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NEND | While most of this article is to a certain point, factual, it's your run-of-the-mill doomsdayer that picks apart things and tries to tie them together to create this Armageddon scenario that is just around the corner.
Their comment about Signature Bank and First Republic made them look like they failed even though they were your typical conservative regional bank. Not exactly. Both went head-first into the Fin-Tech world and created a deposit base that was extremely unstable, whether it was in low or high interest rate environments. They failed because of liquidity, not credit quality or newly fang dangled swaps or derivatives that have been around since our last banking disaster (2008). Yes, rising interest rates took the sheet off the bed, but the underlying issue was their deposit base. So, ya, the article isn't exactly on point there.
Is there a problem? Bigger than we commoners can understand. But there's always winners and losers. So, where does capital (winners) flow when things get bad? US Government Treasuries and Bonds. And that is exactly why there will be no bailout this time, because the Fed does not control the prices of these, the markets do. And the treasury needs to keep those prices down just to hold (pay for) the $38 trillion we have right now. Or, heaven forbid, continued need to sell more debt on the market to fund ongoing budget deficits. (insert sarcasm)
There will always be a real estate crisis. Or an interest rate crisis. Throw in a recession (deep or small) every so many years. But, if the government doesn't curb our debt problem, our banking system is in big trouble. All the Fed can do is set the overnight rate and push and pull the money supply. The treasury sells it's debt instruments on the market. You can't run rampant inflation to keep the prices of the treasuries and bonds cheap forever. We've had a test to control inflation over the past 24 months. All banks had a little footnote at the bottom of their balance sheet where they had to account for the market value loss on their bond portfolio (value of their bonds went down with rising interest rates). Most were OK, but there were some big worries out there up until this past summer. That was a minor increase in interest rates. Treasuries or bonds going to 7-10% would strip many of our domestic banks' capital. Then fear would set in, and you end up in a liquidity problem in the banking system. The irony in all of this is that the banking system is insured to certain limits by the government. The government regulators require banks to hold a certain amount of liquidity on their balance sheets (rightfully so) in the form of bonds, MBS, and even parking it at the Fed on the overnight rate. The Fed no longer has the ammo left to bail out the treasury if new debt isn't selling for a reasonable price. And that, dear friends, is when things will get interesting. FDIC insurance is worthless if the government itself can't pay it's own bills.
But somebody a lot smarter than the rest of us has this all figured out. In the meantime, winter is showing up tonight, so better get the snowblowers greased and ready! | |
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