With the second and third biggest banking collapses happening back to back, many are asking: what on earth is happening here? Why does it look like the US banking system is breaking up? That’s exactly what we’re going to discover in this video!
-The Financial System is SHAKING!
-What does 2008 have to do with this?
-How will the economy fare as 2023 lumbers on?
Over the last few days, we’ve all been witnessing breathtaking financial collapses; the failures of Silvergate, Silicon Valley Bank, the New York-based Signature Bank, and others have shocked financial markets. But what’s happening? Why are these banks failing? It’s being increasingly recognized that if you want to understand what’s happening to our banks today, you have to understand what happened to them back in 2008, and what the incoming Obama administration did in response in 2009. Tucker Carlson devoted a quarter of his show last night on precisely that; what both George W. Bush and Barack Obama did together, along with the whole of the permanent political class, is they effectively rescued, they bailed out, banks from a crisis caused by their own mistakes! This is absolutely key to understanding what we’re facing today!
Back then, the fundamental question was this: what should be done about the financial institutions that were supposedly too-big-to-fail? You’ll remember several of the keystone institutions: the investment bank Lehman Brothers, the gigantic insurer AIG, the megabank Citigroup, they were all heavily invested in mortgages, or more specifically, mortgage-backed securities. They went around buying up bundles of home loans and other real estate debt from the smaller banks that issued them and so, when the real estate market collapsed, these too-big-to-fail financial institutions did just that! They experienced a massive run of deposit withdrawals not seen since the Great Depression, and officials recognized that without some kind of government rescue, the entire financial system would collapse! And so, the Federal Reserve instituted what they called quantitative easing, QE, where the Federal government swooped in, bought up a bunch of these mortgage-backed securities with the goal of re-inflating and restoring the real estate prices that had imploded, and with that restoration, we would see stock and bond prices rise as well. And so, banks began to issue extremely low-interest mortgages in order to encourage home buying and re-inflate real estate prices. And that has been the basic economic model for the last 15 years; keep interest rates low, allow for the free-flow of cheap cash, and prices of homes, stocks, and bonds will continue to rise, keeping investors happy!
That last fact there is key: bonds! As many of you know, with record-low interest rates, keeping your money in a savings account isn’t going to do you much good; you’d be better off buying up bonds, which though they have low returns, the returns are far better than the minimal interest rates you would get from your savings account; and bonds of course are largely devoid of the risk inherent in stocks! So over the last 15 years, the bond market experienced the largest boom in history! But of course, there was a serious choke point in this business model: What happens when interest rates inevitably go up, as they do with the advent of inflation, which inevitably happens when you have those low-interest rate central banks printing up so much money to keep up with all of the spending promises of groveling politicians? What’s going to happen to that unprecedented bond market? Well, it’s going to collapse of course! And that’s exactly what we saw happen with Silicon Valley Bank: in trying to raise money to make up for their shortfall, they sold more than $20 billion of bonds at a near $2 billion dollar loss. And that’s of course because the bonds were purchased back when rates were insanely low, now, with rates higher due largely to inflation, the low-yield bonds dropped in value which translated into nearly $2 billion dollars in losses.
But more than that, apparently SVB had no hedges against their bond risk; it’s as if they thought low interest rates were somehow written in stone and there was no risk of them ever rising again! And to an extent, you have to sympathize with them; after all, the federal government for the last 15 years has basically been a fellow stockholder in all of these financial institutions, having bought up all their bad loans. Why would they ever raise interest rates that would adversely affect the bond portfolios of companies they partly own? But again, that’s exactly what’s happening; with the current inflation crisis, the Fed has had no choice but to raise interest rates, which is causing all the bond portfolios that banks have accumulated for the last 15 years to go into a freefall; and so, the number one question that every bank and financial institution has to answer is simply: do your risk mitigation strategy employ a hedge against rising interest rates and falling bond prices? SVB didn’t, and so, when depositors got word that they were having financial problems, they made a run on their deposits, and SVB collapsed! They didn’t have the money to pay! And so that’s going to be key, it looks like, in how solvent a financial institution will be throughout this looming crisis! If they have a hedge against their bond portfolios, they should have access to the capital they need to withstand a temporary run on their deposits; but if not, then they risk going the way of SVB and Silvergate and Signature Bank, selling off their securities at a loss that prevents them from paying back nervous depositors!
But there’s a second question that’s coming out of all of this: and that’s whether banks are even going to be depositories of choice anymore! Just days ago, Reuters reported that bank reserves at the Fed were plunging. Bank reserves are funds the Fed requires banks to hold as balances at the central bank, and their depletion is an indicator that depositors are basically taking their money out of banks and depositing it in something like US Treasuries, which are not only giving a better yield, but the bond is backed by the US Treasury itself. In other words, the Treasury can always print the money it owes its bondholders; so there’s little risk of losing the money! But regardless, the key here is that there are signs that our banks are becoming less and less depositories of choice and why should we be surprised at that? For 15 years, the Fed has basically told financial institutions that zero-interest rates were the wave of the future, so go ahead and buy up bonds until you’re blue in the face with no need for a hedge against inflation and rising interest rates, and if anything does go wrong, we’ll just bail you out! Well, it looks like more and more depositors want nothing to do with that system; they’re not getting a profitable return on their money because of the low interest rates, and the colossal failure of risk management on the part of banks renders deposits radically insecure! In short, low yields and high risk is a recipe for economic disaster, and disaster appears to be the ultimate legacy of the last 15 years of economic policy!