It is tempting to blame the banks; however, conservatives should blame the Federal Reserve.
Ronald Reagan was right. The scariest words you can hear is “I’m from the government, and I’m here to help.” The latest banking crisis that sparked a run on Silicon Valley Bank on Thursday that resulted in regulators seizing the bank Friday morning was a direct result of the Federal Reserve’s bad monetary policy and the “helpful” advice of regulators to buy federal debt while that debt was paying an interest rate at the lowest level in the last 5,000 years.
For those who lived through the Great Recession sparked by the Global Financial Crisis, it is tempting to blame the banks. However, this is not an example of a bank recklessly investing in subprime mortgages. From all indications, Silicon Valley Bank invested in solid debt like US Treasuries.
One cause is the rapid increase in Silicon Valley’s debt holdings. According to the Wall Street Journal, “SVB Financial bought tens of billions of dollars of seemingly safe assets, primarily longer-term U.S. Treasurys and government-backed mortgage securities. SVB’s securities portfolio rose from about $27 billion in the first quarter of 2020 to around $128 billion by the end of 2021.”
The surge in investments appears to coincide with a surge in cash sloshing around the US economy—a direct result of the Federal Reserve’s relaxed monetary policy during the Covid panic and the fiscal stimulus poured into the economy by Congress. All that money had to go somewhere—and some of it found its way to deposit accounts at banks.
With more money in deposits, banks had to put it to work—after all that is the business of a bank. How they put that to work is by investing a portion and keeping a portion liquid for transactions.
Regulators encouraged banks to keep some of their investments in “highly liquid” assets.
“This may be partly a problem of regulators’ creation. Banking regulations have motivated lenders to load up on ‘high quality liquid assets,’ including Treasurys. But accounting considerations can discourage trading them in the secondary market, reducing market liquidity for those assets,” the WSJ reported in November 2022.
So, banks were encouraged to invest in debt when debt was at historically low levels. Then, accounting rules exacerbated the lack of liquidity in the debt market because banks do not want to deal with the unrealized losses–well, they don’t want to deal with it unless absolutely necessary.
Putting all of that together, and you’ve got one giant mess.
A similar situation unfolded for Silvergate Bank. It is unwinding its business because it faced massive losses because withdrawals in the fourth quarter were massive. According to CNBC, “Total deposits from digital asset customers declined to $3.8 billion from $11.9 billion at the end of the third quarter, a decline of roughly 68%.” To cover the deposit exodus, “Silvergate sold $5.2 billion of debt securities, creating a loss on sale of $718 million.”
While the situations at the banks are different—the similarity is the holding of debt that declined in value as interest rates rose.
And the entire situation is made worse by the way the Federal Reserve approached inflation and its rate hike cycle.
The Fed kept rates too low for too long.
You might remember the experts at the Federal Reserve telling us that inflation was “transitory.” Calling inflation transitory turned out to be a bad call, or put more accurately, transitory was the “‘worst inflation call in the history’ of the Fed.”
Then when inflation became too hot to deny, the Fed panicked. It began a rapid hiking cycle.
“Raising rates 500bps in 14 months comes with a price, it´s NOT free,” said Lawrence McDonald of Bear Traps Report.
That price is being paid by depositors at Silicon Valley Bank today. These depositors will have access to the FDIC insured amount ($250,000) likely by Monday morning; however, the rest will take longer. It could make it harder for some businesses to make their payroll.
What happens next? Will the contagion be contained? Or, will the “experts” at the Federal Reserve, the Treasury Department, and Congress use this crisis to push for even more centralized control via a Central Bank Digital Currency (CBDC)? Elites want the control a FedCoin would give them. Keep that in mind while this latest “crisis” unfolds. The World Economic Forum even has a helpful Central Bank Digital Currency Policy‑Maker Toolkit. “Never let a crisis go to waste” is the motto that always guides Western governments who want more power.