (+773%)
2023 - 300 (+1053%) in 11 years
Now imagine we kept at the same relative rate of change from 1952:
1952 - 26
1972 - 41 (+58%)
1992 - 65 (+150%)
2012 - 103 (+294%)
2023 - 132 (+407%)
Your dollars being worth ~2.5x less than they would have been otherwise is huge, and largely explains nearly every graph from https://wtfhappenedin1971.com/ . This also ignores the fact that CPI does not accurately reflect change in costs of things like education, healthcare, and housing which have all inflated in cost far beyond the rate of nominal CPI. And all having the same common denominator of dramatic increases in government $ involvement, which has largely been enabled by the end of Bretton Woods.
I'd also add here that another child comment is completely correct. Inflation had already been increasing at an unacceptable rate prior to 1971, largely due to reckless spending. And that was a major reason we withdrew from Bretton Woods. But it was completely myopic. Instead of solving the problem, we simply gave ourselves room to make it even worse, which we promptly proceeded to do - much much worse. So now instead of solving a relatively small problem in 1971, we strapped a bandaid on it and gave a later generation an exponentially larger problem to solve. The point of this is that the delta from 1952-1972 is already far higher than it "should" have been. The "to the moon" rates from there are simply completely unsustainable.
Yes and now look at indicators that aren't susceptible to manipulation by a government agency and are more favoured assets by the institutions who get the money first. That would be real estate in major markets, stock market price/earnings, luxury goods. Those increased by a substantially larger margin.
>Here [1] is a graph of inflation. We've had increasingly accelerating inflation, especially since 1971 [2]. That's the end of Bretton Woods, or the date that the USD became completely unbacked by anything - enabling the freedom to arbitrarily "print" money.
You have it backwards. Ending Bretton Woods didn't cause inflation. Inflation caused the end of Bretton Woods. If you zoom into the period before 1971, you still see plenty of inflation. If the government wants to stop its deficit that forces it to "print money", it needs to stop its deficit. Forcing the government to give a fixed quantity of a shiny yellow metal in exchange for a green piece of paper isn't going to help with that. All that does is ensure that the government will instantly give up all of its shiny yellow metals.
Lots point to Covid-19 ppp and spending to be the cause of inflation. When the majority is supply chain and corporate opportunist. Great interview with Jon Stewart ad fed chair here: https://youtu.be/tU3rGFyN5uQ
This is false. Just look at amount of money pumped, it is easy to see the skyrocketing line in graphs. It is not the only but the main reason of inflation.
Inflation started going up before Covid and the war in Ukraine.
Saying “the central bank printed money for years without inflation” as proof it’s not the cause is like saying a gas leak didnt cause the explosion because it’s been leaking for years.
@nostromo -- you are exactly correct.
The US Fed govnt policies caused inflation, now trying to cool it down through raising interest rates on govn bonds. So investors that were buying commericial bonds, now go and buy govnt bonds.
Then, the commercial bonds (for good sound companies), loose values. Then commercial bonds investors loose their investment...
So the loose-loose sitation were are looking at:
a) continue printing money out of thin air -- raising inflation and indebting the generation of kids who do not even vote yet
b) get the current economy go into depression.
It seems like the current generation, with their choices of leadership and the habits is responsible -- so ( b ) has to be chosen (to be fair).
But since we do not live in the world where accountability is a thing --
( a ) will be selected.
The argument with the kids is really bullshit. I‘ve heard it again and again in different contexts. As if anyone could know how the short term economy will affect the kids. As if the kids would only start living in their 30s and the experience of poverty in childhood would be nothing. As if the economy would be a fixed thing that could be predicted for a few decades in advance.
SVB leveraged cozy relationships to attract business than they could handle. They ignored compliance and normal banking risks. They left their C level risk management position open and we’re not transparent about their fiscal health.
Rate risk is a key feature to buying any bond, and it’s a risk that is manageable if management isn’t asleep at the switch. Nobody forced SVB to buy long duration bonds. Any investor with a moderate level of expertise understands that, and you’d have to be pretty green to not expect rate increases from the all time lows.
Blaming the government is a cop out. The job of finance professionals is to manage the assets in their custody responsibly.
> Blaming the government is a cop out. The job of finance professionals is to manage the assets in their custody responsibly.
Somehow I feel that blaming the government is much more than a cop-out; it's a calculated position that enables the big players to continue privatizing the wins and socializing the losses. "Of course we are getting a bailout", the narrative goes, "cause it was the big government's fault all along!"
Of course. Outside of academia and some law schools, there’s no real conservatives. These guys will cry and whine for bailouts, cash the check and start crying and whining about government meddling.
there is credit risk (risk of default) and for this risk, treasuries are still considered safest.
then, there is duration risk (risk of interest rates increasing) - and this risk has always been there.
Bankers know about these risks, it is just they were greedy and decided to go for the highest yielding MBS, instead of short-term securities. => and obviously banks suffered consequences.
for bankers this is Banking 101
One can argue that what is going on right now is market forces punishing the most greedy bankers (SVB, Debit suisse, etc)
> it printed too much money in 2020/21 and is causing inflation, so it raises rates very quickly.
It printed too much money in 2008 and the following years. It raises rates very quickly now, because each time Fed tried to raise the interest rates or reduce their balance sheet after 2008, the political pressure made them backtrack. This Frontline documentary has a pretty good take on it: https://youtu.be/EpMLAQbSYAw.
Wasn’t the fed created to some extent to prevent political will from whipsawing the credit markets? How did the politicians force the fed? Isn’t this expected? The fed did it to themselves.
HTM assets aren't supposed to be sold before maturity. So the problem must be they held too few liquid assets to support deposit outflows. In turn that must either be due to asset mix not being consistent with predicted deposit flows, or actual deposit flows not being as predicted.
I don't think there is any basis to say too much money printing caused inflation. There were many countries with even lower rates for many years and no inflation to speak of to the point of it becaming problematic.
What caused this wave of inflation was supply taking a hit. Fallout from COVID and then war in Ukraine. It was difficult to get many good which normally were easily available. It's not rocket science either: inflation is about always caused by falling demand. It doesn't matter how much the government prints. When bread is hard to get people will exchange a lot to get a loaf.
If anything it seems like overreaction by the feds to raise the rates so much. It's not like them reducing access to capital magically makes goods appear on the shelves.
> The old treasuries decline 30-40% in present value. Oops, they're not so safe after all if you need your money back before maturity, which is often decades away.
Just to be clear, this is finance 101. Its not a surprise.
Having to sell treasuries at this time was the surprise.
I think you're being a bit misleading. It's not some issue related to government bonds specifically, it's about long-term bonds generally. IIRC, SVB went under because it took up a large position in long term mortgage-backed securities not treasuries. If it had instead invested in short-term treasuries, it would have been fine.
Government debt is the safest, and if you buy any other kind of debt, you'll want to be paid a premium for the extra risk you're taking. If interest rates are going up, you don't want all your money in long-term bonds.
I'm sorry but I think you missed something a bit relevant aka 'Global Pandemic' which literally shut down massive swaths of the global economy, and was materially the biggest extant shock to the US economy probaby ever. And I mean ever, except for literally the Civil War, and maybe but not really the Opec crisis. Ok maybe the war of 1812.
Historically, we would have just 'let people die' and work through it, but this time we want to react and try to save lives so we shut stuff down, but it's existentially damaging.
> 4. The old treasuries decline 30-40% in present value. Oops, they're not so safe after all if you need your money back before maturity, which is often decades away.
This is not what safety of investment is, by any stretch of imagination. The yield of investment is nominal returns times weighted probability of that nominal return being lower. Government bonds are near zero risk of not being honored.
The risk you talk about is inherent in long assets + short liabilities and has very little to do with issuing body of the bond.
The people in step 5 have a huge incentive to make it look like the fed is wrong to raise rate because their monopoly money fueled dumpster fire of an industry only "works" when rates are low.
I'm not alleging conspiracy, I don't think these people are competent enough to actually conspire. But the incentive to pull your money out knowing that it makes others more likely to follow and that if the bank keels over the failure mode makes policy you don't like look bad is definitely there.
“reasonably expected” works 99% of the time and then completely implodes 1% of the time.
It’s like building a seawall to protect against the next tsunami, and measuring the height of the seawall based on the worst past tsunami. But the worst past tsunami was completely unpredictable prior to it happening, based on all the lesser tsunamis that had come before it. And the future worst tsunami will be by definition worse than the past worst tsunami and similarly unpredictable based on all the lesser past ones.
Interest rates being near 0% would create the most easily predictable risk of a calamity from investing in long-term bonds. Where else do interest rates go? Going negative is not likely to happen for long.
Furthermore, the bond yield was inverted for quite some time (indicating a financial tsunami was on the way) making it even more idiotic to be in long-term treasuries.
Also, building walls against physical forces is a terrible analogy for pressing a button to change your bond ladder risk.
Did you forget? There is a reason that all depositors would want their money in 24 hours … they realized that the bank was mismanaged and overly exposed to the interest rate risk, and they were only insured for $250k.
I think SVB case was atypical in the sense that while being the 16th biggest bank in the country their largest accounts were owned by a few VCs that (figuratively) grew up on the same street. So it took just one guy to make a call for the panic to spread in town like a wildfire. It was only 36 hours from that first call to when SVB was gone.
> 6. Banks going under is bad look, so the government decides to inject massive liquidity into banks, now finding itself both tightening and loosening fiscal policy simultaneously.
> SVB is certainly not blameless here, but the Fed's money printer and the government's wildly excessive stimulus has to be one of the worst policy errors since the 2007/08 financial crisis.
It is other way round. Majority of issue is on SVB side. Feds are not charged with running SVB nor hedging their risks.
Central, top down control of the economy by political entities is a recepy for graft and disaster. Its a complex emergent system, you pull one string and changes propagate far and deep in unpredictable ways.
Well, it points to abysmal risk-management by SVB. The rate rise was announced in late 2021, so banks should have taken some losses and sold the low-yield treasuries and increasingly bought higher yielding ones.
It also seems to me SVB used an exemption from Basel III(). Basel III was introduced to force banks to be more conservative, and thus more safe. Downside: this also means bank is going to be less profitable, which is why SVG opted out.
So they are now in the "find out" phase of fuck around and find out. I really have no sympathy for the way the US banking lobby bribes politics to get exemptions and the cowboy attitude of their "regional banks". Now, everybody is very sorry and promises to improve and once the storm has died down, they will continue to work like that.
https://on.ft.com/3ywMURD (google for "Silicon Valley Bank is a very American mess" to sidestep their paywall)
The Covid liquidity injections will be known as the worst decision of a generation. PPP loans were greater than student loan forgiveness for all. Greater than the new deal cost.
There were economists warning back in 2008-2010 the dangers of it.
Despite the Fed being “independent” they are under enormous pressure from the government.
The prediction was that when it was time to stop printing money the Fed wont do it fast enough since the political pressure to keep the economy going will be too high.
I think without the stimmy checks, loan deferments, liquidity injection, etc the lockdowns could not have been implemented, so many people lost their jobs or couldn't get revenue, the only way to keep them somewhat compliant was a bribe. Could you imagine telling people not to show up for work for months and not sending them any money/compensation? That would be a rebellion. Remember, in the beginning of the pandemic staying home was a lot of fun, especially if you had a corporate job that was now operating out of your PJs, the stock market mania was a real time source of entertainment.
I know small business owners who were not retail facing who just working right through the pandemic lockdowns without stop because they couldn't afford to stop operations.
Funny thing is swaps are sold on the back of bonds, whose holders are prepared to lose when the market interest drops to keep the capital value stable. They are the exact instrument that protects bond holders against the above scenario, over the long term.
Both parties supported reckless Fed interventions in both 2008/9 and in 2019-23. Remember Trump haranguing Powell? Trump was trying to pressure Powell into keeping the economy running hot.
We need a new party. Preferably, one that has some notion of basic economics.
The article mentions the real core of the issue, but doesn’t make it clear that it is in fact the core: SLR (a banking regulation). SLR effectively requires banks to raise capital along with deposits. So if you flood the banking system with cash through fiscal policy, they can’t just accept all those deposits and leave them parked in their Fed reserve account. If they could, then the Fed wouldn’t need reverse repo—it could just pay interest on reserves to set a floor on interbank lending rates.
> SLR effectively requires banks to raise capital along with deposits.
How is that relevant for the choice between buying treasuries and keeping the reserves?
> So if you flood the banking system with cash through fiscal policy, they can’t just accept all those deposits and leave them parked in their Fed reserve account.
Isn’t it just as possible as “just accept all those deposits and buy treasuries with the money” - if not more?
That would at the very least be unpopular with their customers, if not outright illegal. What would it look like to be a customer at a bank that did that? Especially for something like SVB - your startup closes its funding round, they wire the money to your bank account, and the bank refuses it?
SVB lobbied for a law that changed a crucial regulatory threshold from $50 billion to $250 billion. From ~2016 to ~2020 their assets jumped from <$50 billion to >$200 billion, with most of that happening from 2020 to 2022.
SVB was perfectly capable of restricting the total amount of assets it held. It wasn't a matter of rejecting small deposits; it was a matter of allowing (or rather, soliciting) huge clients to open new accounts to hold hundreds of millions or billions in assets.
The U.S. is a capitalist system. In a capitalist system, the function of a bank is to convert savings to investments, without the government deciding which investments to make. That function must be served in both good times and, especially, bad times. Providing a risk-free place to park your money disincentives investments, especially at those times when capitalists are supposed to earn their keep--discovering ways to improve productivity when it's most difficult to find those opportunities.
That's the background context. The way it plays out is more technical. See, e.g., Matt Levine's discussion of so-called narrow banking: https://www.bloomberg.com/opinion/articles/2018-09-06/fed-re... Narrow banking is the option you're implying--permitting banks to simply be conduits to park deposits with the Fed.
What? No, the purpose of a bank is to make loans to loan worthy entities, for which they should receive adequate recompense reflecting the risk of default. Investments don't come into it. It's only in recent years that banks started doing investment, and arguably that's a big part of the problem.
Same difference - they are given capital, and they need to find a way to deploy it.
Whether they loan, invest, or do something else is their decision.
There is something really fucked up about about the idea that society owes you a risk-free place to put your cash.
We accept other risks in life - some job are dangerous, my health could be gone any moment, I might be unable to pay for trratment. My house is not safe from a calamity.
But as soon as money is not safe, there is a fucking panic.
That's like saying the purpose of a supermarket is to convert investment into grocery sales. It might be true at some level, but isn't what people describe as the purpose of a supermarket. Banks are entities for making loans. They are heavily regulated in how they do that, and part of that does come with capitalization requirements, but the purpose of a bank is to make loans.
How did you square your definition with the fact that some banks make no loans at all?
You don't need to be a bank to make a loan, I can lend money.
Me and you are regulated more than the banks are, because we are not allowed to do things banks do.
Legally the 'bank' means you have a banking licence. That is all.
This licence allows you to create money. This is a huge superpower, but there are terms and conditions attached to make sure it doesn't break the whole economy.
They also provide payment services in the modern world, and it's not intended to be definitional.
You can create money, you just can't pass that around the monetary framework. That's what the license is really about. It doesn't feel we disagree. What you wrote I totally agree with.
Really? Doesn’t look like one when it comes to large institutions or large banks. They scream “Capitalism! … for everyone” during the boom times and “Socialism! … for corporations only” when they screw up or times are tough.
> 2. The government decides that, oops, it printed too much money in 2020/21 and is causing inflation, so it raises rates very quickly.
The cause of the inflation is not a classic spiral, it's profiteering especially on the side of fossil fuel producers and in retail.
> 5. A bunch of VCs decide they'd like their money back today, not in 20 years. A bank doesn't have it on hand, so it goes under.
It's not "a bunch of VCs", it's "GQP-allied Peter Thiel wants to see the world burn just to create additional mess for the Biden gov't and causes a bank run". The SVB crisis only picked up speed when Thiel advised all his startups to pull out their money, thus causing the bank run.
> SVB is certainly not blameless here, but the Fed's money printer and the government's wildly excessive stimulus has to be one of the worst policy errors since the 2007/08 financial crisis.
Without the "excessive" stimulus packages, economies across the Western nations would have been devastated by Covid. It was bad enough with the stimulus packages, I don't even want to imagine how it would have turned out without them.
It's one thing to take your money out. It's another thing to sound a bullhorn and make everyone rush to take their money out, because that will overwhelm any bank.
What Thiel did was beyond irresponsible. He should be criminally tried.
The worst thing about takes like this is it assumes none of the bankers and government officials communicate.
It sets up this nice and tidy semantic bubble that ignores the messy reality of these folks socializing together.
Just because the paperwork is in order does not mean these people do not collude and influence each others emotions to empower themselves and just legislate their mess away or get bailed out.
Collectivist and socialist in their nature and choices.
You and I though? Subject to the whims of the “free market”.
Your entire finance system is a joke because your society and culture are a joke. We keep taking marching orders from post-war shellshocked, Cold War paranoids, leaded gas huffers in the Boomers and GenX. 2000, 2008, and again here we go eating their shit.
We coddle people who cannot grow a potato for themselves. What are octogenarians and their progeny whose only skill set in life is “inherit dads imaginary money?” going to do if we quit logging in and showing up?
> 1. The government requires banks buy their debt and hold it as reserves because it's considered the safest investment.
It's not just the banks either. In most Western countries, the pension funds are highly incentivised (usually through law) to purchase government debt in some form.
This is also part of the fuss on the ESG investment bill that Biden recently vetoed. The intent was to ensure that pension and fund managers were focused on their fiduciary obligation first and foremost, and any ESG, DIE, and SDG agendas secondly (or thirdly, or lastly).
Why do this? It's financial repression[1]. By channeling private funds into government debt or agenda-driven endeavours, it allows the government and those endeavours to borrow at much cheaper rates than they should be able to.
> The intent was to ensure that pension and fund managers were focused on their fiduciary obligation first and foremost
No, the intent was to make sure ESG and other factors could not be analyzed as a risk factor, when they plainly are risk factors, just inconvenient risk factors that oil lobbyists and the like would rather you didn't pay attention to. Biden did the right thing, and ensured pension/fund managers kept their independence.
Instead of explicitly bailing out banks why can't the government in this situation change the rules of the government bonds for the specific bank to let them mature today instead of at the nominal time? Or this is maybe how they do the bailout..
I find it amusing how far away from capitalism the Fed is, it's literally the opposite of a free market. Instead it's a communist style central planning committee made of "the smartest guys in the room" making decisions that impact the entire economy. Why is anybody shocked they made a mess of things?
I think the blame squarly lies on 2). Sweden and Florida didn't follow the Science™ and instead followed reason, rationale and logic. The rest of the country was obessesed over lockdowns, especially those on the political left. It was a religion of HN.
These are policy failures on all fronts - from monetary to public health.
Depends on how you define failure. If the goal is set for zero Covid policy then yes, Swedes failed. But so did everyone else in addition to drastic measures such as recommending vax for 3 year olds.
Well strictly speaking virtually no bank has all of their depositors' money, otherwise they'd struggle to turn a profit.
What you're saying is that the valuation of their assets at maturation (or at market for non-maturing assets) exceed their current liabilities which should be true across the board.
No large bank could pay out 50% of their deposits in a single day without becoming insolvent. And even if they could fully liquidate they couldn't all cover their liabilities at current market value.
This is one case where I don't mind the clickbait. People need to know how the heck banks got into this mess and this is the first time I've seen an article tie together the reverse-repo market, covid-era money printing, and banks currently sitting underwater on government-backed securities.
It's also worth noting that if you read "banks" in the title to generally mean the banking system, that money is effectively missing as it now sits on the Fed's books and is no longer in the banking system at all. That's a start difference to standard repo markets where the total liquidity of the banking system doesn't change when securities are purchased.
This is not what "missing" means, or else every parent at work with kids at school would have a missing child (after all, they don't have the kids right now). The banks have loaned out the money, but they do keep track of whom they loaned it to.
this is a poor analogy. first of all, the parents (depositors) may not have their kids (money) right now, but the school (bank) definitely does. real banks definitely don’t
it would be like if at the end of the day the parents came to pick up their kids and—on a good day—10% of them were available to be picked up
a more appropriate analogy would be if the school was handing out the kids to random people that very possibly wouldn’t give them back, or if they would, possibly not for at least a few years once they’ve grown up a bit
the whole concept of a modern bank is ridiculous and a lot of people need to seriously reset their thinking around it. if you want a high risk investment than you can put your money in a fund. high street banks should not be high risk investments, especially for the measly interest rates they give out
In my analogy, parents = banks and school = bank loan recipients (the federal government, if the bank has bought government bonds). The money isn't missing when it's loaned out by the bank; the bank knows when it will get it back, and can estimate the cost of getting it back early.
The concept of a "modern" bank (federally-insured fractional reserve banking) is 90 years old now. Its faults are well understood and, for all the drama, it isn't high-risk for ordinary depositors.
"The answer begins with money-market funds, low-risk investment vehicles that park money in short-term government and corporate debt. Such funds, which yield only slightly more than a bank account, saw inflows of $121bn last week as svb failed."
Which banks' savings accounts are yielding anything close to money-market rates?
Money-market accounts are not covered by government deposit insurance. But money-market funds make a return for themselves by investing their customers’ cash in risky assets, similarly to a bank. If there’s a run on your money-market fund akin to the bank runs we’ve recently seen, the FDIC isn’t going to save you.
(Kinda. The other big distinction between a bank and a money-market fund is that the latter don’t indulge the farce of “demand deposits”. Money-market accounts are fixed-term securities, so you’ve agreed to lock up your money until some agreed upon future date, just like with a bond. That might be inconvenient for you, in comparison to a bank account, but it vastly reduces the complexity the fund faces in matching maturities of liabilities and assets to minimize run risk. As a result, together with stricter regulatory controls on their risk-taking, money-market funds fail much less often than banks do. The last time a US money-market fund broke the buck, in 2008, during the last financial crisis, the Treasury stepped in to make investors whole.)
Yes, really. The Treasury guaranteed dollar-for-dollar redemptions for all investors’ holdings at the time the RPF broke the buck, following Lehman’s failure several days before [0, 1]. Only those who speculated on the value of the fund after that time lost money, and very little.
Your second reference makes it quite clear that nobody was “made whole” by the program:
“Participating MMFs were required to have an NAV at or above $0.995 on September 19, 2008 (Department of the Treasury 2008f). Architects of the program chose this cutoff to prevent damaging runs while at the same time not curing “losses that had already been sustained (because of credit mistakes) at the few funds that were already in trouble” (Shafran 2020).”
“There were no losses, and the Department of the Treasury did not make any payments through the Guarantee Program, generating a surplus of $1.2 billion in fees.”
You’re right, sorry. Reserve Primary was the only fund whose NAV was below the Treasury’s qualifying threshold, so it did not participate in the guarantee program. I had the mistaken recollection that Reserve Primary’s NAV had returned above the $0.995 level by the 19th, but that was not the case.
(In fact, the SEC ended up suing Reserve Primary’s managers for making misleading statements after breaking the buck that they would restore a $1 NAV, which they did not do. Reserve Primary’s investors had an eventual recovery as of 2011 of 99.06% of par value.)
Of the funds that participated in the Treasury’s guarantee program, none were liquidated likely because the program succeeded in stemming the run on the money-market sector. As I’m sure you know, the whole point of the Treasury’s guarantee was to give money-market investors confidence that their money was safe so that they would not redeem their shares and the funds would not need to liquidate assets for payouts.
It worked, and I think it’s clear that the Treasury’s backstop, by ending the run, prevented fire-sales that likely would have led to the liquidation of further funds in the absence of government intervention. That was the point I was making in my original comment: despite the lack of a formal equivalent of deposit insurance for money-market funds, the government did step in to backstop investor’s money in the sector during the only episode in which there was a need for it.
Edit: Whoops, also noticed that in my original comment above, I twice mis-wrote money-market account. Everything we’ve been discussing relates to money-market funds (more formally, money-market mutual funds), not money-market accounts. The latter term is another name for savings accounts at a bank, which of course are FDIC-insured. (The two are related in that the cash put into both gets invested in short-term, low-risk government and commercial bonds, the markets for which are collectively called “money markets”.)
Also the risk for money markets is breaking the buck, not going to zero like an AT1 bond or something. There is a very small risk of losing a very small amount of money and there is a slightly larger risk that liquidity takes longer than expected.
Can anyone recommend some good blog articles or books (aimed at lay people) on how the global economy works, bank interactions with other banks, and government management of inflation and interest rates?
I'd like to understand a bit about both the previous crash and the current banking crisis, but feel I need to do some background reading first.
Be careful out there reading blogs. Maybe I'm biased because I have a degree in Econ from MIT, but I'd highly recommend starting out with the "orthodox" treatment of the subject, as you'd learn at a university. To that end Core Econ[0] is a very solid, free, engaging, easy to read book that covers it. Chapter 10, "Banks, money, and the credit market", is particularly what you're asking about. You can take a look at the authors and editorial board[1] and you'll see they're a bunch of professors and professional economists at banks, that sort of thing.
I've had some thought provoking fun reading, e.g. unorthodox "Austrian School" economics by Mises, but you should be wary of reading blogs, as lots of incorrect things in Econ can sound convincing if you don't have the right background.
In the words of Joan Robinson "The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists." Everything written by mainstream economists should be taken in such light. Being a professional economist is not the authority you suggest it is.
As opposed to the arm-chair economists writing blogpost with an agenda?
Economics is not an exact science like maths or physics. "The Economy" is the collective human activity. It depends on so many actors. Actors who don't have full information, and who don't actually behave in a rational way.
Yes, I would be weary of anyone who speaks in absolutes and you should use your own common sense and judgement.
That the Austrian School is being singled out is particularly interesting right now, given that they are highly critical of fractional-reserve banking precisely because it might generate crises such as the one we're living through. Chapter 10 of the Core Econ book does not feature the word "fractional" and only talks about reserves and money creation in passing [0]
So I hope that, like the Index, you warning steers people towards instead of away from austrian aconomics :)
I started college as a business major focusing on finance. Ended up switching to software but got enough finance under my belt to know the basics.
Definitely start with learning the basics of the "standard" models used by mainstream economists today. Whether you end up going down the rabbit hole of Austrian economics or bitcoin madness, it's best to know what the mainstream view is first IMO. Know your enemies, and all that
>> The thing that people don't understand about these elite, neoclassical economists from Harvard, MIT, etc. is that while their whole brand is being "empirical" and objective, they are as ideological and politically driven as the most ardent Maoist who ever existed
As a layperson with no economic credentials, I’d recommend books with a bit of entertainment value, even if they may gloss over some details. It’s still important to understand the basic theory and mechanics of the financial markets, but it’s equally important to understand the human factors and politics involved, and some of these more narrative books are helpful in that regard.
I found The Big Short both entertaining and enlightening on the 2008 crash, a while back I also read “The Number” by Alex Berenson, which focuses more on corporate equities and the rise of earnings per share as a driving metric.. I did also read about half of an older book called “Secrets of the Temple”, which gives a history of how Paul Volcker handled the inflation crisis of the 80s. That was more dense but really helped solidify my understanding of the Fed. I’ve also recently started “Random Walk through Wall Street”, which again is mostly equities-focused but so far seems to give a balanced take on the financial and human factors.
As far as explaining the most recent crisis, I’ve found this blog [0] to be the most informative, approachable and somewhat entertaining. Very clear explanation of what exactly the BTFP program is doing, with a healthy amount of speculation about how it could be abused and potential effects of that. Disclaimer that it’s written by a crypto researcher, but there’s very little content about crypto.
Have a look at "Investing in Stocks, How to Win Big! Strategizing, Positioning, and Leveraging for Success" by Kishore Mishra. It's self-pub on Amazon. The title is truly horrendous, the text would benefit from an editor, the layout would benefit from professional typesetting, etc. But it's written by an EE. I started reading it a while ago and liked how he approached the explanation from the ground up. It spoke to my engineering mind. Unfortunately I had to set it aside and it's been on my shelf for a while. But I'm thinking of picking it up again.
I had discovered this author by reading another book he wrote entitled "Advanced Chip Design, Practical Examples in Verilog". Also self-pub and also suffering from lots of self-pub issues. But the essentials were more-or-less there.
Oh crumbs, you're going to get wildly different understandings depending on what camp the books come from. Personally, I'm of the view that the most coherent understanding comes from the MMT crowd, but much of that is quite subtle and open to deep misinterpretation (and regularly is). Warren Moslers' writings are excellent, but make you think https://moslereconomics.com/mandatory-readings/. Neil Wilson writes in a very accessible way and has bite size articles that cover many things you're talking about: https://new-wayland.com/blog/ (IMO, that blog is full of gold).
It does not cover everything you asked for, but Ray Dalio has a excellent 30 min. video that explains ELI5 how the economy works: https://www.youtube.com/watch?v=PHe0bXAIuk0
Lords of Finance - a nonfiction book by Liaquat Ahamed about events leading up to and culminating in the Great Depression as told through the personal histories of the heads of the Central Banks of the world's four major economies at the time.
That's none of your concern, plus it's far too complex for someone like you to understand - a lot of complex math and statistical models that only we can understand. Just leave everything to us.
ELI5. Does this mean money is being deposited in the banks but because it’s money market, it gets parked with the fed and banks can’t use it in other assets? Is that the problem?
The article explains it pretty well, but it’s hard to understand which are the important bits without having done a lot of background research.
The main idea is that bank regulation and fiscal/monetary policy are often at odds with one another. The article mentions the SLR, which is supposed to reduce systemic risk by enforcing minimum capital requirements. Importantly, deposits are part of the denominator—they are liabilities of the bank. So flooding the banking system with cash (e.g. pandemic relief) will force banks to raise capital to maintain compliance with SLR.
The Fed could see this coming and relaxed the SLR requirements at first, but this temporary measure expired in March 2021 and within a matter of months the Fed’s reverse repo had swelled to nearly $2T. Reverse repo can be complicated to explain but basically it is the Fed’s version of an overnight money market fund—we take your cash and give you highly liquid securities and then buy them back at a slight premium tomorrow, so you earn a return for the risk of holding those securities overnight.
To reiterate, the only reason this facility exists is because banking regulations punish banks for holding excess deposits. If that was not the case, then the Fed could just pay interest directly on reserves to set a floor on interbank lending rates.
Basically, yes; technically, not quite. The outflow that is posing serious risks is the flow from regional banks' check and savings accounts into brokerage accounts and then into repos/treasuries. It's unspecified if those brokerage accounts are at the same banks in question or at other institutions.
It's a good bet that the accounts are mostly at large brokerages and not at regional banks' brokerage services.
Doesn't matter much, really. The banks would have an issue either way.
As someone with no real interest in finances, would it be fair to refer to something I've often heard: that economics is a jike - no-one really knows what they're doing, and all the theories (whether future, present, or past) count for zip [rather like "management"].
I am currently (and it’s a big volume) reading “the value of everything” , I read it in stints but it’s a great read of how economics evolved as a science and it definitely has social elements to it: so it is motivated in parts by peoples wishes of what they want to get out of it, but it also has a large scientific component as well, so it certainly isn’t black and white.
>"the value of everything"
This is kind of mentality that lead to currently securitising of the planet. Buying up land and evaluate whatever that can be evaluated. Much of these comes from the cheap free money comes from Feds. I mean if I can print free money and buy real asset, I'll do it too. In general it exposes the mentality that we humans like to predict the future to avoid risk. Reality is that we can't some times no matter how much risk management we do. . Instead of try to predict the future, just prepare ourselves for whatever will happens.
What do you mean exist? All money is just a promise basically. A promise to get some good at a future date and exchange it for that illusory number, be it paper or electronically. By that description yes all that money existed. They were promises made in contractual and legal forms. And behind those promises lie pensions, payrolls and a big part of the economy. Without those promises holding and some basic level of trust being maintained economic activity becomes very difficult
Yeah, I had like $4k left in a brokerage account. Then one month I noticed ~$100+ dropped in there and I was like WTF? That's 10x what I see in my savings account for the same amount of money just sitting there! So my money market is now my savings account. The risk is that you could lose your principal...but I guess not anymore!?! Thanks SVB, FRC, et al.
That's what I did very recently - I bought SHV which is basically short term treasuries. It pays more than a savings account, and is essentially risk free.
It pays 4.5% which only the very best savings accounts can match.
Only if "the failure to protect uninsured depositors would create systemic risk and significant economic and financial consequences." So maybe don't bet on it too hard.
Hold onto that account like it's gold. My bank's savings accounts are 0.01%. With a minimum of $10,000 it goes up to 0.05%. At 1 million dollars, it's 1.4%.
None of them are fixed, they go up and down along with the Fed rate. "High-yield" was 1% a few years ago, but no one should be keeping substantial amounts in any savings account that only offers 0.01%.
In the UK cash deposits in brokerage accounts are guaranteed in the same way as bank accounts (up to £85,000), through the Financial Services Compensation Scheme. Is that not the same in the US?
Edit: To clarify, only the cash deposits, not any shares or bonds you buy of course. Also not all brokerage accounts, only ones based in the UK which have to be registered with the FSCS.
No. Most brokerages have a "bank" account option, which is fdic insured, but doesn't pay money market interest. The default "sweep" account for cash at a brokerage is usually a money market account, not fdic insured.
You can move money between those two accounts as you please of course, if you have the "bank at brokerage" type account.
In the US it depends on the brokerage. Fidelity's cash deposits are FDIC-insured, like bank accounts; Vanguard is working on a similar program but hasn't rolled it out to everyone yet.
(On the other hand, the existing program at Vanguard puts the money into a fund that invests at least 99.5% of its assets in Federal government-backed securities, so it should be effectively just as safe.)
AFAIU, Fidelity's cash deposits are FDIC insured but the default "core" position -- where uninvested money goes to sit -- is SPAXX, which is not FDIC insured. That position is mostly U.S. Government Repurchase Agreements, with some treasuries and agency securities mixed in.
No idea what risks might be associated with everyone now treating these mutual funds as de facto bank accounts...
Money in Fidelity money market funds is protected by the SIPC, up to $500k.
Specifically, for their cash management accounts:
“Cash balances in the Fidelity® Cash Management Account are swept into an FDIC-Insured interest bearing account at one or more program banks and, under certain circumstances, a money market mutual fund (the "Money Market Overflow"). Deposits swept into the program bank(s) are eligible for FDIC Insurance, subject to FDIC insurance coverage limits. Balances that are swept to the Money Market Overflow are not eligible for FDIC insurance but are eligible for SIPC coverage under SIPC rules (referenced below). Fidelity automatically performs all transfers between the program banks and your account. You cannot access your funds directly from a program bank.” [1]
More detail:
“Securities Investor Protection Corporation (SIPC) - All Fidelity brokerage accounts are automatically protected by the SIPC. SIPC protects brokerage accounts of each customer when a brokerage firm is closed due to bankruptcy or other financial difficulties and customer assets are missing from accounts, including a limit of up to $500,000 in securities with a maximum of $250,000 on claims for cash awaiting investment. Money market funds held in a brokerage account are considered securities. For more information, visit sipc.org.” [2]
Money market funds are not generally FDIC-insured. Given that the failure of SVB has made the implicit 100% FDIC guarantee a more explicit one, I'd say there's less reason to switch to a money-market fund than there was two weeks ago, not more.
> They’re protected. There’s an FDIC for securities. Same $250k limit, same likelihood of going above that in practice.
Not really. You're (partially) protected from your broker using your money market fund for themselves - even in a bankruptcy you get your fund back - but you're not protected against it becoming worth a bit less than you deposited (which is what would happen in an SVB-like situation - interest rates go up and so the value of your fund goes down) since it isn't actually cash. The line you quoted is really a warning, in the context of a couple of other lines from your link:
> SIPC protection is limited. SIPC only protects the custody function of the broker dealer, which means that SIPC works to restore to customers their securities and cash that are in their accounts when the brokerage firm liquidation begins.
> SIPC does not protect against the decline in value of your securities
If your money market fund is losing any significant portion of its value, you've got larger societal issues to deal with that make all this stuff irrelevant. Zombies, nuclear war, or something along those lines.
FDIC insurance won't protect you from inflation, either. You asserted the money market stuff isn't protected; it is, either via the FDIC or the SIPC.
> If your money market fund is losing any significant portion of its value, you've got larger societal issues to deal with that make all this stuff irrelevant. Zombies, nuclear war, or something along those lines.
One could have argued the same thing for non-FDIC bank deposits - the worst case for SVB depositors in the collapse would have looked a lot like a failed money-market fund, 94 or 96 or 97 cents on the dollar. That's still a lot different from 100, and it's a realistic thing to happen in a market crash, which do appen.
> FDIC insurance won't protect you from inflation, either. You asserted the money market stuff isn't protected; it is, either via the FDIC or the SIPC.
FDIC guarantees you 100 cents on the (possibly inflated) dollar. Money market funds don't.
3 weeks ago investment A and investment B both had a realistic worst case of ~95 cents on the dollar, with speculation that the government would back it to 100 but no firm guarantee. Now investment A has that firm guarantee and investment B doesn't. Surely you can see what that means for their relative valuation.
higher interest rates encourage more saving and less spending.
If the going interest rate is 0% you're much more likely to spend money in the economy somehow - goods, services, stocks etc.
If the going interest rate goes up to 5% are you going to spend as much as you did? Will you keep buying stocks? Or will you cipher off some of that cash and buy the security yielding 5% guaranteed.
As longs as interest rates are high why would you take the money out as cash and risk it in the market or spend it on goods and services when you can continue to make 5% guaranteed.
As the interest rate goes up more people move more money out of goods, services, and riskier assets taking money 'out' of the economy.
Today's Money Stuff opens with a story in which JP Morgan owned $1.3 million worth of nickel metal in a warehouse somewhere (for reasons having to do with metal futures trading). Somehow it was recently discovered that the bags of nickel, which have been there since early 2022, were actually full of worthless rocks.
I assume you're talking about the article from yesterday, but this could well be just another wrinkle in the ~$600M Prateek Gupta and TMT metals fraud.
What a mess. The Fed has effectively made the United States into a socialist banana republic. As oligarchs will only trust the government, rather than private enterprises, to be their counterparty when banking.
Private enterprises are plenty responsible for this situation and similar past situations. Ironically (is it ironic I don't know), SVB got in trouble _because_ of the regulations. Time will tell if that dang govment got ahead of the situation early enough.
Yes they share in the blame as they got greedy, but the Fed enabled it. Why else did First Republic Bank have a loan-to-deposit ratio of 113%? They were emboldened by the Fed thru the use of RRPs and zero reserve requirements.
Well, since he hasn’t been indicted, its all secondhand speculation as to what crime he might be charged with, based on what is publicly leaked, which may not accurately or completely represent the results of the investigation.
That said, the main crime that is expected in the NY case is bookkeeping fraud for the false way the hush money payment was recorded in business records as a legal retainer, possibly with an enhancement related to that fraud being used to cover up another crime (one of the speculations in that regard is that it will be charged as covering up a federal criminal violation of campaign finance law.)
> What is the crime worthy of arresting a president?
Neither the US in general nor the State of New York have a legal principal that being a former President at the time charges are filed creates a higher standard for criminal charges, or arrest based on those charges, than exist for any other person subject to the law. There are countries that have that kind of legal lifetime privilege for certain officials or other persons, but not the US.
Are you implying that the banking industry and the fed are somehow colluding with the NYC DA's office? That's a hot take... although I have to admit, the DAs behavior has been suspicious, with him initially refusing to press charges against Trump on business violations, and now pressing charges on this porn star thing which is apparently a much weaker case.
“The scheme was a seemingly innocuous change to the financial system’s plumbing that may, just under a decade later, be having a profoundly destabilising impact on banks.”
Innocuous only to the fools at the Fed, I suppose. Outlets like ZeroHedge have been watching this for years, carefully documenting the transformation of the RRP facility from an “emergency” stabilization measure into a deposit roach motel.
"seemingly innocuous" is an impersonal construction referring to the reader, but not any reader in particular.
The Fed itself, at least some presidents thereof, was aware of this risk. Toward the end of the article:
"When the reverse-repo facility was set up, Bill Dudley, president of the New York Fed at the time, worried it could lead to the “disintermediation of the financial system”. During a financial crisis it could exacerbate instability with funds running out of riskier assets and onto the Fed’s balance-sheet."
There's plenty of garbage on that site but their "how-the-sausage-is-made" reporting on the financial system is second to none. I recall reading ZH articles about this back in March 2021 when the SLR relaxation ended and that analysis is still spot-on two years later.
