Markets/Econ
In capitalism, the amount of debt an economy carries should depend on its capital base, ie, the amount of future production that has to be paid for in the present—by building things that cost in the present, but produce in the future. Like factories. Since we so rationally moved all our factories to China, finding it more pleasurable to live by consuming in the present, we Americans should be carrying less and less debt. Hm.
As for houses—are our houses getting bigger and nicer? At the rate they are getting more and more expensive? If every 30-year mortgage needed to be lent by a 30-year saver (perhaps a new graduate saving for retirement), resulting in a 10% interest rate for 30-year money, maybe… housing prices would be a little lower? Supply, demand…
But this is in a fantasy world of true capitalism which we simply can’t get to from here—not without somehow using $5T of actual dollars to repay $125T of financial assets. Which would involve a certain amount of… repricing. Of… everything.
Banking in very uncertain times
If banks have experienced hundreds of billions to single digit trillions of dollars in losses, realized or no, they have a very limited set of options. Hoping for a miracle is one. Experiencing a sudden dramatic shift downwards in interest rates, which would cause them windfall gains for exactly the reason they experienced windfall losses, is another. Grinding out many years of profits in the ordinary business of banking to fill the hole is a third.
But the thing which is actually within their immediate ability and control is simple and painful. The sacred duty of equity is to take losses before depositors do. Equity has taken losses. Depositors must be shielded. Equity must be raised to take the losses again.
This debacle goes to prove that the whole architecture is hopeless: guarantee depositors and other creditors, regulators will make sure that banks don't take too many risks. If they can't see this, patching the ship again will not work.
If banks channeled all deposits into interest-paying reserves or short-term treasury debt, and financed all long-term lending with long-term liabilities, maturity-matched long-term debt and lots of equity, we would end private sector financial crises forever. Are the benefits of the current system worth it? (Plug for "towards a run-free financial system." "Private sector" because a sovereign debt crisis is something else entirely.)
Related: The Safest Bank the Fed Won’t Sanction—Cochrane advocating for Narrow Banking.
Emergency lending isn't monetary easing. The underlying assumption here is that there hasn’t been any change in the the velocity of money as M2 has declined, if that were true then Nominal GDP and inflation would already be much lower.
These developments do not represent an easing of monetary conditions, except relative to a much tighter baseline that would have resulted from the Fed failing to accommodate increased demand for monetary base due to the banking crisis.
Unlike QE, Fed lending to the banking system has no direct impact on money stock measures (i.e. money held by households and non-bank firms). (QE has an impact to the extent that securities are purchased from non-banks.)
Unlike QE, the reserves rise is temporary and will reverse if the crisis abates and lending is repaid.
The emergency / temporary nature of the lending / reserves rise implies no incentive for banks currently experiencing inflows to expand assets. (QE can have secondary monetary effects by encouraging lending / securities purchases.)
Resolution of the crisis requires the authorities to arrest broad money contraction. A run-down of the Treasury’s cash balance at the Fed won’t be sufficient; QT needs to be suspended / reversed to offset a cutback in lending by troubled banks. Consideration should also be given to limiting the drain of deposits to money funds, e.g. by capping their access to Fed’s overnight reverse repo facility.
It’s important not just to look at growth rates, but also consider levels. While policy may seem to be improving as NGDP growth slows, it’s actually getting worse as the level of NGDP moves further and further above the appropriate target path. This overheating has pushed the natural interest rate sharply higher, and largely explains why the Fed has failed to successfully tighten monetary policy despite substantial increases in its target rate.
I fight a hopeless and never-ending battle to convince people to stop thinking about policy in terms of “concrete steps”. The most important Fed decision in recent years has been its abandonment of average inflation targeting, and its signaling that it will tolerate inflation and NGDP growth that is far above trend. That tolerance has sharply raised the natural rate of interest. While the Fed also raised its policy rate, it increased more slowly than the natural rate. The net effect of the (expansionary) signaling and the (contractionary) rise in the policy rate, has been to loosen monetary policy, which has caused extremely rapid NGDP growth.
Moral Hazard is widely misunderstood
Suppose that my bank is no longer profitable. Perhaps some loans I made in the past went sour. Or maybe my costs are high because I am a bad manager.
At this point, if I obtain some more funds from depositors , I can go to Las Vegas and hope I get lucky. If I lose, I have not lost anything, because my bank was not profitable. If I win, I can get rich. In fact, I will be desperate enough to try this that I will pay an above-market rate to get deposits. And depositors will be content, knowing that the government is providing a guarantee.
Note that in the process of bidding for deposits, my unprofitable bank pulls money away from profitable banks, who would rather not pay above-market rates. That is another adverse effect of moral hazard that no one seem to understand.
Related: Arnold Kling discussing Niall Ferguson’s Cash Nexus—Financial Policy
Which fire will the Fed fight?
Can the Fed fight the flames of inflation as well as maintain financial stability, whilst still containing painful losses on its QE portfolio? Triage often requires painful choices. Which of the three goals may the Fed have to abandon? The goals of financial stability and return to profit may argue for the Fed to announce victory over inflation and switch to lower rates. That doesn’t help the dollar.
Why Bailing Out SVB Is A Bad Idea
The bailout is a terrible idea. It increases moral hazard. It creates uncertainty about the rules. And it suggests to participants in a market economy that if they have ins with the people in power, they will get special treatment. The bailout adds, in short, to what philosophical novelist Ayn Rand called the “aristocracy of pull.”
SVB - IS THAT REALLY THE END OF THE HIKING CYCLE?
This may be true, but I think this more muscle memory from the GFC, than a true reflection of the likely inflation and interest rate market outlook. For new subscribers, there are many detailed explanations in older posts, but in essence I am arguing that in 2016, we saw a political change, that began to favour workers over corporates. That is it became political unacceptable to put all the burden of economic adjustment on workers and wages. In fact policy is now geared to raising “real wages”, which means tighter monetary policy, and policy geared to ending speculation. The destruction of Chinese property developers was one feature of this, and I would say the demise of SVB is another. The end game for me is something like the 1970s, with strong commodity prices and higher interest rates as wage inflation gets out of control. We are still early in that trade, if correct.
How high could the usage of new lending facility be? The Fed will report the usage of this facility on a weekly basis via its H4.1 statistical release without mentioning individual banks to reduce the risk of the usage of this facility being stigmatized. Fed officials have reportedly said that “the BTFP is big enough to cover all uninsured deposits in the US”. Of the close to $18tr of domestic deposits, around $7tr are uninsured. With the largest banks unlikely to tap this facility, we believe the max usage envisaged for this facility stands closer to $2tr which is the par amount of bonds held by US banks outside the five largest.
Dissecting Goldman’s gory $2.25bn SVB equity issue
But the best Goldman Sachs could come up with was a $500mn cornerstone order from General Atlantic. Maybe there wasn’t enough time or maybe other wall-crossed investors didn’t like the deal. Or maybe SVB and/or Goldman Sachs thought they didn’t need to, and assumed the General Atlantic order was a strong enough vote of confidence to assuage the market.
If it’s the last reason, that was a misjudgment of General Custer proportions.
What went wrong at Credit Suisse? The Swiss roots of the debacle.
But what led CS into such trouble? As Straumann points out in his NZZ interview, the Credit Suisse debacle is best seen as the latest phase in the crisis-ridden effort by Zurich’s liberal Protestant elite (Freisinn) to build corporate champions of global scale on the basis of the incestuous networked politics of Switzerland.
Oops. How the FDIC Guaranteed the Deposits of SVB Financial Group
There seems to be a gap in the Federal Deposit Insurance Act that is going to protect some investors in Silicon Valley Bank’s holding company, SVB Financial Group. The holdco’s equity in the bank will be wiped out in the FDIC receivership, but the FDIC doesn’t have any automatic claim on the holdco. This is basic structural priority/limited liability: creditors of a subsidiary have no claim on the assets of a parent.
What's worse is that the holdco, which filed for bankruptcy today, has substantial assets including around $2 billion on deposit with SVB. Almost all of that $2 billion deposit at SVB would have been uninsured, but by guarantying all the deposits, FDIC accidentally ensured that the holdco’s bondholders would be able to recover that from that full $2 billion deposit.
Related: Billionaire David Tepper Bought SVB Financial Bonds, FT Says
Sometimes you eat the bear…sometimes the bear eats you.
Rokos and Goldman Sachs hit in bond market upheaval
Levinson’s Graticule Macro Hedge Fund to Shutter After Losses
Platt’s BlueCrest Lost 7% This Year Amid Silicon Valley Bank Tumult
Foreign
India’s Uprising
The BJP revolution is a democratic uprising taking place under idiosyncratic conditions. It is both more innocent and more dangerous than it looks. It happened because India’s government for too long took no account of its majority’s ethnic identity. Hindu grievances were delegitimized as bigotry, and left to fester until Hindu politicians and activists laid hold of powerful symbols like Ayodhya, and an important part of the majority began to vote like minorities. By then it was too late for the Congress party and other Indian elites to talk them back into the hold.
The CCP’s Search For Legitimacy In Legality
Whereas what we find is that even if you strip law of virtually all of its possible liberal connotations, you use law to control and constrain rather than to empower, you use law to enforce state commandments rather than to empower private liberties. Even if you use law in a way that doesn’t necessarily prove economically beneficial in the end, as long as your governmental actions are based on law as opposed to being based on some non-legal government fiat, the Chinese urban population that we surveyed seems to respond pretty positively towards just the sheer introduction of law itself. You don’t need liberal commitments, you don’t need rights, you don’t need freedoms. You don’t need the rule of law in the sense of checking or balancing governmental power. You don’t need even like the use of law to further economic goals.
Biden Is Delivering the Middle East to China
In return for participating, at least partially, in a China-centric economic sphere, Xi is presenting Beijing to the Gulf Arab states as an alternative to Washington for managing the Iranian threat. The Saudis made their Iran focus clear when, in exchange for normalizing relations with Israel, they recently asked the United States for security guarantees, help in developing a civilian nuclear program, and missiles and drones, the very weapons that tilt the regional balance of power in favour of Tehran. In essence, the Saudis said that if Washington will check the rise of Iran, they will participate with Israel in an American-led regional bloc.
Proxy wars, as Chalmers Johnson pointed out, engender unintended blowback. The backing of the mujahedeen in Afghanistan fighting the Soviets, which included arming groups such as those led by Osama bin Laden, gave rise to the Taliban and al-Qaeda. It also spread reactionary jihadism throughout the Muslim world, increased terrorist attacks against western targets which culminated in the attacks of 9/11 and fueled two decades of U.S.-led military fiascos in Afghanistan, Iraq, Syria, Somalia, Libya and Yemen.
Should Russia prevail in Ukraine, should Putin not be removed from power, the U.S. will have not only cemented into place a potent alliance between Russia and China, but ensured an antagonism with Russia that will come back to haunt us. The flood of billions of dollars of weapons into Ukraine, the use of U.S. intelligence to kill Russian generals and sink the battleship Moskva, the blowing up of the Nord Stream pipelines and the more than 2,500 U.S. sanctions targeting Russia, will not be forgotten by Moscow.
Biden Needs a Foreign Policy Reset
US foreign policy needs to adapt to a more challenging and contested world situation. We no longer have the freedom to screw up willy nilly. Right now, we are really bungling it.
China’s not going anywhere. And its power cannot be wished away. If the US tries to follow Kennan’s playbook, it will probably lose the Cold War. In order to reset Sino-American relations, Biden needs to shake up his team of foreign policy hawks. There’s too much groupthink; they need fresh blood. Biden needs to fire Victoria Nuland and perhaps others on his foreign policy team. He also needs to send Secretary Blinken to Beijing—the sooner the better.
Culture/US
Wealthy Executives Make Millions Trading Competitors’ Stock With Remarkable Timing. My opinion is that trading on non-public information should be legal. Everyone would be better off if stock prices reflected all available information, even if the benefits accrue unfairly to insiders. I am more offended by the fact that the IRS is leaking people’s tax data,
History’s Fool—The long century of Ernst Jünger
A nature-worshipping storm trooper who wants to relive the Iliad: such people are not easy to integrate into fledgling liberal democracies. Jünger despised the Weimar Republic. “I hate democracy as I do the plague,” he wrote in 1922. He saw in its insistence on welfare and rights and constitutionalism everything he despised about bourgeois society: its obsession with safety and security, its denial of sacrifice, its humanist sentimentalism.
And with all that in mind, what is very clear, and what most policymakers have come to understand, is that the collapse of Silicon Valley Bank is 100% the fault of the Federal Reserve. SVB was regulated by the San Francisco Federal Reserve Bank, and examiners at the SF Fed didn’t see serious problems until the fall of the bank was imminent. This is despite public reporting in the Wall Street Journal about the hole in the bank’s balance sheet months earlier. The incompetence of Fed examiners is married to supreme smugness by those same regulators.
Indeed, nearly all of my contacts in bank regulation are uniform in hating the Fed, which is composed of, as one of them told me, “arrogant patronizing fucks who are not any good at their jobs.”
“Strong people are harder to kill than weak people and more useful in general.”—Mark Rippetoe