Deposit Insurance And Cheap Money – The Ultimate Financial Bad Guys
Why would you throw-in the towel now? We are referring to the Fed’s belated battle against inflation, which evidences few signs of having been successful.
Yet that’s what the entitled herd on Wall Street is loudly demanding. As usual, they want the stock indexes to start going back up after an extended drought and are using the purported “financial crisis” among smaller banks as the pretext.
Well, no, there isn’t any preventable crisis in the small banking sector. As we have demonstrated with respect to SVB and Signature Bank earlier this week, and these are only the tip of the iceberg, the reckless cowboys who were running these institutions put their uninsured depositors at risk, and both should now be getting their just deserts.
To wit, executive stock options in the sector have plunged or become worthless, and that’s exactly the way capitalism is supposed to work. Likewise, on an honest free market their negligent large depositors should be loosing their shirts, too.
After all, who ever told the latter that they were guaranteed 100 cents on the dollar by Uncle Sam? So it was their job, not the responsibility of the state, to look out for the safety of their money.
If the American people actually wanted the big boys bailed out, the Congress has had decades since at least the savings and loan crisis back in the 1980s to legislate a safety net for all depositors. But it didn’t for the good reason that 100% deposit guarantees would be a sure-fire recipe for reckless speculation by bankers on the asset-side of their balance sheets; and also because there was no consensus to put taxpayers in harms’ way in behalf of the working cash of Fortune 500 companies, smaller businesses, hedge funds, affluent depositors and an assortment of Silicon Valley VCs, founders, start-ups and billionaires, among countless others of the undeserving.
And for crying out loud, forget this baloney about the bailouts aren’t costing taxpayers a dime because they are being paid for by the banks via insurance premium payments to the FDIC fund. Well, yes, when the Congress wants to disguise a tax they call it an “insurance premium”, as if its victims had the choice to elect coverage or not. But when $18 trillion of deposits are being assessed in order to bailout careless large depositors who paid no attention to what was happening to their money, then that’s an onerous tax by any other name.
Accordingly, Washington’s panicked bailout of $9 trillion of uninsured deposits held by big and small companies, hedge funds and affluent customers over the weekend was therefore nothing less than a gift to the undeserving. And now we find out the two banks that have been explicitly funded 100% by Uncle Sam—SVB and Signature Bank—were deep into woke investing and conduct. That makes the bailout by Janet Yellen & Co. especially galling.
For crying out loud, this is how the poison of wokeness and ESG spread like wild-fire among American businesses in the first place. The latter should have ordinarily been a bulwark of conservative values and common sense, but years of ultra-easy money from the Fed and the precedent of bailout-after-bailout since the 1980s allowed top executives to take their noses off the grindstone of safe and sustainable profitability in favor of a purely political agenda.
In any event, inflation is still raging and wage workers are still taking it on the chin. During February real wages dropped for the 23rd consecutive month. So the Fed needs to stay on its anti-inflation playbook, come hell or high water. That means it needs to keep raising rates until their after-inflation level is meaningfully positive, which is not yet remotely the case.
Indeed, unlike Tall Paul Volcker back in the late 1970s, who inherited 10-year Treasury yields at -2.0% and raised them to 10% over the next several years, real interest rates are still deeply underwater as we show below. The cries to stop the rate increases, therefore, are just damn nonsense.
In fact, in any sane world these are not even “increases”. They are long overdue normalization of interest rates that have been absurdly pinned to the zero bound for upwards of a decade.
And the Fed most certainly should not throw in the rate increase towel owing to a Wall Street proclaimed “crisis” in the small banking sector. That’s the long-standing wolf cry of the entitled class of speculators decamped in the digital canyons of Wall Street.
Yes, regional banks were playing fast and loose with depositor money, but even the biggest of these did not amount to a hill of beans in the great scheme of the nation’s $25 trillion GDP. As we showed a few days ago, both the recently departed SVB and Signature Bank each accounted for barely one-half of one percent of the nation’s $30 trillion of banking system assets.
If a few more local and regional banks need to be closed, therefore, so be it. Sooner or later the piper has to be paid.
Y/Y Change In Real Hourly Earnings, March 2021 to February 2023
For want of doubt, here is the pattern of the annual rate of change in the two-year stacked CPI. During the 18 months after January 2021 it soared from 1.9% to 7.1%. Yet notwithstanding the Fed’s purported anti-inflation campaign since March 2022, there has been no meaningful retreat from the June 2022 peak. That is, when you take the “base effects” out if the equation, it is clear that the CPI has been stranded at 40-year
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