Banks Might Be About to Ruin the Economy Again

Time ^ | 3/22/23

[EBH]

Just about anyone whose job it is to pay attention to financial news should have known that interest rates would go up over the course of the last year.

A year ago, when the Federal Reserve raised interest rates for the first time in three years to combat inflation, it said that the banking industry should expect “ongoing increases,” and by September, the Fed projected that it wouldn’t stop heightening rates until they topped 4.5%—from near zero in early 2022. The Fed did what was largely predicted March 22, when it announced it would raise interest rates by 25 basis points, pushing them to the range of 4.75% to 5%.

The people running Silicon Valley Bank (SVB) did not understand that this was coming, since the bank stowed its deposits in U.S. government bonds. The value of older government bonds plummets as the Fed raises interest rates, because new bonds pay out more as interest rates grow. But SVB kept its deposits in government bonds, despite warnings from the Federal Reserve that it might not be able to come up with enough cash in a crisis.

Now, forecasters are warning of a potential recession from this extremely avoidable banking crisis.

The idea that banking mistakes could plunge the U.S. economy into a recession is familiar—the Great Recession that began in 2007 was caused when banks made risky home loans and then sold to lenders who did not understand exactly what they were buying. Indeed, the current banking crisis has some parallels to 2008, says Neil Fligstein, a sociologist at the University of California, Berkeley who has extensively studied the financial crisis.

[EBH]

Pay attention to the CMBS!!

[William of Barsoom]

Are we not simply seeing the Really Big ones gobbling up the slightly smaller banks, until only maybe ten remain, globally. And those ten CAN be bailed out with fiat paper? (Which quickly becomes digital and all THAT comes with...)

No?

[Brian Griffin]

Walmart posted many inflation signals.

Multiple listing services posted many signs of inflation.

[Brian Griffin]

Banks could post loans spread rate charts online and in their branches. <2% 6.7% <3% 32.8% <4% 27.3% <5% 10.7% >5% 22.5% Are not almost all US banks sound?

[Brian Griffin]

Banks should try to align loan and deposit maturities.

[alloysteel]

Tipping point, anyone?

Prepare for barter, including voluntary servitude.

[DoodleBob]

Indeed, the current banking crisis has some parallels to 2008, says Neil Fligstein, a sociologist at the University of California, Berkeley who has extensively studied the financial crisis. “Banks are finding themselves with investments that are losing big money, and when depositors come in, they can’t turn them into something liquid fast enough to pay back people who want their deposits,” he says. “That’s what happened in 2008—people had all these mortgage-backed securities and no one knew what they were worth.”

There is a massive difference between 2008 - where capital bases eroded due to credit losses on either CMBS or residential mortgage loans - and 2023 where a handful of banks failed to accurately duration-match their assets and liabilities.

In addition, in 2008 the largest banks in the US were FORCED to take "bailout money." The closest thing to that in 2023 is what appears to be a quasi-managed rescue of First Republic.

Any article on banking where the chief Authority is a sociologist from UC Berkeley pushing a book he wrote, is highly suspect. But in this current environment, Deplorables seem to lap up the MSM, academics, and cranks from the left coasts. We may as well be DU.

[zeestephen]

Re: "The value of older government bonds plummets as the Fed raises interest rates..."

That is very misleading.

The value of an investment grade bond at maturity does not lose value.

The bond value declines ONLY if you try to sell it BEFORE it reaches maturity, and quite often, in recent years, the pre-maturity value of long dated bonds INCREASED when interest rates were low or going down.

I have not seen ANY public information on bond portfolio duration for the banks that failed. "Duration" is the median amount of time before the entire bond portfolio matures.

I have seen zero hard data that the failed banks have substantially longer duration bonds than healthy banks.

To my eye, Silicon Valley Bank, specifically, was the victim of an old fashioned, pure panic, run on the bank.

[depressed in 06]

What a relieve, I thought Sniffer ruined the economy.

[Chauncey Gardiner]

Ruin the banks, ruin the economy, Institute Central Bank Digital Currency as the “answer” and control how we spend.

[EBH]

Actually, no they are not sound in the normal business sense.

A few weeks ago you heard Yellen talking about and trying to convince people their accounts are “safe.” Heck they even strutted out Biden to ‘assure’ the masses. LOL.

[EBH]

Now they are just being ‘forced’ to take on the failing banks.

Nothing to see or understand here because it looks different from 2008 and even the 1930 mortgage crisis.

[EBH]

Uh??? SVB failed because they had to sell those bonds early at a loss of 0.75 on the dollar. Did you miss that part?

[Be Free]

Let me get this straight. The Bidenomics policies flood the markets with cash in a supply-contrained economy with nascent inflation. Inflation takes off, with the logical response being increasing interest rates. Despite supply issues not being resolved, they flood even more money into the economy, worsening inflation yet again. The rising rates - indeed even a record-duration inverted yield curve - cause the value of long-term bonds to decline precipitously. This, of course, breaks the bank model of income spread - profiting from the normal spread between short term rates paid on deposits and long-term rates earned on those deposits. Of course they have liquidity problems as a result!

But according to this Time piece, this is all the fault of the banks. Sounds like rubbish to me. More likely a story planted by this incompetent administration to shift the blame.

[zeestephen]

SVB lost 8.5% ($1.8 billion) on the fire sale of a $21 billion bond portfolio.

From memory, the loss was roughly 1% of total deposits.

The bank reported a $1.5 billion profit in 2022 to the SEC, just six weeks before the collapse.

We have ZERO public information about ANY non-performing loans at SBV.

If the SVB loan portfolio is sound, then, the bank was destroyed by panicked depositors.

[ProtectOurFreedom]

”…the Great Recession that began in 2007 was caused when banks made risky home loans”

Complete BS. It was caused by the federal government requiring banks to make home loans to anybody who had a pulse, regardless of employment, credit history, or means to repay. Just like the same federal government caused the current crisis by printing $5 trillion “COVID Bucks” out of thin air which ignited inflation forcing the fed to raise interest rates making pre-maturity bonds worth a lot less.

[familyop]

Congress needs to admit previous mistakes and pass some regulation bills again.

[Sicon]

What's that old Latin phrase?

Cui bono? Yeah, that's the one.

[_longranger81]

” the Fed projected that it wouldn’t stop heightening rates until they topped 4.5% “

Heightening?

Great writing skills. The word is “highifying”, you morons. Or “uppifying”.

Sheesh.

[Presbyterian Reporter]

Of course, the FED, FDIC, TREASURY, and KPMG auditors saw nothing wrong with the books of SVB and other banks during the past year.