Written by Mike Shedlock via MishTalk.com,
The Fed is looking for scapegoats. He got help from the Wall Street Journal…
Silicon Valley bank scapegoats
Please note that the economy has changed, the regulators have not
As of March 8, Silicon Valley Bank and Signature Bank were both, according to public disclosures, “well capitalized,” the optimal level of health by federal regulatory standards. Days later, both failed.
“The question we were all asking during this first week was, ‘How did this happen?'” Federal Reserve Chairman Jerome Powell said Wednesday.
Banking regulators will spend months, if not years, getting to the bottom of what happened.
What none of the regulators or bankers anticipated was how quickly depositors could flee, which appears to be a new reality in the age of smartphone apps and social media.
“The speed of the race … is very different from what we’ve seen in the past,” Mr. Powell on Wednesday. “And that suggests there is a need for potential regulatory and oversight changes, just because oversight and regulation needs to keep up with what’s going on in the world.”
FDIC officials are discussing how to manage public trust as social media expands people’s ability to “e-panic,” a person familiar with the talks said.
“The speed of the race … is very different from what we’ve seen in the past,” Mr. Powell on Wednesday. “And that suggests there is a need for potential regulatory and oversight changes, just because oversight and regulation needs to keep up with what’s going on in the world.”
Scapegoating nonsense
The idea that the economy changed (it’s always changing) and that smartphones and social media are largely responsible for the failure of Silicon Valley Bank is a bunch of scapegoat nonsense.
Granted, social media increased the speed at which SVB failed, but that has nothing to do with the cause of the failure.
Social media increased the speed of failure, but smartphones played no role. To start a transfer from bank A to bank B you need to have an account with both banks. If this was done by computer, a normal landline or smartphone makes no difference in speed.
“Bank regulators will spend months, if not years, getting to the bottom of what happened.”
How crazy, but I have no doubt that it is true.
At the Fed’s Q&A, Jerome Powell asks “How did the bank failures happen?”
“The question we’re asking ourselves going into the first weekend is how did this all happen.”
No study required. I laid out twelve reasons for bank failures, none of which had anything to do with smartphones or the changing economy.
Please note in the Fed Q&A, Jerome Powell asks “How did the bank failures happen?”
How did this happen?
The Fed once again kept interest rates too low for too long.
Even as the Fed sought to make up for the lack of prior inflation, it initially welcomed the uptick in inflation.
The Fed failed to understand how $9 trillion in QE would encourage asset bubbles.
The Fed failed to understand how three rounds of fiscal stimulus, the largest in history, would boost inflation.
Fed presidents believe in economic models like inflation expectations that their own studies show don’t work.
When inflation picked up, the Fed continued to insist that inflation was transitory.
Even when the Fed finally realized that inflation was not transitory, it maintained QE until the end, not wanting to disturb the previous forward guidance.
The San Francisco Fed, whose job it was to oversee Silicon Valley Bank (SVB), was asleep at the wheel.
The Fed considers Treasuries a risk-free asset, ignoring duration risk.
The Fed ignored a record concentration of long-term Treasury and mortgage assets in SVB despite understanding the interest rate risk of those assets.
The Fed’s guidance has been a disaster. He openly encouraged speculation.
The Fed reduced reserve requirements for deposits to ZERO.
If you are looking for one item and one item only see point 12. The reserve requirement for deposits is ZERO.
The discussion sparked a bunch of silly responses on Twitter, but this one takes the cake for financial illiteracy.
Mattress solution
“Anyone in the US can set up a 100% reserve account tomorrow if they want. For a big safe and fill it with big denomination notes, gold, silver, whatever they want. But why ask everyone to have that that hardly anyone wants?
Wow!
Try making a $1 million payroll with a safe or a mattress.
Heck, try paying anything with $10,000 cash. You’ll be knocking on the door quickly asking where you got the money from, and it will most likely be confiscated as drug money.
As for “But why demand that everyone have what almost no one wants”, it seems to me that there was a run on SVB worth hundreds of billions of dollars because there was amazing demand from a bank of security.
The FDIC only covers $250,000. The bank run occurred precisely because there was no custody by the bank.
Not designed for speed
Why didn’t regulators blow the whistle on SVB’s problems?
“The oversight process has not evolved for rapid decision-making. It focuses on consistency over speed. In a fast-moving situation, the system is not so well designed to force change quickly.” https://t.co/eOlHFdKJkC
— Nick Timiraos (@NickTimiraos) March 24, 2023
Not designed for speed
Here’s another shout out from the same article.
“The oversight process has not evolved for rapid decision-making. It focuses on consistency over speed. In a fast-moving situation, the system is not so well designed to force change quickly.”
Again, this has nothing to do with speed. It has everything to do with a zero reserve requirement on deposits plus a Fed that piled up about $9 trillion in bank deposits without considering the duration mismatch of those funds’ bank investments.
We have consistency, that’s for sure. We have the consistency of duplicating failed policies and not learning from past mistakes.
Fed Policy: It’s not fractional reserve banking, it’s ZERO reserve banking
If you think we have fractional reserve banking, we don’t. We have zero reserve banking.
For further discussion, see Fed Policy: It’s Not Fractional Reserve Banking, It’s ZERO Reserve Banking
Certainly, part of my proposal is controversial. I propose a 100% gold backed dollar. But we don’t even have a dollar backed 100% by dollars.
I do not endorse fraud, because that is what it is.
A person deposits money and a bank lends it over a long period of time.
Both claim the rights to the money at the same time.
It is logically impossible and in fact legalized fraud. https://t.co/2vPW8G23QK
— Mike “Mish” Shedlock (@MishGEA) March 20, 2023
All SVB or any bank had to do to maintain 100% liquidity was park deposits at the Fed or extremely short duration US Treasuries.
Reader question
My posts also prompted this question. “Are you proposing that banks stop lending on their deposits?”
Going further, since SVB didn’t park money at the Fed, they had unrealized losses that did affect their ability to lend!
This is a failure of the SVB, the FDIC, reserve policy, QE and the Fed.
I blame the Fed more.
— Mike “Mish” Shedlock (@MishGEA) March 25, 2023
The fact is that loans create deposits. And so did QE with almost $9 trillion.
Fiction reserve loan
If anyone thinks I’m a johnny-come-after-the-fact I’ve written about the issue many times lately, at least once in 2009 and again in 2020.
Please note my March 2020 article Dummy Reserve Loans Are the New Official Policy
Official policy finally caught up with reality. Reservations are fictitious.
With little fanfare or media coverage, the Fed made this announcement about reserves: “On March 15, 2020, the Board reduced reserve requirements to zero percent effective March 26, 2020. This action will eliminate reserve requirements for all depository institutions.”
What has changed in terms of loans?
Essentially, nothing.
The ad that just officially admitted the booking denominator is zero.
There are no reserve loan restrictions (but practically speaking, there never have been).
When do banks make loans?
They meet the capital requirements
They believe they have a solvent borrower
Creditworthy borrowers want to borrow
BIS Working Papers no. 292 Non-conventional monetary
In 2009, I referred to working papers no. 292 of the non-conventional Monetary BIS
The article addresses two fallacies
Proposition #1: An increase in bank reserves gives banks additional resources to make loans
Proposal no. 2: There is something uniquely inflationary about bank reserve funding
From the BIS
The underlying premise of the first proposition is that bank reserves are necessary for banks to make loans. An extreme version of this view is the textbook notion of a stable money multiplier.
In fact, the level of reserves hardly figures in banks’ lending decisions. The amount of outstanding credit is determined by the willingness of banks to offer loans, based on the perceived trade-offs between risk and profitability, and by the demand for these loans..
The main exogenous constraint on credit expansion is minimum capital requirements.
The central bank has a monopoly on interest rate policy, but not on balance sheet policy. This raises complicated questions about coordination, operational independence and division of responsibilities.
Balance sheet policies can have a significant impact on the financial risks that the central bank absorbs. The extension depends on its features and how much you trust them. This also raises questions about operational autonomy and credibility, which largely reflect the impact of losses on the central bank’s financial position.
Read these points over and over until they sink in. I discussed this article in 2009 and again in 2020.
Three Key Points
Deposits result from loans and QE policy.
The central bank has a monopoly on interest rate policy, but not on balance sheet policy. The FDIC is supposed to address the latter. And in the case of the SVB, the San Francisco Fed was also asleep at the wheel.
Social media, smartphones, and the WSJ’s notion of “The economy changed, regulators didn’t” are scapegoats for a problem I addressed in 2009.
what to expect
Bank regulators will spend months, if not years, getting to the bottom of what happened.
They will conclude that the problems are social media, smartphones and the WSJ’s idea that the economy changed but regulators couldn’t keep up.
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