The Cure for the Bank Collapse? It Could Be Worse Than the Disease

The Cure for the Bank Collapse? It Could Be Worse Than the Disease
Composite, original images by Cristalloid and pch.vector

From Peter Reagan at Birch Gold Group

Sure looks like the bank contagion and its ripple effects I reported on over the last week are expanding.

That’s because of the underlying making things worse for the Federal Reserve, which is inflation.

Carl Icahn recently restated what we already know and offered a sneak preview of the future:

Billionaire investor Carl Icahn said that the U.S. economy is at a breaking point, blaming “worse than mediocre” leadership and warning that soaring inflation threatens to topple America’s position on the world stage.

“Inflation is the worst thing an economy can have, and I think people underrate that,” he said, adding that, historically, “every hegemony has been destroyed by inflation.”

So how is inflation tied to the banking crisis?

Here’s the issue in a nutshell:

  • In order to fight inflation, the Federal Reserve raises interest rates
  • So far, those higher interest rates have “disinflated” the value of banks’ capital reserves
  • …without having much impact on street-level prices

This leaves the Fed with a paradox. They’re forced to choose between bailing out the banking system by giving up the fight against inflation…

Or continuing to fight inflation with higher interest rates, which will continue to destabilize the entire banking system.

We’ll start with comments made by Mohamed El-Erian, president of Queens’ College at the University of Cambridge, who said:

See? El-Erian thinks the Fed must “retreat from its inflation battle” in order to stabilize banking.

Although the Fed has other tools at its disposal – however, those tend to increase inflationary pressures…

When excessive money-printing causes problems, the only solution is more money

The Federal Reserve and the Treasury Department invoked Great Depression-era emergency measures to shore up banks – and immediately banks borrowed an all-time record $164.8 billion from the Fed in just one week – 33% more than the worst week of the 2008 financial crisis. That’s astonishing.

This article captures the Fed’s dilemma. The crisis:

prompted the Fed to announce a new bank lending facility on Sunday in an effort to maintain confidence in the system – effectively putting the Fed back in the business of emergency lending even as it tries to tighten credit overall with higher interest rates.

“The threat of a systemic disruption in the banking system is small, but the risk of stoking financial instability may well encourage the Fed to opt for a smaller rate increase at the upcoming meeting,” Oxford Economics economist Bob Schwartz wrote on Friday.

There are two directions the Fed could take here. On the one hand, they could stay true to their stated course, and fight inflation. Hedge fund co-head Jonathan Butler observed:

Markets believe that central banks will pivot before a recession, whereas my view is the central banks will tighten until they’ve got control of inflation. Central banks are going to be more hawkish than the market believes.

That’s certainly what the European Central Bank (ECB) did this week when they moved ahead with their 50 basis-point rate hike regardless of the howls of distress from Credit Suisse.

But there are also some Wall Street types who are are still desperately hoping the Fed will surrender, stop raising rates and return to money-printing:

“We believe the Fed is near its peak,” said Seyran Naib, a strategist at Skandinaviska Enskilda Banken AB. “When credit conditions and spreads are now tightened, the market does the job for the Fed, reducing the need for further rate hikes.”

To Amy Xie Patrick, head of income strategies at Pendal Group Ltd. in Sydney, the fact that two-year yields fell below cash rates is a sign that the hiking cycle will end.

Here’s the thing you must understand: the Fed’s interest rate hikes push prices down, the price of eggs and equities alike.

Money-printing caused this problem in the first place.

But now, the cure is worse than the disease – at least if you’re a bank…

Today, U.S. banks have at least a $620 billion hole in their capital reserves.

FDIC report, U.S. bank capital reserve losses, February 2023

via FDIC

Nationwide, 1 out of every 10 U.S. banks have bigger unrecognized losses than SVB (remember, the one that collapsed on Friday).

If just half of uninsured depositors withdrew their funds, 190 more banks would fail.

That’s how big the problem is.

And it’s not just a domestic problem. Because the entire world engaged in coordinated, reckless money-printing, global banks are suffering together.

Take Credit Suisse, for example. This week, Credit Suisse became the first megabank to beg for a central bank handout since 2008.

The bank’s press release said absolutely nothing about the crisis, yet has a whiff of desperation about it nevertheless:

The bank called the loan a “decisive action to pre-emptively strengthen its liquidity.”

This additional liquidity would support Credit Suisse’s core businesses and clients as Credit Suisse takes the necessary steps to create a simpler and more focused bank built around client needs.

Seems like Credit Suisse should’ve been strengthening its liquidity and creating a more client-focused institution all along?

But that’s not how these things work. When money is easy, they act like it will last forever. Like kids on a playground – who throw tantrums when you tell them it’s time to leave.

If all this has you concerned, you shouldn’t be! Because Janet Yellen has a special message for you…

 “This is fine,” Janet Yellen assures Congress (with a straight face)

The Treasury Secretary of the United States wants you, and Congress, to know that, despite the chaos unfolding in the banking system:

I can reassure the members of the Committee that our banking system remains sound, and that Americans can feel confident that their deposits will be there when they need them, this week’s actions demonstrate our resolute commitment to ensure that depositors’ savings remain safe.

Just a few things she didn’t mention…

  • Credit Suisse and its central bank bailout
  • The $30 billion loan she wrangled 11 other banks to prop up failing First Republic Bank
  • The $620 billion hole in banks’ capital reserves
  • Inflation

…well, there’s more, but I’m sure you get the point. If Janet Yellen were actually on fire, I guarantee she’d say, “What smoke? I don’t smell anything,” right up to the moment she collapsed into a pile of ashes.

Have you been on the fence about diversifying with physical precious metals? Maybe you’ve been waiting to see whether something broke before you pull the trigger?

If that’s the case, I politely encourage you to not wait another day.

Take a minute and educate yourself on the benefits of diversifying with tangible safe haven assets like physical gold and silver. The sooner you do, the sooner you’ll be sleeping more soundly at night.

2023, bank run, central banks, Featured, gold, janet yellen