Power & Market

Another Week, Another Crisis

To no one’s surprise, there was another banking crisis over the weekend. The Federal Reserve and other large institutions stepped in to allegedly save the day, in what could be considered a highly accretive investment for some very wealthy individuals. As CNBC explains:

JPMorgan acquired all of First Republic’s deposits and a “substantial majority of assets.”

…and that was Monday.

Two days later the Fed raised rates again, moving the target federal funds rate into the 5 to 5 1/4 percent range. With the rise in the Fed’s fund rate, America’s central bank will lose even more money as it also increased the interest rate paid on the nearly $3 trillion reserve balance. As explained:

The Board of Governors of the Federal Reserve System voted unanimously to raise the interest rate paid on reserve balances to 5.15 percent, effective May 4, 2023.

They didn’t have to do this. Just one day prior the Fed was paying 4.90% to banks. Surely if the Fed decided to keep this rate at 4.90% rather than 5.15%, the banking system could hardly be said to be worse off, and it would save the Fed a few billion dollars over the course of a year. Not only did this not happen but it will only further the $52 billion remittances due to the Treasury.

One would think interest rates this high would be great for the banking sector. Yet, CNBC reminds us this was the third banking failure since March, and given the trajectory, there will be more failures to come.

Take a moment to consider the current state of the economy: There is a national debt of $31.7 billion with interest rates higher than few could ever imagine. The Fed is taking losses each week paying more interest out to banks than interest earned from the public. On top of that, war drums in DC are getting louder while the role of the US dollar in international trade is getting smaller. No one has time to consider longer-term issues, which the Wall Street Journal noted last year, such as the $100 trillion in unfunded liabilities that must be paid eventually.

Yet talk of the debt ceiling continues to dominate headlines. Paul Krugman extols the virtues of the $1 trillion platinum coin, per Business Insider:

But as I said, people who really should know better constantly get this wrong, and imagine that the coin would be inflationary.

According to the Nobel Laureate, this monetary inflation would be neutralized if the Fed simply sold $1 trillion of its US Government bond holdings. Of course, the question to follow is: To whom and at what price?

Given that the Fed’s scheduled $60 billion roll off of US Treasuries per month has taken financial markets to the brink of extinction, the act of selling $1 trillion in bonds becomes next to impossible.

If that wasn’t enough to show the current state of affairs:

On Monday, Treasury Secretary Janet Yellen said the government could run out of money and trigger an economic crisis as soon as June 1.

It seems the only person with something good to say this week was Fed Chair Jerome Powell, who opened Wednesday’s press conference with unbelievably great news:

Conditions in that sector have broadly improved since early March, and the U.S banking system is sound and resilient. We will continue to monitor conditions in this sector. We are committed to learning the right lessons from this episode and will work to prevent events like these from happening again.

Between Powell, Yellen, Krugman, and the Austrian Business Cycle playing out right before our very eyes, the only certainty is that not all is well, and that the U.S. banking system is not sound and resilient. This week’s bailout will not be the last. And by the time you read this article, another banking bailout will already be in the works!

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