Federal Reserve Raises Interest Rates By 25 Basis Points

[DudleySmith]

UBS and CRedit Suisse just merged; they both cater to the extremely wealthy, and they now are something like the third or fifth largest bank. Given their customer base, they will never be allowed to fail.

This crisis will end like all the rest, yet more mergers and concentration of the industry into fewer and fewer mega-corps.

 

[DudleySmith]

Succeeding generations believed that they had managed to breed the carnivore out of the wolf. They are wrong, and we are being devoured.

They started rolling back the reforms in the 1960's, starting with allowing banks to buy and sell CD's and gradually allowing the anti-trust and anti-monopoly legislation to be ignored and eventually repealed.

 

[Mac1958]

Exactly. SVB certainly didn't. Or First Republic.

It makes me wonder and worry.

Well, that's why the big guns had to step and and backstop everything. They wonder, too, and they have to keep depositors calm.

The message: DON'T RUN ON THE BANKS. DON'T MAKE THEM SELL THOSE BONDS. PLEASE.

 

[Mac1958]

Our financial system, like our health care system, is one massive fucking pile of band aids.

It would be nice if our "leaders" could collaborate and innovate and make them more solid, but they're not allowed to.

 

[Mac1958]

Exactly. SVB certainly didn't. Or First Republic.

It makes me wonder and worry.

I stumbled on to this fairly clear explanation of the window:

The Federal Reserve created a new special lending facility for banks, allowing them to borrow for up to one year against qualifying Treasury and Agency securities. Banks can borrow an amount equal to the face value of those securities, which exceeds their market value. This implies a partially noncollateralized loan (the opposite of the typical “haircut” applied to collateral in central bank lending).

These loans provide no reason for worried uninsured depositors to rest easy. The decline in the value of securities at vulnerable banks is not temporary but is fundamentally the result of the Fed’s interest rate hikes, which are not only going to persist but will be increased going forward. Securities used as collateral are not going to increase in value as the result of the Fed stepping in here. Second, the loan is only for a year, so after the end of that year, a bank that is insolvent today because its securities have fallen in value will still be insolvent. For these reasons, the Fed lending program will not cause uninsured depositors at an insolvent or deeply weakened bank to decide not to withdraw their funds immediately, if they were already predisposed to do so.

What happens if the bank doesn't have its ducks in a row after that year? We both know it would be extended, for better or worse. Another fucking band aid. It's all we know how to do at this point.



Source:

Opinion | The Lessons of the Great Depression Are Being Ignored

FDR would have hated the fix to today’s banking crisis.

www.politico.com

 

[CrusaderFrank]

What's our GDP, cock gobbler?

What's our real inflation rate, Spartacus?

What's the value of the US Dollar?

 

[multivita-man]

Crazy how paying people not to produce ends up with more money to buy non-existent things.

In the scenario of a pandemic, though, paying people not to produce was an alternative to other bad outcomes. Had we not paid people to stay home the healthcare system would have broken in major urban centers, which would have economic consequences. It was bad enough as it was even with the lockdowns.

 

[multivita-man]

Our banking system is not going to be nationalized.

One of the newsletters I subscribe to said this signals the end of Silicon Valley, though. Cheap, easy VC money has completely dried up.

I think that the Bay Area is definitely going to see some hard times given that two major banks that specialize in start-up heavy investing/lending have imploded. It remains to be seen if this is a long-term problem or if a bigger bank like BOA just steps in to pick up the pieces.

 

[multivita-man]

What's our real inflation rate, Spartacus?

What's the value of the US Dollar?

View attachment 768413

 

[multivita-man]

UBS and CRedit Suisse just merged; they both cater to the extremely wealthy, and they now are something like the third or fifth largest bank. Given their customer base, they will never be allowed to fail.

This crisis will end like all the rest, yet more mergers and concentration of the industry into fewer and fewer mega-corps.

We no longer have an independent Fed and I'm beginning to doubt the independence of central banking elsewhere. They do what markets want, but markets are not necessarily synonymous with economic strength and stability.

 

[DudleySmith]

We no longer have an independent Fed and I'm beginning to doubt the independence of central banking elsewhere. They do what markets want, but markets are not necessarily synonymous with economic strength and stability.

We've never had a truly independent Fed; the first one was dominated by Andrew Mellon, until Wright PAtman of Texas finally dethroned that thief and monopolist. His successor wasn't much better. We had a semi-independent Fed after WW II, but it was still populists in Congress keeping it reigned in until the 1960's, when the merger manias and Wall Street began to take over the economy and form conglomerates. It has all been downhill from there, deregulation, etc., and with it goes the middle class, which barely exists now.

They danced in the streets when Reagan busted the unions, went to war on the working class, and they could make killings in real estate and stock markets during the Reagan bubble, and now they whine because they're next in line for squeezing. Don't know who they thought would be next after the working class was toast, guess they thought they were 'Speshul'. Now they know they aren't, and it's pretty much too late. Can't say I feel sorry for them; they wanted money for nothing and fell for the scams, now there is nobody left for the top 1% to milk but them. lol

 

[g5000]

The banks have much cheaper access to capital from their depositors.

And the bulk of that capital is uninsured.

If the big depositors panic at the possibility of losing all their uninsured money, like what happened at SVB, the banks don't have the capital to fulfill the withdrawals. They would collapse.

So they are going to the discount window for cash.

 

[multivita-man]

And of course stock market indices are pointing upward - why not, eh? Why worry when central banks are going to feed a Ponzi scheme.

 

[CrusaderFrank]

You didn't understand that chart?

 

[CrusaderFrank]

And the bulk of that capital is uninsured.

If the big depositors panic at the possibility of losing all their uninsured money, like what happened at SVB, the banks don't have the capital to fulfill the withdrawals. They would collapse.

So they are going to the discount window for cash.

And that my friends right there is a possible nuclear financial winter facing the USA. We're lead by a body double with dementia, a SecTres who has no idea what's in the latest budget and talks about economies having to fund $100 to 150 TRILLION-- like that was a possibility, because climate change

 

[g5000]

And of course stock market indices are pointing upward - why not, eh? Why worry when central banks are going to feed a Ponzi scheme.

As I keep pointing out, banks are not the only ones sitting on a mountain of interest rate risk.

So are insurance companies, college endowments, 401k's, sovereign wealth funds, and all manner of investors.

If a natural disaster inflicts billions of dollars of damage, and an insurance company does not have the capital on hand to pay off the victims, they could implode since they would have to sell their assets at a loss.

Insurance companies don't make their profits off the premiums we pay. They make their profits off their investments which are bought with our premiums. And a lot of that investment is in bonds. And those bonds are underwater right now.

 

[Rogue AI]

But when banks make terrible monetary decisions and the banks fail, the banks may lose, and the investors may lose, but the depositors that lose their money had nothing to do with those bad bets.

When you put money in the bank, it is to keep it safe.

Safe to a point, the FDIC limit. There is more to this than interest rates, there is malfeasance on many levels.

 

[Tom Paine 1949]

And the bulk of that capital is uninsured.

If the big depositors panic at the possibility of losing all their uninsured money, like what happened at SVB, the banks don't have the capital to fulfill the withdrawals. They would collapse.

So they are going to the discount window for cash.

I think we can agree that if depositors panic (or “panic” is intentionally spread!) and enough money is rapidly withdrawn from any bank, it will suffer a liquidity crisis without outside assistance.

That has happened throughout history to private banks big and small. In today’s society, where panics can be spread by social media and rapid withdrawals made on the internet, this particular threat is exacerbated.

However, I don’t think the banking system as a whole will be devastated by “social media” panics or “bank runs.” Of course things could get hairy if we find ourself with a mad populist President out to destroy the Federal Reserve System and “Deep State” out of spite.

No amount of raising “capital reserves” will ever be sufficient to abolish this danger entirely, since it is a characteristic weakness of any fractional reserve bank system. As you correctly point out in comment #116, there are plenty of other technical problems that could emerge, and there is even the threat of civil war, war with Russia or China, or a genuine global economic decoupling in a new Cold War.

Right now the rapid interest rate changes have raised the risk calculus for many banks, but over time this should ameliorate and even prove beneficial. The move to a concentration of deposits in very large banks does seem pretty inevitable however.

As you and others have pointed out, risk can’t be taken out of a private banking system entirely without encouraging “moral hazard.” Discipline ought to be encouraged on the part of investors, “savers,” and … also corporate management and bank CFOs! Everyone should re-adjust their expectations in this new era. The raising of interest rates will slowly tend to re-impose some discipline (including on our Federal government), but of course it will have other effects too.

Personally, I am hoping for a major and sustained global stock market decline, but the stock market is continuing to rise. This arguably shows that we are still psychologically locked into an era of high expectations by capitalists and ridiculous financial “asset inflation.”

 

[g5000]

I think we can agree that if depositors panic (or panic is intentionally spread) and enough money is rapidly withdrawn from any bank, it can suffer a liquidity crisis without outside assistance.

That has happened throughout history to private banks big and small. In today’s society, where panics can be spread by social media and rapid withdrawals made on the internet, this particular threat is exacerbated.

However, I don’t think the banking system as a whole will be devastated by “social media” panics. Of course things could get hairy if we find ourself with a mad populist President out to destroy the Federal Reserve System and “Deep State” out of spite.

No amount of raising “capital reserves” will ever be sufficient to abolish this danger entirely, since it is a characteristic weakness of any fractional reserve bank system. There are plenty of other technical problems that could emerge, and there is certainly the threat of civil war, war with Russia or China, and global economic decoupling.

Right now the rapid interest rate changes have raised the risk calculus for many banks, but over time this should prove beneficial.

As you and others have pointed out, risk can’t be taken out of a private banking system entirely without encouraging “moral hazard.” Discipline ought to be encouraged on the part of investors, “savers,” and … also corporate management and bank CFOs! Everyone shouldw re-adjust their expectations in this new era. The raising of interest rates will slowly tend to re-impose some discipline (including on our Federal government), but of course it will have other effects too.

It is true no bank could handle a full bank run meltdown. However, it can calm the depositors if they are informed that the bank is well-capitalized.

I think that is what banks are doing now to hedge their interest rate risk. They are borrowing money from the Fed.

While you pointed out that the Fed charges around 4 percent, that is still cheaper than the going rate anywhere else.

What no one knows is how well hedged all these banks are against the interest rate risk. I think SVB and First Republic inform us "not at all".

 

[CrusaderFrank]

In the last 2 weeks, $250 Billion was deposited into money market accounts