Before sitting down to write this evening, I considered possible tacks for the content of this post about the SVB and Signature Bank failures. I first wondered about the jaded and cynical approach, and the glee over firms like Bain Capital and crypto crooks having a haircut to be expounded. Something about reaping what’s sown.
How I wish the problem were only of such matters, isolated incidents of some badly managed financial institutions. But the land of unicorns, rainbows and lollypops just doesn’t exist.
What is to wonder is if the standard narrative is true, that SVB exhibited odd behavior mid-week last week which caused a run on deposits that, because they failed to properly hedge their assets, it simply didn’t survive. While the narrative contains some grains of truth: poorly managed assets, failure to provide great customer service as evidenced by 80% of deposits uninsured at the time of closure, I suspect that it’s just a synopsis of the very end of the final chapter. It’s not the whole story, or even anything close.
I suspect that SVB had been experiencing an outflow of funds for some time. It happens during a disinflation. But the real beginning of the end of the final chapter for SVB started with the spike in market rates that occurred sometime in week before.
Suddenly, up, up, up they go…
It’s the danger of pegging rates and using tight money to raise them to the peg because the Fed only influences market rates within a band around the target rate so long as that rage remains near the clearing rate. But the clearing rate is market driven, and excess demand for money can push the clearing rate well past the Fed’s target band, into the stratosphere with unquantifiable damage inflicted.
What really matters is what happens next and how fast it happens.
I remember seeing a report in Reuters very recently about market rates exploding. I suppose it was about a week ago. I don’t use my econ skills much these days, and when I saw that report, something in my mind whispered that this was potentially important information. But I had not the time nor inclination to study the potential of this market phenomenon at that moment, and I went on to something else.
Next, I see stories about some banks not being able to fund themselves, and, of course, 2+2 = 4.
We don’t hear anything about the NY Fed trading desk having lost the rate peg and what it means to banks on the fringe trying to fund themselves. No, it’s the bad, bad, banks needing rescued that we hear about, partly because that is what’s visible to most, and perhaps, a little knowledge about the trading desk that can come in handy to help understand what really happened is lacking in much of the reporting.
It’s sad that we don’t hear about the Fed’s oopsies and the cost of them. But I suppose that if we did hear about them, then the central bankers would never get to look like they’re donning the red cape and hurrying off to the rescue.
Nobody wants to see the day that the Fed’s discount window opens. What needs to happen next, and preferably right now, is policy changes at the Fed that make it irrelevant – inflation be damned.
PS: By the way, I am guessing that the SVB depositors didn’t receive the “broad pain” memo from Fed Chairman Powell that was dated some time last Spring either, because they categorically refused to be assigned to take one for the inflation-fighting team and the government is letting them off the hook while the ranks of the unemployed start piling up, experiencing the individual and very personal destruction that comes with that. “Find 20 million someone-elses,” they say. It’s just not the way this is supposed to work.
dajeeps 