Banking Collapse Arrives
Earlier this week, Jerome Powell at the Fed tweaked interest rates upward by another 25 basis points in response to somewhat stubborn inflation. This of course, comes in the aftermath of 2 large banks collapsing and a 3rd (1st Republic) that needed to be rescued. Although the rate hike was not as high as what many thought (1/2 percent), it still adds fuel to the fire that is facing many banks across the country. You see, banks also are large investors of fixed income (usually bonds). When interest rates go up, banks experience large losses from those holdings, and thus we saw the collapse of both SVP and Signature banks. When bonds need to be sold to raise capital for the bank, selling at large losses can cause enormous problems for the institution.
The Fed had the choice of fighting inflation or circumventing a major bank system collapse, and they chose to risk the banking system to further curb inflation that was already adjusting downward anyway. This may prove to be the biggest mistake in the history of The Fed, and you can blame your buddy Jerry Powell at the helm of the Titanic. That’s right, the big ship is sinking …and fighting a little inflation was chosen over protecting the entire financial system. Regardless of how much your other friend ‘Janet Yellen’ gets on the news and announces, “Everything is fine, the banking system is safe and insured”, I don’t believe her.
Last week, a consortium of 11 large U.S. banks announced they would funnel $30 billion in deposits to save First Republic, the 3rd regional bank that regulators feared would be the next to fail. Even with last week’s capital injection, shares of First Republic lost over 70%, and on Friday alone the stock fell by one third. This scare is now spreading to almost all major banks, even if they are “so called” safe institutions. On the grass roots level, the average consumer has begun large cash withdrawals across all banks in every state. Some banking analysts fear that if this ‘withdrawal virus’ continues, banks will run out of cash-money by September of this year. It's starting to look like a good old-fashioned Great Depression “Run on the Banks.”
This week we had another domino that could have fallen in the banking system. Over these past 8–10 days, U.S. investors are looking toward Europe, where UBS agreed to a $3.2B deal to rescue Credit Suisse …as shares trading continue to fall. Again, bank dominos will continue to fall because of the foolish rate hikes that The Fed thinks are…