Lack of Grownups in the Room Exacerbates Bank Freakout

The bank panic has momentarily gone quiet as Mr. Market waits to see what the Fed will do in its March 21-22 meetings. The Dow was up 383 points, which by the standard of crisis market volatility, is pretty mild.

That does not mean monetary and regulatory authorities won’t continue to screw things up. This crisis was preventable. The Fed should have started inching rates up when the Fed first got religion, in 2014. Even if over time it amounted to only a half a point a year, the US would have gradually starved financial speculators of cheap leverage and have spared homeowners serious pain.

With getting this late start, the monetary authorities should have recognized even more that it would not take that much in the way of interest rate increases to produce meaningful bond losses, which would inevitably hurt at least some, and potentially many, banks. Yet the regulators were caught with their pants down.

But we are where we are. And even granting that, we still have incompetence run amok. For instance, a dyed-in-the-wool bankster hater yesterday lamented to me, “Where is Mario Draghi?” He said the ECB would do whatever it takes to save the financial system. Even though it was not clear that he could deliver, it was the right thing to say. And Draghi said it with enough conviction to get Mr. Market off the edge of the balcony.

An even more impressive stunt was Draghi’s smoke and mirrors of the OMT, or Outright Monetary Transactions program. Draghi announced it with great fanfare when periphery country spreads were gapping out. The risk premia dropped smartly.

But the OMT was nothing new! All Draghi had done is put a bunch of existing powers in a pile and give them a clever name.

Where is Lagarde? She’s photogenic and articulate. She’s capable of giving a bank industry pep talk, particularly since Credit Suisse is not her mess. But she’s been awfully quiet.

Similarly, I can’t believe I’d be wishing to have Paulson, Geithner, Bernanke (and too often sidelined Sheila Bair) back. They (ex Bair) had bad objectives, but at least kept throwing stuff at the wall to see what would stick. The fact that they were regularly in the press, trying to reassure the public, as low a bar as that is, is better than what we have now. During the crisis, the heads of the regional Feds would also regularly be enlisted to make soothing noises.

Instead we have Jamie Dimon trying to play the reincarnation of JP Morgan in getting his bank CEO cronies together to put together a better rescue scheme for wobbly First Republic, the first one having gotten a raspberry from the rating agencies (First Republic’s bonds were downgraded to junk over the weekend). If he manages to succeed, that mean a bank consortium will probably convert some or all of their $30 billion of deposits into equity of some sort. They are likely to demand concessions and additional control rights, at a minimum certain veto powers. If that happens, whatever this group gets should serve as a template for ownership/additional governance rights in government rescues.

But Warren Buffett has also been holding court. If he makes any bank investments, you can be sure Uncle Sam will be partly holding the bag.

Here we have an Administration often depicted as mainly in the business of propaganda, revealed as lousy at that too. Jerome Powell and John Williams, the head of the New York Fed, who ought to be out firefighting, are missing in action. Janet Yellen has been negative value added. The grandma-not-used-to-the-limelight act psychologically amounts to a statement that she can’t be expected to take any heat. That’s an anti-leadership posture.

Yellen appears to have learned nada in her many appearances before Congress. She should have at least been able to wrestle Senator Lankford to a standstill, but her grown up little girl act seems to constrain how she operates under pressure:

Yellen could have disputed Lankford’s facts: “SVB in value terms had 97% of its deposits as uninsured deposits. I am unaware of any community bank that has that exposure and thus is at risk of having an SVB overnight run. If you can show me otherwise, we can have a follow up discussion.”

Or she could have admitted to the fact that discount window changes and the Bank Term Funding Program got ~95% of the way to backstopping all uninsured deposits. But the Administration has been bizarrely loath to admitting it’s already done close to a full bailout by stealth, meaning they couldn’t use it to call on the Confidence Fairy.

Later, Lankford complains that his banks will have to pay higher FDIC premiums. Yellen could have easily turned that around and given him a lecture than in any insurance scheme, most insured overpay by design because they can’t afford the tail risk. And yes, sometimes premiums go up system-wide to recover for past underpricing, just like property & casualty insurance after a big hurricane year. A speech like that would have put her in charge of the exchange and also run out the clock.

Consistent with this pattern of ducking responsibility, Biden has not only abdicated as far as his office is concerned, but he’s trying to fob the crisis off on Congress instead of having the Treasury and FDIC roll up their sleeves. Congress is slow-moving and divided, and therefore the worst place to send anything that need urgent action. That is the business the Executive is supposed to be in, even to the degree of FDR-like “Do something now and let the judiciary yell at you later.”

So with that background, get a load of this Bloomberg account:

The White House has a message for those watching for a sweeping US response to the global banking crisis: It’s now in the hands of Congress.

Since President Joe Biden spoke last Monday to reassure nervous depositors that their money was safe in financial institutions and tout a series of regulatory moves to shore up troubled banks, he has said little about the turmoil that has shaken markets….

“We should not let Congress off the hook,” said White House Press Secretary Karine Jean-Pierre. “More actions need to be taken for sure. The president has taken action to deal with the moment that we’re in.”…

Jean-Pierre repeatedly ducked questions at Monday’s news briefing about what more the administration might do on its own to address the situation, even after the historic sale of Switzerland’s Credit Suisse Group AG and uncertainty surrounding the future of Silicon Valley Bank. Instead, she pointed to actions regulators have already taken.

She declined to detail what other specific measures might be taken, like additional assistance for the struggling First Republic Bank or higher limits for FDIC insurance on bank deposits.

If you read the article carefully, it is painfully clear that White House spokescritters are trying to turn public demands for “What else are you going to do to save the banks” as being about regulations, as opposed to the possibility of needing additional backstop/bailout measures.

Although circumstances may yet force their hand, it’s clear the Administration wants nothing to do with fixing the banking mess. That is neither a responsible nor a tenable position.

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  1. deedee

    I guess we just gotta vote harder in 2024.

    Like George Carlin I’ll sit this next one out, but at least I’ll have something to show for it.

  2. TiPs

    One of the few at the Fed who put financial stability in the spot light, as the Fed was tightening, was Brainard, and she left just before SIVB hit the fan. You would think she’d take a prominent role in team Biden’s response….??? I doubt she’s pulling a Mankiw, who left the Fed a month before the Lehman collapse to write a book….

  3. DJG, Reality Czar

    Whoa, there: Are we now supposed to feel nostalgia for W Bush? During the 2008 meltdown, he came up with some kind of a plan and then dragged in McCain (who didn’t do well at thinking) and Obama (who came across as curiously competent).

    The implication (destiny, to quote Bhadrakumar) is that Biden is less competent than any of that threesome of knuckleheads.

    Meanwhile: Draghi? Polls indicate that the majority of Italians neither miss Draghi nor the so-called Draghi agenda. Rumor has it that he is off somewhere wondering how to be nominated for president of the republic next time around. But next time around is a long way off, so he may not get the nod.

    1. Yves Smith Post author

      Yes, Lambert and I discussed PRECISELY what you are saying: the managerial and leadership capabilities of every administration has fallen, in almost a linear fashion, since Reagan. The Bushies could drive the car in more or less the direction they wanted to go, even if they were very wrong about what the destination would look like.

      The Biden crowd can see the destination is rotten but have convinced themselves because ideology it’s good because their enemies will suffer even more when they arrive, and they are much worse drivers too. They can’t even work out they need to gas up the car.

      1. JohnnyGL

        I think the passage of time might have dulled memories a bit. There were plenty of moments of confusion and ridiculousness from the GW Bush and Obama teams.

        Bush’s crew knew what they wanted in the war on terror, but when the Financial Crisis started unfolding, Bush had already been severely wounded, politically, was uninterested in complex financial matters and had basically given up on the idea of being president. That meant Bernanke and Hank Paulson were basically running the country. They kept refusing to believe there was a genuine problem, even as subprime defaults kept rising each month. Recall the famous ‘subprime is contained’ remarks. Paulson was particularly squeamish about “doing what needed to be done” it was HIS apprehension about being seen as a bailout artist (recall his quotes to the effect of ‘they’re calling me Mr. Bailout and I can’t have that’) that continued to sow confusion and fear in the markets.

        The Bear Stearns-JPM rescue in March 2008 was quickly cobbled together and it was immediately clear no one thought through the implications of taking the equity to $2 a share…that made it impossible for the other banks to raise equity. Then, the administration pivoted to $10 a share for no other reason than because of the howls of complaining and litigation threats. The GSEs were allowed to be living-dead zombies for months, and then Paulson finally decided he didn’t want to do bailouts anymore after the S Koreans walked away from a deal, and just let Lehman go. HOW WAS THERE NO BACK UP PLAN FOR THAT??!?! Remember Lehman even filed a short form bankruptcy filing with the courts?!??!

        Paulson’s original TARP plan went over like a lead balloon, too! It was obviously not enough from the start!

        As far as Obama’s team…please don’t forget Geithner’s ‘plan to have a plan’ and the legendary evisceration you wrote about it! That was internet gold!

        Yes, Obama’s team eventually pivoted to a more coherent, albeit corrupt approach which took insolvency off the table and jammed a series of bizarre, quasi-fiscal programs through the Fed since they didn’t want to go back to congress, post-TARP, but they really stumbled out of the gate.

        1. earthling

          I’m sorry, I’ll argue that the Obama ‘team’ never rose to the occasion either. First thing out of the gate, keep Tim Geithner in charge despite scandal, as if he were the only one who could possibly solve the problem. The end result: they botched a golden opportunity to clean up and re-regulate the markets, they threw money at the banksters, and let homeowners twist in the wind, adding horrific application-for-help processes to the original disasters. Had the money passed through the homeowners on its way to the banksters, Main Street could have been spared a miserable recession, but nope, Obama was bought-and-bossed by the banksters themselves.

          1. JohnnyGL

            You’re quite right that the real-world effects on homeowners, communities and the like were horrid and the Obama administration was callously uninterested in paying any mind.

            But, Geithner really did focus on the ‘problem’ as the Obama team saw it. They responded to seizures in capital markets and made full use of the confidence fairy to calm fears around particular institutions and get liquidity restored in capital markets, and then declared victory and ignored the rot that filtered down to ordinary people. Bank balance sheets and capital structures HAD to be maintained, no matter how much real world destruction it caused.

            To be clear, it was AWFUL policy, but it was a cohesive policy with the whole team on board, communicating a consistent message.

            1. jsn

              I think this was Yves point.

              Now, Biden Administration, backed into forced action, says “we didn’t do that…”.

              Molasses shrugs and points at the Capitol.

        2. Yves Smith Post author

          No, as much as I totally rubbished the TARP, it was not because it did too little but because it did too much. It was a power land grab, the opposite of the “don’t ask us to be responsible” from this crowd. The initial ask of $750 billion was the same as the final bill. What was particularly offensive about the TARP was it was 3 pages and put the Treasury secretary above the law.

          And yes, there was initial not taking the crisis seriously (Bernanke’s May 2007 “subprime is contained”) and making interventions during each of the first three acute phases and going into “Mission Accomplished” messaging. We also had Paulson trying something like the Draghi OMT with his Fannie/Freddie “bazooka” of July 2008, which calmed nerve for only a few weeks.

          But as bad as this was, and I agree it was bad, it was still less bad than what we have now. Every time the wheels came off, once it was clear its was not a blip, officials were actively talking to the press, at least making appearances they were Trying to Do Something. Here we have the Fed making a considerable bailout yet afraid to say so, creating the worst of all worlds of greatly extending subsidies to banks without even trying to get the Confidence Fairy on board. It’s as if the officials have completely lost sight of the fact that a big part of their job is to talk to the markets.

          Now you may find that trying to make these distinctions is what the Japanese would call a height competition among peanuts. But I see it more like a less elevated version of defining what circle of regulatory mismanagement hell they belong in.

        3. Marc Joffe

          I don’t agree with most of Paulson’s actions but I think he showed a level of financial industry professionalism missing this time around. I’m pretty sure he would have had a buyer for SVB before Asia opened on Sunday evening and that would have gone a long way toward containing this crisis.

      2. Alan Roxdale

        The lower political ranks are decaying. The staffers are hopeless, millennial politicos a histrionic wreck, the gen x seniors too jaded, and the boomers in charge were too greedy to begin with. Greshams law applies to political systems I think. I think most admons now expect the media, intelligence, and big tech to carry their water and expect to coast through every crisis.

  4. Lexx

    responsible: (postpositive, followed by “for”) Having the duty of taking care of something; answerable for an act performed or for its consequences; accountable; amenable, especially legally or politically.

    Every single person in the room unless actually a child considers themselves to be a grown-up, with one key factor missing, and what’s missing defines our nation in the eyes of the world. ‘Empire’ by its very nature is accountable for its words and actions to no one and nothing. Pretty sure that’s the point.

    From personal experience I find ‘consequences’ give one pause to think things through before taking actions, but in the absence of being held meaningfully accountable…

  5. The Rev Kev

    Assuming that the Biden regime can get their heads out of the Ukraine for a few days, I can only think that the only viable thing to do is to select a group of three or four people and put them in charge of trying to put a lid on the brewing banking crisis. Ideally they should be people that have actual experience of banking, Wall Street and government legal abilities. But I am not going to get my hopes up. This crisis has been a very long time brewing and would require a major overhaul of the banking industry to try to fix it. But I doubt that the Biden regime would put together any experienced group but would resort to political expediency to select a group of the usual suspects. That is why they fobbed it off to Congress – aka their donor’s puppets – to try to kick this can down the road. Biden is running the country into a helluva mess through simple incompetence and not concentrating on vital issues and you don’t get much more vital than a country’s banking system.

    1. NotTimothyGeithner

      One problem is the 2008 had a peculiar set of circumstances. Every seat was more or less decided at that point. Control of the White House and Congress wasnt in doubt. Shrub committed to heavy lifting, and Obama acted knowing he could pin PR blame on Shrub. Remember how Obama heroically pushed a car out of a ditch?

      Biden is still flirting with re-election concerns, and Obama didn’t pursue justice in the aftermath of the bailouts, setting up failure for any future crisis without a perfect set of circumstances to make these moves. The Treasury/Fed gang in 2008 knew Bush/Obama had their back. Biden is simply rudderless. He never built credibility as president.

      Biden is about Biden. He won’t do something for the good of the country.

    2. JohnnyGL

      “Assuming that the Biden regime can get their heads out of the Ukraine for a few days” — with the Russian success becoming harder and harder to deny, and the Chinese shuttle diplomacy making them look like rapid dogs, foaming at the mouth for war (never a good look, gotta keep it behind a veil) they may yet welcome a respite from this debacle.

      There’s no appetite for a broader rescue plan as you’re floating…this crew wants to let markets do markets.

      The dirty little secret is that all they have to do is STOP RAISING RATES and a lot of this goes away. That’s the most likely scenario.

      1. NotTimothyGeithner

        I think Biden’s character is a problem. He never should have nominated the Trump appointed Powell. It’s an important position. Biden plays a steady, wizened old hand. He will not tell Powell to do anything as it undermines Biden’s “serious” credentials. This is a guy who keeps Pete Buttigieg around.

        1. JohnnyGL

          Biden’s character is definitely a problem. He and his team can’t seem to see when they’ve messed up and need to course correct. None of them understand the concept of “restraint” or ‘diplomacy’ in the foreign policy realm. They’re obsessed with looking and sounding tough.

          I get the feeling Powell does as he’s told (much like Zelensky). Biden signaled through Lael Brainard in late 2021 that rates were going up, and swiftly, and that was the solution to inflation.

          Powell was pretty malleable for Trump, too. Recall that Trump told him to stop raising rates and he did just that.

      2. Louis Fyne

        —The dirty little secret is that all they have to do is STOP RAISING RATES and a lot of this goes away. That’s the most likely scenario.-

        No, that is just kicking the can. We are in the darned if you do, darned if you don’t—the “Zugzwang” phase.

        The US needs to stop inflation because real wages having been going down for the majority of the Biden administration; but
        Powell-Yellen-Bernacke-Greenspan created this debt bubble that needs to be cleared.

        We will probably get, as you predict, dovish monetary policy and 3% to 4% inflation is the new 2%. But that will hurt the bottom 85% more than the top 15%.

        1. Pat

          Actually admitting and tackling the major drivers of inflation in this country would require competence and courage, things that are more missing in the Biden administration than any in my lifetime.
          Does anyone really think that Biden and the majority of his crew actually understand that most of our inflation is top down and not driven by higher base wages? And any group that couldn’t even float an excess profits tax during the period of major gas increases when that idea made it to most of the financial press, doesn’t begin to have the cajones to do anything to stem the “market driven” price increases.
          Add to that that his years of being Delaware banking’s dogsbody means Biden’s go to is always going to be make bankers happy…and his administration, even if they were competent, would be undermined. Since they aren’t, and since most of the banking community couldn’t manage their way out of a hole without the government sending in pallets of money to use as steps, we are going to be left with 2008 and aftermath on steroids. Sadly, even if Trump or anyone else wins, the bank restructuring, regulation and yes indictments that are necessarily will be as likely as winning powerball.

          1. OwlishSprite

            Does anyone really think that Biden and the majority of his crew actually understand that most of our inflation is top down and not driven by higher base wages?

            Yeah, I think they know that and it’s all about profits, and price-gouging is what the wealthy donors want to do. Biden has always worked for his donors. His contempt for workers is palpable. He can drive a big rig better than anybody, dontcha know.

  6. vao

    The reluctance by responsible authorities to take proper action in due time is also a topic of discussion in Switzerland. Criticism is pouring against the precipitated incorporation of CS in UBS, worries are expressed about the competitive impact on the banking sector, and doubts are made explicit about the medium-term solidity of the consolidated entity — from business circles, finance specialists, political parties, and even former members of the SNB. The editorial of the business-orientated Schweizerische Handelszeitung is typical:

    “The impossible becomes reality. The forced takeover of CS by UBS is an unfathomable disaster.
    Once again we see that, with bankers, the old rule still applies: profits are privatized, losses are socialized. Not only does this lead to devastating incentives and compromises the stability of the finance sector; it also undermines the legitimacy of our economic and social system. Therein lies the greatest danger.

    The general tenor is that CS was already tottering on the brink of collapse two years ago, after the Greensill and Archegos debacles and the consequent billions of losses, the evident failure of all its risk management procedures, not to mention the accumulated fines because of its involvement in tax evasion schemes. Last summer at the latest, when CS did not seem to be able to get out of losses, was already haemorrhaging customers in its wealth management division, and was getting a third CEO since 2020, was it clear that something had to be done. Neither the FINMA, nor the SNB, nor the Swiss government did anything, despite a law being in place to restructure such problematic cases into “good” and “bad banks”.

    I wonder what the situation is in the UK and the EU.

    1. Sunny Nilavar

      The whole Swiss Banking system is 5x the GDP of Swiss.
      Will the merger of these 2 banks, the bleeding will stop. Unlikely
      UBS is also sitting on a lot derivatives and interest rate swaps, which are opaque
      and hanging sword.

  7. JohnnyGL

    Yellen definitely had a toad jump out of her mouth in that appearance. Rotten ideology and consolidation of power on full display, “a bank is important when I SAY it is important! Oh, yeah, and when the FDIC board agrees.”

    Here’s the rub…this is very much NOT 2008. The Biden team can get themselves out of this crisis by telling Jay Powell to lay off the rate hikes. Fundamentally, that’s what is causing the mark-to-market losses on long-dated securities. There’s no solvency issue.

    Don’t be surprised if the Fed doesn’t raise rates at this meeting. They’d rather deal with the politics of elevated inflation for longer than deal with the politics of rescuing more banks via shotgun-wedding-style arrangements that give plenty of political talking points to Republicans about bailouts.

    1. griffen

      Yellen and her appearance Thursday was followed Friday morning by a similar lackluster appearance from a direct report of hers at Treasury, Deputy Secretary Wally Ademeyo. I think a few here had commented on his fumbling of the responses to pretty direct questions by the CNBC anchors.

      I suspect that Powell, etc, have no desire to eat their recent words (which they did a mere year ago when they “took 75bps” off the table) and they will raise by 0.25% after this week’s two day confab. Added, one will hope they get highly specific on the nature of the economy and inflation vs the financial system risks that are already known and in the public eye. I don’t believe Elon Musk or Bill Ackman tweeting about the FED’s policy approach will find many takers, to be honest ( that headline was quickly featured on CNBC this morning)

      I can see an ongoing scenario where this crisis leads to more consolidation among the smaller community banks and regional banks, to an extent where geographic locations and headquarter locations offer scale opportunities.

    2. Yves Smith Post author

      Yes, this is way less complicated and entrenched than 2008. They need to back off of the rate increases and if they are going to be bloody minded about that, proceed MUCH more gradually.

      But the problem is again the Administration does not want to deal with the inflation hot potato, of supply chain and labor market issues. How about jawboning employers to hire more middle aged and elderly and disabled, who are normally frozen out of the labor market, FFS, when many would like or need more work?

      And of course they will never admit they need to roll back the Russia sanctions…..

      1. JohnnyGL

        Putting on my ‘matt stoller’ hat…what you suggest sounds too much like actual governing.

    3. Mildred Montana

      >”The Biden team can get themselves out of this crisis by telling Jay Powell to lay off the rate hikes.”

      Is the Fed independent of the government or is it not? I have always understood that it was. If it is not, then why does it exist?

      1. JohnnyGL

        Sure, the fed is independent in the same way that the DOJ is independent…not very…but enough to pretend insulate from accountability.

        “Don’t blame us, it’s the fed!!!”

    4. Alan Roxdale

      Yellen was better than this. And the question was entirely expected and should have been prepared for. Greenspan wouldn’t have given such a performance in a bad dream.

      My conclusion is Yellen, like Biden, is getting too old, and moreover is not the one making decisions. Something is deeply wrong in the White House, as with Regan post shooting, and we are getting Iran Contras tumbling out everywhere.

  8. Ashburn

    Perhaps we should view the Credit Suisse debacle as a metaphor for the US. An institution that is in permanent failure mode but whose leadership is too greedy, timid, and incompetent to make the necessary hard choices. Instead it simply doubles down on its bad decisions, throwing good money after bad.

  9. Revenant

    Lagarde is being held incommunicado after agreeing with Russian pranksters Vovan and Lexus that a central bank digital currency is all about individual control and that war on Russya has caused inflation via the energy channel.

    She’s been very lucky that Credit Suisse’s dying swan dance has distracted almost completely from this video!

    As for “normalising” interest rates, the normal rate of interest on risk-free securities should be zero. There should be a penalty for saving rather than investment pace the Parable of the Talents….

    The central banks should start financing expenditure directly, which places money in the hands of Main Street, rather than manufacturing reserves etc with quantitative easing which places money in the hands of Wall Street, especially by paying interest on overnight reserves too

  10. spud

    i watched a youtube by Douglas Macgregor when he said that the people that came into power in the 1990’s were not based in reality at all, or something on that order.

    the best these dimwits could do was play pacman, hate minorities, slavs and union members, cross picket lines, and base a economy on the coding of computers, then sent almost all manufacturing over to countries where the people were of a different color, and proudly stated their supremacy over the sweating people of color, and the destruction of their environments.

    you think any of them would admit to what they did? nope, they blame working people, russia, china, and congress.

    they will never reverse bill clintons disastrous policies, because they think they are correct, and everyone else is wrong.

    its up to the banks to become rugged individuals, pull themselves up by their bootstraps of unlimited tax payer dollars, and get back to coding.

  11. Piotr Berman

    I did not see much concrete in this article, except for “That does not mean monetary and regulatory authorities won’t continue to screw things up. This crisis was preventable. The Fed should have started inching rates up when the Fed first got religion, in 2014. Even if over time it amounted to only a half a point a year, the US would have gradually starved financial speculators of cheap leverage and have spared homeowners serious pain.”

    I do not know much about the levers that central banks have on interest rates, and long term consequences of positive or negative real interest rates. I would appreciate pointers to more details about negative consequences of long sustained period of very low interests rates that we had until recently versus a better alternative.

    1. Yves Smith Post author

      Sorry, the close-to-universal terrible quality of leadership in the West is a real problem and that is the main point of this post. Pervasive managerial deficiencies are severely limiting the Western ability to address any challenges, when we have even more complicated and fundamental issues staring us in the face, starting with climate change.

      Just because the big deficiency looks like a “soft” problem, in this case personnel and decision-making approaches, does not make it any less real than “hard” problems of say bad IT or bad regulations.

      This lack is manifesting itself both in the deranged responses to the fact that Russia is winning the war in Ukraine, clearly a scenario no one contemplated, and now the inability to process that the Fed can’t stop inflation with its blunt tool of interest rates (which is not the right tool) without killing the banks.

      Things are so bad this isn’t even, as I said in the post crisis era, Versailles 1788. We’ve gotten to late stage Romanovs misrule. Incitatus in the Senate will be coming soon.

      1. flora

        An aside: maybe the neoliberal “religion” that the Market will make all important decisions correctly – being the greatest information processor in the universe – and the only role for leadership is to get out of the way of the Market; maybe that is the problem. Govt just needs to stay out of the way of the Market for it to release its creative (and destructive) forces, like “creative” banking. So no need for a competent senior civil service or competent politicians. / wish I was joking.

    2. Mildred Montana

      >”The Fed should have started inching rates up when the Fed first got religion, in 2014.”

      A perfectly sensible approach. But easier said than done. It’s hard to tell QE addicts they should start weaning themselves. Better to go with the flow and continue to enable rather than provoke one of those fearsome Wall Street tantrums. So the Fed persisted far too long with ZIRP.

      I said a couple of years ago that the Fed was painting itself into a corner. When interest rates inevitably began to rise, its options would be few. Fed, meet corner, meet the paint you applied.

  12. Susan the other

    Seems like there’s nothing but hot money out there. So wouldn’t capital controls be good? Maybe as effective as Glass-Steagle Since all that corporate profit is international? It’s possible that the very last thing we should be doing is raising interest rates to attract more commercial deposits that are uninsured. But Powell, probably at the insistence of Larry, saw all the military spending and raised rates. He’s got a very stubborn expression on his face. I betcha Biden told him it was his problem. Actually the problem is our outdated foreign policy. It’s not working and it won’t matter how much money we throw at it, it’s not going to suddenly start working. And by the same token high interest rates just compound the problem by depressing domestic manufacturing and good wages. Maybe instead of raising interest rates we could impose capital controls, and maybe address the crazy imbalances caused by overly creative financial instruments while we are at it. The entire symphony is out of tune in an almost desperate attempt to keep the dollar strong.

    1. OwlishSprite

      It’s like, everybody hates US but so what, bomb them. Can’t bomb them? Sanction them. Sanctions don’t work? Seize their assets. Countries getting too friendly with each other? Well, the threats aren’t doing the job any more. Russia really put a wrench in the State Dept.’s go-to m.o.’s.

  13. Rubicon

    According to a reliable business source, “Today, a headline appears at Bloomberg News that provides a big clue as to Jamie Dimon’s frantic obsession with First Republic Bank is really about, that is, use a collapsing regional bank to get Treasury Secretary Janet Yellen on board to push for a government guarantee on all deposits, insured and uninsured, at all FDIC banks. By framing this as coming to the rescue of regional banks, rather than another crony bailout of the unaccountable mega banks on Wall Street, Jamie Dimon doesn’t have to explain to his compromised Board of Directors why 69 percent of the bank’s deposits were uninsured at year end.”

    So it appears Dimon was gun-ho w/ capturing First Republic Bank by coercing Yellen/Others into mandating Govt. Guarantees on “all deposits” because JP Morgan has 69% of uninsured bank deposits.

    It’s these behind-the-scenes manipulations that need to be brought into the limelight with what is really going on.

    1. Mildred Montana

      Thanks for that. I have lately been wondering why unrelated banks would scrabble together $30 billion to rescue a competitor. Why throw good money after bad? Whatever happened to devil-take-the-hindmost, survival-of-the-fittest free enterprise?

      Your comment enlightened me. Now I know why. That $30 billion, so generously (sic) proffered by other banks, went to deposits (sure to be FDIC-insured), not to capital where it was at risk in the event of a bankruptcy.

    2. flora

      Oh boy, just imagine what an outfit like failed (if not fraudulent) FTX could do with a setup like that – unlimited govt bailouts for all deposits in huge excess of FDIC limits. I believe FTX did acquire a bank at some point, before the balloon went up on SBF’s “creative bookkeeping.”

  14. flora

    The WH doesn’t want to fix the banking mess, the railroads mess, the E. Palestine mess, the Ukr mess, the FAA mess, the transportation mess, and on and on.

    And the EU is awfully quiet on their front, too.

    Some wags have suggested the US/EU leadership want to destroy the current banking system for some purpose or other. That seems a little far-fetched, imo. On the other hand, if the leadership did want to destroy the current banking system, what would they do and how would they behave differently than they are doing now?

    1. flora

      Or start a second fire to distract from the first fire, then start a third fire to distract from the second, then start a forth fire…. etc.

  15. OwlishSprite

    What is going to happen when enough countries ditch the USD and it is no longer the world’s reserve currency? This is being presented everywhere I look as a certainty.

    1. Sunny Nilavar

      No matter how much the prediction of US$ demise, it is still the least dirty shirt out there.
      What’s the alternate for Global currency?

    2. Yves Smith Post author

      This is a libertarian meme, just like crypto replacing fiat currencies. 10 years later, tell me how far that project has gotten.

      As we wrote previously:

      We have pointed out that it took two World Wars and the Great Depression to dethrone pound sterling, and that was when England had never been the dominant economic power (France, for instance, has been bigger). Even with the understandable resentment of America’s abuse of its privileged position, as the quip has it, “The dollar is still the cleanest shirt in the dirty laundry.” In an interview yesterday, Kremlin spokesman Dmitry Peskov conceded “We will not stand a chance to succeed” if Russia were to try to dethrone the dollar now.

      It is true that a long-standing move away from the dollar has been underway as the US standing in the world economy shrinks. The dollar represented 70% of central bank foreign exchange reserves in 2000. It’s now down to 60% as of the end of second quarter 2022. But the US percentage of world GDP has fallen even more over this time frame, from 30% of world GDP to 24%.

      Even as countries are trying to move to more bilateral trade and skip the dollar for trade transactions, many trade partners have currencies that are too weak, volatile, or illiquid in large transactions to be suitable to retain as foreign exchange reserves. For instance, the countries of Southeast Asia take each other’s currencies, but their central banks square up in dollars every few months.

      The US is admittedly capable of shooting itself in its economic foot, say via attempting a rapid military buildup with our “good only for looting” defense industry, which would put the US on an even faster decline path than it is now. (Doomsters can also worry about the Yellowstone caldera). But absent a rapid fall in our economic standing, there is not an obvious way to displace the dollar.

      The renminbi is not a good candidate for a host of reasons: China uses capital controls and is unwilling to run sustained trade deficits to get currency in circulation abroad. The US capital markets are still comparatively well regulated and the US courts are seen as pretty even-handed in dealing with monied interests.

      As the bro-affecting Jacob Dreizin put it:

      A bunch of commenters have written…..

      … various times…..

      …..that “if China, Russia, India, Brazil, etc. start trading in their own currencies“…..

      …..then the dollar comes down.


      It doesn’t matter so much…..

      …..what you accept for your oil, coal…..

      …..nuclear fuel, arms, whatever.

      Yes, it’s great to avoid key economic sectors being impacted…..

      … U.S. or other sanctions.

      But, structurally, it hardly impacts anything.

      What matters is…..

      In which currency do central and private banks, maintain their RESERVES?

      For Russia to stash away a lot of yuan…..

      …..(MUCH more than it holds now)…..

      …..China would have to issue a TON of debt…..

      …..because, at present…..

      …..there isn’t enough “quality” (central state-issued), yuan-denominated debt…..

      … be had, in the entire world.

      (Yes, if you read Bloomberg etc., you’ll hear about China’s horrible debt growth. It’s almost all regional, crap debt.)

      Well, the Chinese central state can only issue such debt…..

      …..if it will deficit-spend the proceeds.

      But, guess what…..

      China’s central state, barely runs a budget deficit.

      (It’s gotten bigger in the last two years, but it’s still just a laughable fraction of what the U.S. runs.)

      What this means…..

      There is only a NOMINAL volume of Chinese state debt, available.

      And even less, available OUTSIDE of China.

      If China DID run a large budget deficit…..

      …..(I can’t imagine it needs to, or what it would spend on, so this is just hypothetical)….

      …..that would be HUGELY inflationary…..

      ……as all that extra money spent inside China…..

      …..would stay almost exclusively INSIDE the country…..

      …..rather than “leaking out” all over the world, as does the dollar.

      (Because unlike the USA, China is a massive net exporter, not a massive net importer, and also doesn’t host tens of millions of immigrants/migrants who send money “home.”)

      And what THAT would do…..

      … raise demand for U.S. Treasury bonds by Chinese financial institutions…..

      …..and dollar account demand on the part of rich Chinese and their brats…..

      …..(looking to park something out of the country)…..

      ….and, what would that do?


      So China is not a candidate until it radically changes its economic policies by becoming much more internal-consumption driven as opposed to export/investment driven.

      How about a joint new currency?

      If you read the section on the bancor below, you’ll see that a multi-polar system requires the participants to surrender national sovereignity. Admittedly they arguably have already with the dollar system but participants understand how it works and have become accustomed to its costs.

      A selling point of a multi-polar order is more national sovereignity, but any new system requires the surrender of authority to new currency minders. And the bigger countries will have more say. But even so, would China cede authority and control to a multi-lateral authority where it did not have a majority vote or veto rights? Somehow I doubt it.

      1. OwlishSprite

        It’s immensely complex to me. What I see is countries de-centralizing and cooperating to get out from under the strangle-hold of the USD finance and FIRE sector, not try to replace the current Western system with an identical or similar one of its own. I found this interesting:

        1. Yves Smith Post author

          There is a big difference between desire and execution. You need a system that in fact is reserve-currency-like to escape. As we have explained, countries can engage in bi-lateral trading (China with Saudi Arabia). But then the net seller winds up holding a lot of the net buyer’s currency. In that Jacob Dreizen quote, we illustrated why that is not such a hot idea with China. And it won’t be because China also does not have a judiciary that foreigners trust will be at least kinda-sorta fair in the event of a dispute, plus China uses capital controls.

          An immediate example: countries in Southeast Asia denominate their trade transactions with each other in local currencies. But every few months, they flush out the currency imbalances into dollars. Vietnam knows Malaysian ringit won’t be of much use if it has to defend its currency. So if you looked at their trading currencies, you’d think they’d significantly weaned themselves of the dollar when it is still central to their currency management.

  16. Spider Monkey

    I think there might be some overlooked aspects to this. This week basically our government said they are working to guarantee all depositors in the entire country, is Europe doing that? They do not have a monolithic FDIC program, it is country by country, if they have it at all. This is one more reason capital will keep flowing out of Europe into the US. This is a good thing for the US.

    Banks are swapping collateral at par under BTFP, they are reducing their exposure to rising interest rates as we speak. This is not 08′ SVB, is not like a traditional commercial bank at all. Any other bank with exposure is getting their issues sorted out, that’s why the FED balance sheet just grew 300 billion dollars.

    Per the posts earlier, anyone serious cannot see how a CBDC could be implemented in the US, there is just no way. Too many conflicting interests. In Europe however…with the credit suise issue the AT1 bondholders are trying to take over (they are supposed to be 1st in line before shareholders) its essentially a hostile take over of UBS if the AT1 bondholders get their way. Currently UBS is saying F’ off (with the backing of the swiss government). I think its likely that if Europe has a banking crisis in front of them this will get brought to forefront. Will the AT1 shareholders go and take over the entire banking system or maybe the ECB just says no way and they buy all them out, issue new forever bonds then they can implement their much coveted CBDC.

    1. Yves Smith Post author

      The Credit Suisse AT1 bonds being ahead of shareholders was a special feature of the Credit Suisse bonds and not typical. From the Wall Street Journal (I’m including information about how the bonds work for the benefit of other readers):

      AT1 bonds—also known as contingent convertible bonds, or CoCos—were introduced after the financial crisis as a way to transfer banking risk away from taxpayers and onto bondholders. They also became a popular investment product that money managers and banks, including Credit Suisse, marketed to clients as a relatively safe way to boost yield on bond portfolios….

      Buyers of these bonds were always risking the chance that the instruments would become worthless or written down to a fraction of their value. They are structured so that the debt can be “bailed in” under circumstances laid out in individual bond prospectuses. These can include when a company’s capital ratios fall below a certain level or if regulators deem a bank unviable. Some AT1s convert to equity, while others such as Credit Suisse’s get wiped out.

      The decision to wipe out Credit Suisse’s AT1 bonds has prompted frantic questions among investors. Among them: Why were bondholders wiped out when shareholders weren’t?….

      Traditionally, bondholders rank above equity holders in capital structure. But the Credit Suisse bonds were outliers from other European banks, because they provided for a case where regulators could write them down without wiping out equity holders.

      Regulators in the eurozone, which doesn’t include Switzerland, clarified that difference with investors Monday.

      “Common equity instruments are the first ones to absorb losses, and only after their full use would Additional Tier 1 be required to be written down,” said a statement from the European Central Bank’s banking supervision arm, the Single Resolution Board and the European Banking Authority.

    1. flora

      adding: yes, Tucker and Noem, however, bank lobbyists are working to change state level definitions of currency in the Universal Commercial Code state laws in a stealth manner; hide the changes in huge bills lege are unlikely to read in full before voting.

      Gov. Kristi Noem: This is a threat to our freedom

      Part of building out a necessary legal framework? (While we’re distracted by other events?)

  17. TMartin

    What I find interesting is the disconnect between the Foreign Policy drivers in the State Department, the ‘ Security State’, and national leadership. While, obviously, many in Europe and the US, don’t want a financial crisis, hasn’t it occurred to anyone that there may be those on the planet who might have other interests…like the ones trying to figure out an alternative to a dollar system. Considering that the US has made it unattractive to drug dealers, arms merchants, banana republic dictators to hold funds in US controlled instruments, why would any respectable oil baron want to have finds in an oh so worthy, non neutral, Swiss bank. Whoosh…that would be the sound of of a bank run if there was a coordinated effort to move funds to a more secure place.

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