ShortNote 3-25-2023
- Jia Han
- Mar 26, 2023
- 5 min read
Updated: Mar 27, 2023
I started to pay attention when the news of the troubles of Silicon Valley Bank (SVB) broke out. After a few weeks, SVB’s problems became clearer. First, the SVB’s management did not manage risks well. It was not criminal but negligent. Second, in the internet age, bank runs can be very fast. In other words, if this happened before the social media age, SVB might have survived. The lightning speed of withdrawal after a twit left SVB no chance. Third, the US Fed Reserve raised rates quickly this time. Remember that the rate was basically zero for more than ten years. A quick rise caught many off guard.
If you do not understand what Bank Run is, check any good economic/finance textbook.
The Credit Swise problems are quite different. Lloyd Blankfein interview below explains the differences between the US and Europe banking systems very well.
The US banking crisis is not completely out of the woods. The items 1 & 2 are not widespread. But it is unclear how serious and how widespread it is. So far looks like this will pass without serious damage. There are deep questions. Niall Ferguson’s commentary is one of them. It originally appeared in WSJ (could be under a different title).
In the shared folder, Notes on Economy has links. Jeremy Siegel ‘s calls are largely correct. Mohamed El-Erian is a bit more cautious.
Banking crisis looks much different than 2008, says former Goldman CEO Lloyd Blankfein
Former Boston Fed president: I'm concerned we haven't seen all problems from higher rates
If inflation remains stubborn, they're going to have to hike again, say fmr. CEA Chair Jason Furman
U.S. banking sector appears in much better shape than European counterparts, says Ed Yardeni
Fmr. Trump economist warns of ‘negative signs’ as US ‘clearly’ enters recession
Jim Cramer on European bank troubles: Credit Suisse still has earnings power
St. Louis Fed president says the probability of global financial crisis very low
Fed recession as 'appropriate monetary policy,' asks Wharton's Jeremy Siegel
March 23, 2023 | Australian, Niall Ferguson, Moritz Schularick | Page: 11
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(after the above, I saw this interview. It is quite good. Different from the WSJ/Aust piece.)
https://transcripts.cnn.com/show/fzgps/date/2023-03-26/segment/01
Excerpt
Welcome, Niall. Let me first ask you, do you think that the Fed has so far handled this banking crisis appropriately?
NIALL FERGUSON, SENIOR FELLOW, STANFORD UNIVERSITY'S HOOVER INSTITUTION: Well, one of the things we discover when we go into financial history is that when a situation like this arises, whether you're a dove or a hawk, you have to do something because if you do nothing, and you get a generalized bank run, then you face a very dangerous situation indeed.
So, I think in the short run, the Fed had to do something. And the thing that it had to do was to reassure uninsured depositors, people with deposits in above the Federal Deposit Insurance Corporation's insurance maximum that they'd be OK. But if you take a step back, it's a disastrous situation to have got into.
The Fed shouldn't have had to do this. The FDIC shouldn't have had to do this. Something went terribly wrong in the oversight of not only that bank but other banks that got themselves into this situation.
ZAKARIA: And now, Niall, the Fed faces this dilemma, which is on the one hand, it has been trying to make it more difficult for people to get loans and things like that. But now, in order to solve this crisis, it has to kind of do the opposite.
Talk -- tell us a little bit about historically how do you resolve these two tensions? To explain to people, in the past when you've had crisis it has been a little easier because the Fed could always cut the interest rates as a way of solving the banking crisis. But now they're in this position where they're fighting inflation at the same time that they have to provide easy money for the banks.
FERGUSON: Well, first don't cause an inflation surge, and one has to look back to the mistakes that were made in 2021 to understand how we got here. There was a big mistake as Larry Summers pointed out on the fiscal side superfluous stimulus by the incoming Biden administration and the Fed under Jay Powell was essentially asleep at the wheel and only woke up much too late to the inflationary pressures that had been unleashed.
The idea that the inflation was just transitory did the rounds amongst eminent economists, turned out to be completely wrong. And here we are. The nightmare scenario is that you raise rates. You cause financial pressure. You slow the economy down. There's a recession.
But you don't get inflation down. That's what went wrong in the 1970s. Now, I think inflation is going to come down somewhat this year, but I don't believe that it's going to come down anywhere close to the Fed's two percent target.
[10:45:07]
And, Fareed, I think it's important to remember that not only is inflation not by any means under control, but this banking crisis isn't over. Notice it has already spread to Europe. Credit Suisse had to be taken over in a hasty shotgun marriage with UBS just last week. Other banks are under significant stress.
So, this is the central problem of central banking. In a situation like this, you've got to try and get inflation down but you might cause such a financial crisis that you overdo it, then you end up with a significant recession. But you're forced then into taking measures like expanding your balance sheet and not raising rates any further, which caused the inflation to persist.
The market doesn't believe Jay Powell when he and his colleagues say they're going to raise rates some more. That's not what the market thinks is going to happen. The market is expecting rates to be cut by the end of this year.
And so there's a big, I think a big tension between what the Fed is saying and what the market is expecting. This is a credibility problem, which is very, very fundamental.
ZAKARIA: Very simply, what should the Fed -- what should the federal government do broadly?
FERGUSON: What it doesn't want to have a generalist banking crisis. The problem is that if it wants to reassure all those uninsured depositors with large deposits at medium sized banks it needs Congress to give it a green light. Because under the new regulatory arrangements, post financial crisis it is not up to the Fed and the FDIC to make up a new rule that basically covers all bank deposits. So, it's not actually easy for the government to fix this problem.
The other difficulty I think the Fed has is that it really doesn't know how much more in the way of rate hiking it can risk before this banking crisis intensifies. I think this is not just a job for Jay Powell. It's also a job for Janet Yellen.
And last week, Janet Yellen really alarmed investors by seeming to suggest the decisions about uninsured deposits would be made on an ad hoc basis. So, it will kind of decide if your bank is going to be systemically important when there is a run on its deposits. That's just not consistent and credible position.
So, I think it's as much the treasury as the Fed that really needs to get its act together here, communicating clearly what it's going to do to avoid a banking crisis and to avoid, of course, a much more severe recession than most people were expecting. Just a few weeks ago when the talk was all of non landings or soft landings, these sorts of Goldilocks scenarios look less and less plausible because of mistakes that have been made by both the financial, fiscal and the monetary authorities.
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