First, the Fed was inflating asset prices for almost a decade, with consistently near-zero interest rates and money pumping into the system since 2008.
In 2020-2022, they continued pouring gasoline on the big bonfire of debt-driven artificial liquidity, the “free-money” party that inflated many bank stocks as if they were disruptive tech plays.
When the inevitable inflation could neither be ignored nor labelled transitory anymore by Powell, they panicked and swung the pendulum in the other direction. So far, so good. Excesses in one direction demand excesses in the other, actio reactio – otherwise an imbalance will form that has severe consequences on the economy and financial system.
When the first imbecile-run institutions started balking under the pressure of the extreme interest acceleration last week, guess who was there again to rescue the parties that had parked their artificially printed capital in Silicon Valley Bank (SIVB) and the likes. Why, the Fed, the treasury, the government, of course. De jure the Fed may be an independent entity, but de facto it is an arm of today’s government, at Washington’s every beck and call.
The government stated that they jumped in to protect “small businesses“, mom-and-pop stores etc. Well, judging from the name, it’s reputation, and a roster of its customers, whoever parked their money at SIVB was anything but small corner shops – rather venture capital and equally financially incompetent tech companies with even more incompetent treasury officers.
The government once again stepped in to protect the elite, to provide training wheel support to those that can’t or won’t think about risks and due diligence when deploying their money. What do they think will be the result of this?
Last week’s events put another nail into the coffin of the free market society that the US once was. If depositors are protected at all cost, no one has an incentive anymore to be financially prudent. As much as a helicopter parent will raise a child that does not learn that actions have consequences in the real world, the government stepping in at the first inkling of stress raises a society and ivory-tower elite of bankers and venture capitalists who now believe that however reckless they act, the government will be there to save the day.
As Ken Griffin put it, the government bailing out SIVB and Signature Bank rewards failures in risk management.
And, of course, the taxpayer will foot the bill. Whatever the government tells you, it will always be the ordinary citizen that gets sucker-punched. It just may not be so obvious in the short term. Whichever way you twist it, in the end the rescue money comes from printing money, the government, or bank insurance pools. These either cause more financial burden on the taxpayer, or are funded by bank customers and taxpayers directly.
Not letting the child learn that falling down hurts, will ends in the child jumping off a cliff at some point in joy. Banks and depositors should be allowed to fail, to enter debt restructuring and bankruptcies. Otherwise, we are just going down the long-term death spiral of renewed excess, loss of trust in the banking system, centralization of financial power, government interventionism, and stubborn inflation.
