economists are the dumbest creatures on earth, inflation is happening because the entire economy became less efficient for various reasons related to the pandemic and foreign policy, plus the money the Fed itself printed. Hence fewer goods being produced with more money available and increased prices as a result. These people think they can print money and adjust interest rates and make the economy magically do what they want when in reality the economy is driven by technological advancements that improve productivity, not financial trickery
these people don't live in the real world and now we are going to be stuck with stagflation for years most likely
+ the apparent belief that it's ok that we bail out people who took the wrong bet (i.e. bought long-running treasury bonds and overvalued mortgage-packages AND the people who saw this and then crashed their own bank...) and now still want their returns, because they are special... Socialism for the 0.01% v2. First one was a smash.
Well, I'd say everyone with more than 250k deposit didn't do their due diligence. And they might have asked the question, why the SVB-conditions were better than elsewhere. I would argue that's the idea of a free market, no?
I don't want to live in a world where I have to track down and personally inspect the factories and farms that produce my food.
If I deposit cash at a member bank that the government says is compliant with their rules and regulations, that should not imply any risk taking on my side.
If I use a payroll provider like rippling that uses SVB as their payment rails, I shouldn't have to worry about that.
If I use a service that goes under because they can't fund payroll because of a banking supply chain issue, that seems rather hard to due diligence.
If you honestly hold that position, I suggest you get a little bit of empathy for decision-makers. It will make you a better member of society.
And yes, to add insult to injury there is people offering the service of splitting up your cash between banks in a way which should give every startup enough leeway to "make payroll" for some months (https://twitter.com/ddayen/status/1634925784271036417)... It just doesn't work with monopolistic structures and you can't bankrun it, when you feel like it, so maybe not as en vogue with our hosts?
Yes, and while less goods were being produced, the Fed simultaneously brought an obscene amount of new dollars existence, resulting in even greater inflation.
Economists are the equivalent of the Rock Star Coder. Think they know the right answer and push through a quick "solution" into the system, then they let other people clean up the mess.
imho inflation is mostly psychological. In a steady state scenario when today's business is like yesterday's, people feel less inclined to put up their prices for social psychology reasons. When there's some sort of dislocation, they all of a sudden feel those factors are less important and more justified in putting up their prices. A pandemic is just an example of one kind of dislocation. It doesn't really matter the specifics of how the pandemic affected the economy -- that's just some noise on top of the signal that is all about "things are different now, so please accept my new increased pricing".
The same thing can be done in reverse: e.g. BigTech firing gazillions of people and suddenly "Ah, no we're not paying the kind of salaries that were common in the before times".
Over half of increased prices most people see are not inflation driven though... it's using it as cover to maximize prices, which can have good and bad points. In the end, it's a vicious cycle of a tail wagging the dog, then the dog eats the tail, then there's a bloody mess for everyone else to clean up.
Find “easy money” and you’ll find inflation. It’s really not rocket science.
Houses never lose value, let’s give those loans out to everyone - housing bubble. Heck, housing inflation goes back to the GI Bill.
Everyone should go to college - let’s give kids hundreds of thousands of dollars to spend at an institution of their naive choosing! Student loan “crisis”.
If I’m charging $1 for something and I know you have $5 to spend on it, the price is now $5.
Jerome Powell has shown that he doesn't have the skill to be fed chair. Why would you drop rates prior to pandemic when the economy was doing well? Why were they overly aggressive when the pandemic hit? Take calculated actions and measure results. Some actions I don't even get like buying junk bond etfs.
Increasing the available cash during boom times leads to inflation risk when you need to inject more cash into the economy during a downtime. While pandemic wasn't predictable and downturns do happen and should have been planned for.
The real problem is that everyone, including economists themselves, pretends that economics is a real science with repeatable theoretical models, when in reality it’s still a social study that relies on several other budding areas of research and study; at least for now.
Another issue is that economist forecasts tend to be heavily influenced by politics.
> economists are the dumbest creatures on earth, inflation is happening because the entire economy became less efficient for various reasons related to the pandemic and foreign policy, plus the money the Fed itself printed. Hence fewer goods being produced with more money available and increased prices as a result. These people think they can print money and adjust interest rates and make the economy magically do what they want when in reality the economy is driven by technological advancements that improve productivity, not financial trickery
Who do you think figured all this out? Surely not economists, the dumbest creatures on earth.
China and other manufacturing behemoths are producing dramatically more than they were before the pandemic and we are importing and buying all of those foreign goods.
https://fred.stlouisfed.org/graph/?g=117Ig
I don't know about where you live but I see a lot more automation in service industries where I live. We continue to innovate. There's a labor shortage and we are below the natural unemployment rate, and it's not that those workers are doing less, as real GDP continues to grow
https://fred.stlouisfed.org/graph/?g=117IF
The inflation we've seen is almost all demand driven. There's plenty of supply of goods and services compared to pre pandemic. Your narrative doesn't fit the data.
Everyone got their stimmy check, paid down their debt, quit commuting, and realized they could buy more stuff. They did that for a couple of years. Now that credit card balances are peaking again (and at higher rates!), demand will slow and there will be a recession. The fed, always looking in the crystal ball but mostly reacting to what's in the rearview, will ease off rates and the economy will level out. The fed can't get rid of business and credit cycles, but they can try to quiet the amplitude. They have blunt tools to do that.
https://fred.stlouisfed.org/graph/?g=117MH
They ignored inflation as being "transitory" for too long. That gave permission to keep rates low, so the administration could do massive influx of spending. Now they have to catch up, and its much harder because they are behind.
How is it murkier? They're going to fund bank bailouts by making other banks and US pay for it via inflation and passed on fees to those of us who don't store our money in financial institutions run by idiots. And they will keep raising rates because the consequence of letting inflation run even higher is a populist revolt.
And the worst part is the majority of this country and the world are too stupid to realize it. Gotta slow boil that frog.
"expected". At some point, the FED is going to run out of instruments to tamper with to prop up a fake economy. It's going to crash, that's inevitable. The whole narrative behind the creation of the FED was that private bankers would enact more rigorous economic policies than politicians and it would lead to more economic stability. It's clearly not the case now. The very existence of the FED will be questioned.
Eh, this is par for the course in democratic decline… same situation in Argentina for example, central bank is supposed to be independent but in reality the government controls fiscal policy. It’s true that the US has a long way to fall though.
As opposed to asset holders getting indiscrominate gains as opposed to the hourly/salary worker?
OH NOES! How dare we let workers benefit from increased wages while we let those poor boomers laze around in retirement. God forbid they can't take a 4th cruise this year.
Nitpick: the real value of wages paid has been declining since 2020. Individual real wages increased because of workforce composition effects, but you can't run an economy on workforce composition effects.
The problem was their assets are going to pay out over at least a decade. If they wanted to redeem them "now" then those assets would have been sold on the open market below the par value. The fed is stepping in as the buyer of last resort and offering what is essentially QE in all but name again to buy those bonds/MBS at their par value.
Releasing that cash out into the wider economy when it was initially locked up in loans increasing inflation which is a tax on all of us.
It very much is a bailout and everyone who uses the dollar is paying for it.
But this is a narrow interest so that depositors at least have access to their money. It does not reward the bank. So long as the bank isn't rewarded, it should be a caution flag for the other banks to take risk management more seriously. Startups have to also have to get their burn rate under control or go out of business.
I think the argument here is that the SVB execs were "in bed" (so to speak) with the VCs who were pushing their companies to deposit at SVB, and the now-fired execs still have their recent bonus payouts. So the punishment is not spread out far enough to discourage moral hazard and future systemically-risky gambling with millions of dollars of other people's money.
I'm not sure the same argument applies for the other bank(s) with huge MBS investments with lower yields than equivalent Treasury bonds. I don't know enough about those casees.
...New York-based Signature Bank, which collapsed over the weekend and will be bailed out by the new Bank Term Funding Program (BTFP), the Biden administration announced on Sunday.... [1]
Either Daily Caller is calling it incorrectly or at least one bank is being bailed out as of now. All comes down to the definition of 'bailing out', does it mean that depositors are made whole past the $250K limit, that investors are being made whole, that banks are simply taken over with their losses covered by the government which hopes to recoup the costs when the banks are sold on the market?
Letting inflation run even higher risks a populist revolt?
Inflation hurts everyone. It is particularly cruel to the poor and middle class, but business also suffers because it is an unpredictable business climate. Are you actually suggesting higher inflation would be the smart strategy if not for the pesky mob?
"Big" business doesn't suffer, smaller businesses do. And from the perspective of legislation and regulation, smaller businesses tend to get the same shit treatment and regular people.
If you believe the arguments of Matt Stoller, the current round of inflation isn't actually inflation, it's just coordinated price increases and corresponding profit increases by the biggest corporations.
Definitionally, it's not inflation if wages aren't keeping up with consumer prices.
Silvergate, SVB, and Signature were cooking for some time and I imagine a few others are too – but would foregoing an expected 25bps rate hike really change anything?
You'd probably want to set your expected % based on word-starting tokens in some large English-language (or Latin-script) corpus, due to the unequal distribution of letters in English and languages that use Latin script generally.
Can we quit with the blaming of VCs, especially without explanation?
The management of SVB messed up massively, and some VCs noticed. They would have been every bit as insolvent if the VCs in question had kept their mouths shut, and if rates went higher they would have been even more insolvent, on account of being massively short interest rates.
SVBs liquidity issues predate VCs telling portfolio companies to take cash out. They already had to liquidate securities at a $1.8B and sell equity to fill the hole in the balance sheet on Wednesday, which was the announcement that led to the run.
SVB likely would have made it through the immediate term if companies did not pull out money en-masse. However, they were in fairly dangerous territory no matter what, and highly susceptible to the ongoing pattern of declining deposits (as burn rates remain high but new capital is not being injected at the same rates it was 18 months ago).
All that said, there were companies (not VCs) flagging SVBs risk on the weeks and months prior to this incident. Some were already pulling money out, albeit much more slowly.
The very nature of bank runs is that as soon as the fundamental trust that we can withdraw tomorrow is gone, everyone wants to withdraw today. That can, as we just saw, happen in a very short period of time. Once that happens, it is objectively in each individual party's best interests to get money out.
So sure, you could say that everyone should have just stayed put and not reacted. But in doing so, you'd be asking depositors in a bank that just announced they were unable to meet liquidity obligations to keep their money where it is, and that as long as everyone else did the same, then we'd all be fine, knowing that:
1. We would still likely have faced problems in the months and quarters ahead, and
2. That if enough of them did not heed the advice, you'd be caught holding the bag and unable to pay employees or vendors
So I'm not quite sure what those blaming VCs were expecting here. Would you leave your money in a bank with demonstrable liquidity issues?
the bank was already experiencing a slow run as startup funding dried up. SVB got hit by interest rates twice - once because the value of their assets fell and a second time because the money spigot into tech turned off and a huge influx of deposits turned into steady net-withdrawals. they managed their risk awfully.
Oh don't get me wrong, I do blame the bank even more. But to pretend like VCs didn't have huge interest in this blowing up in the worsts possible way, is just shutting your eyes.
They are such bad actors, their words were all pretending this is something bad, but their actions weren't to recapitalize the bank but to let it blow up intentionally, while spreading FUD. They made a very successful gambit here that they could blow the system up to get what they want (rate hikes stopped). And they won with that gambit.
If they get away with this, this gambit to them was totally worth the risk that the Fed won't chicken out.
It's a case of murdering and keeping the inheritance.
If I were the Fed, I would see this as a jackpot that finally the rate hikes are creating deflation in the best possible location and continue straight ahead. This is even better deflation than you can get by rising rate hikes for everyone.
> Oh don't get me wrong, I do blame the bank even more. But to pretend like VCs didn't have huge interest in this blowing up in the worsts possible way, is just shutting your eyes.
What are you talking about? What possible interest would they have in killing the by far best capital partner they've ever had (and maybe will ever have had)?
The death of SVB makes things significantly harder for VC and startups in the future.
As I understand it, VCs manage pools of money that are structured as limited partnerships. Each pool has an investment objective, and presumably “recapitalize a failing bank” is not one of them. Any VC who did this would probably have been sued by their investors.
So you are saying the bank ceo was in conspiracy with vc heavy weights to tank the bank at the expense of their startups who bank there? Made the CEO buy long term bonds right before a bank run?
This verges on conspiracy theory logic, to my eyes... no, VCs certainly did not purposefully put their entire portfolios and industries at risk in order to put a stop to interest rate rises. You'd have to presume an all-knowing and all-powerful cast of actors to pull that off. The original point was a good one -- that the overall outcome of this disaster is overly good to VCs, but that's about as far as it goes.
I'm not saying they made the shitty choices for the bank. I'm saying that given the risk that the bank faced, and their awareness that they are risking systemic failures in their industry, some of them decided to run the bank. And they obviously knew the others would have to follow, because bank runs force you to do it.
It only takes one of them to do this calculation and take the gambit, and the rest of them just follow because they have to.
The shitty bank choices were independent mistakes, and were the major mistake. But the reason it blew up so strongly is because key players had an interest in a blow up.
Maybe we need to understand how management came to the investment decisions they did? Surely those kinds of decisions are well documented. I'm concerned the banks clientelle was too intertwined with the banks decision making.
> The management of SVB messed up massively, and some VCs noticed. They would have been every bit as insolvent if the VCs in question had kept their mouths shut
I keep saying this, but "The management of SVB" was a core part of the VC ecosystem. These weren't remotely separate entities. This bank was being run like a cartel, not a competetive service provider in an efficient market. And the VC's were, 100%, in on it. Exactly how, I suspect, is going to be revealed in the coming months.
If I had to guess, this failure was neither complicated nor involved any sort of conspiracy on the part of the VS.
Imagine you run a largish financial company. Over the course of a year or two, your customers like your service and ask you to hold on to a few tens of billions of dollars for them. And they only ask for 0.20% interest. Wow!
You could invest this money in the usual money-market things (short term treasuries, etc), and earn very little money. Still plenty in the grand scheme of things (you're multiplying by tens of billions!), not you see dollar signs in your eyes and want more. And you look at the yield curve:
Wow, you can get 2% net if you buy long-dated treasuries, and 2% of tens of billions is hundreds of millions of dollars a year! And those dollar signs in your eyes get really big and you ignore the fact that this shiny yield curve is in part because no one sensible actually expects rates to stay low forever. And you also think "wow, this is such a good deal that I'm not going to think about the fact that a long-dated treasury is also a short bet on interest rates". So you decide to pull the trigger and buy these things with customer money.
And then the plot actually gets a bit nefarious, because you discover that this will violate Basel III. So you lobby Congress to exempt you, and you succeed, and you go for it. And you make a killing, at least until it blows up completely.
(The whole "liquidity" story is a red herring here. If SVB had been solvent, liquidity would likely have appeared. But SVB was actually insolvent, and no one really wants to lend money to an insolvent institution.)
If the VCs had actually been paying attention, I bet some of them would have said to their portfolio companies "here are a few million dollars in capital -- kindly store it in a Basel III-compliant bank or maybe a money market operated by one of the big players" and not "SVB is down the road and they're great!". Because the VCs were not playing the "screw up the Fed's monetary policy next year" game -- they were playing the "throw lots of money at portfolio companies and hope some of them make it big" game.
the key point is that rich VC's got what they wanted at the expense of the truly wealthy. The ops tempo remains unchanged however: Rate hikes will continue, despite this 'tantrum of the vichy.'
the shot across the bow for other banks was "no investor bailout." in short, this isnt 2008, we will continue to de-escalate quantitative easing through rate hikes, and we arent above letting these banks fail spectacularly in the future with a cold indifference. Your landlords humbly insist upon the crow for supper.
it was inevitable...lots of people have forecast that eventually these rate hikes would be rolled back due to political pressure...and eventually we would be back to even worse inflation requiring even more brutal hikes
Yes… let’s blame the VCs because SVB took the government’s money and lent it back to the government. That’s all SVB did. The Covid stimulus was so poorly conceived.
Ha ha, but the sad reality is that most VCs are herd followers and not smart enough to engage in deep political plots. When the bank run started they all just panicked and reacted.
(Well maybe Peter Thiel is that smart. But not the rest of them.)
Well, I think the only losers are the bank management (all fired with deferred comp clawed back I’m sure), equity holders, and unsecured bond holders. I’m curious what you think making bank customers eat it will accomplish? They had nothing to do with the whole affair. Letting the bank collapse in a disorderly fashion would tear up wide swaths of the economy. The fed being able to drive us into a recession isn’t worth letting the banks domino us into a recession.
If we play the blame game one could also attack the Federal Reserve that pumped an unprecedented amount of money into the market during the Covid crisis, ran an almost zero interest rate policy even years before and now hurried to prevent further damage but created even more problems now.
Boom and busts are created by central bankers manipulating the money supply and not by the market players that act on their natural interests. Central banking is hubris pretending to know how much money an economy needs. It’s a dead end of an economy policy. It only serves governments running their deficit and those who run unsustainable businesses.
For the last 20 years, the financial system learned how to throw these tantrums to reduce rates back down. Inflation numbers were also fudged. Financialization is successfully holding everyone hostage. Even before COVID in 2019 the Fed had given in to another tantrum.
Today it is VCs tantrum. It's actually ridiculous. We've reached the point where the riskiest sector in the financial system gets to cry and get rewarded for bad behavior and self destruction.
This isn't a problem of a strong Fed in control choosing what to do. It's a problem of a spineless Fed that gives in to manipulation. It isn't a problem of central banks manipulating, but being manipulated.
Once the financial system realized it's in their own interests to be fragile, it was game over. They will keep on holding everyone hostage.
Unless we figure out how to rescue the hostages without paying the kidnappers, this will continue happening.
If anything as long as this doesn't get out of hand this seems like what should be happening in an environment of raising rates - more speculative investments/companies get killed and we return back to normalcy.
SVB didn’t buy T-bills though, they would be fine if they did. They bought 10-year bonds that dropped 20-25% in value since 2021 so yeah pretty speculative.
The old saying goes: the federal reserve raises rates until something breaks
People seem to think the backstop is some sort of moral hazard. But they’re ignoring the decision making principals, equity holders, and unsecured bond holders are all being left holding the bag on the bailouts and they’re not faced with a moral hazard. The only ones being protected are the customers of the bank, who had absolutely no say in the management of the bank. So, yeah. Not impressed with the moral hazard and “let them fail” argument.
“Destroyed my last bank” isn’t great resume fodder. I would imagine they’re doing the jobs they do because they either can’t afford to retire, or do not want to retire. I think no one wants to destroy their careers. I do find it fascinating that bankers are one of the few professions that if you go bankrupt the public opinion is no torture is sufficient for the principals.
I think it's any career in which your bad decisions have the potential to harm millions of people, whether you're a bank executive or a rail freight executive hauling huge amounts of poisonous chemicals through residential neighborhoods.
The difference is that in banking specifically, the regulations seem to have some amount of teeth, so it's tantalizing to see executives receiving any material consequences at all.
Meanwhile I don't see the Norfolk Southern shareholders losing money or their executives losing their jobs. The incident is barely visible in Norfolk Southern stock prices.
Well don’t forget they didn’t do anything criminal and in a normal turn of events it would have been a note in the quarterly disclosures. The bank run wasn’t a necessity to happen, and I don’t know how culpable they are for it. Certainly they could have done their jobs better and hedged interest rates etc.
Also remember in banking a large percent of your annual compensation is in deferred compensation and often with a long clawback period. These folks could have stood to lose something like 5 years or more of their total compensation. They’re not billionaires, and they’re not likely all that rich (just a wee rich). This will hurt them a lot. Maybe not as much as a kick in the balls but this isn’t a no-op as many people seem to think. It’s enough that no one will look at this with “ooo I should do that” intent for sure.
By reading the news. The fdic insurance is the absolute minimum you can recoup. It’s not a cap, it’s a floor. The fed, treasury, etc have said no business disruption will occur for depositors or customers.
If the Fed blinks we'll have solved absolutely nothing and people will put money back into nonsensical asset classes creating and perpetuating more economic inefficiency. Just look at how crypto is behaving this morning, it's not up because it's a safe haven, it's up because people think the Fed will blink and we'll go back to an age of people spending $100k on a JPEG.
Recognizing these are some unique circumstances, over the last week, expectations for next week's FOMC meeting swung from a near-certain +25bp, to 75% +50bp / 25% +25bp, to 60% +25bp / 40% 0bp. Tomorrow, February's CPI data will be released which might help collapse this wave function.
tech / venture capital and other models that rely on ZIRP need to naturally die back and then re-emerge when the environment is more favorable for them.
Why can’t they just set the rate to 0 and be done with it? What does the interest rate have to do with inflation? The inflation is caused by the printing of money during the pandemic, the supply/productivity issues, environmental related inefficiencies and deglobalization. The FED does not have any control over any of these issues and is creating more issues.
Money is loaned into existence and the Fed's funding rate affects how easy or difficult it is for banks to get that money when they need it. The banks are turning around and using that money to pay interest, to make their own loans and financial products, etc. Those products' rates will always be compared to the rate the Fed lends at.
A higher Fed rate make new money more scarce, a lower rate makes it less scarce. The market behavior follows that.
So it controls the rate at which money flows into the economy. It also indirectly affects the cost effectiveness of other loans that aren't directly connected to the Fed, and also how risky people and institutions are willing to be with their money. That's a crucial piece here, not only does the Fed's rate control how much "new" money flows into the economy, it also influences the ways people behave with existing money.
In the beginning of COVID times, the Fed lowered rates to near 0%, which meant people/institutions were getting money much more easily than before. A whole host of zero interest loans meant it was easier for people to buy cars and houses and all kinds of stuff.
> What does the interest rate have to do with inflation
From what I gather it is supposed to work like this:
Low interest
-> cheap loans and low interest on savings
-> more money in the market to buy goods and services
-> not enough goods and services to cover the demand
-> prices go up
-> inflation
Higher interest rates
-> expensive loans and higher interest on savings
-> less money in the market to buy goods and services
-> demand goes down until market finds a new equilibrium
-> inflation goes down
Any economists around here who want to correct my simplified picture?
I understand that logic but the interest rates were not the cause of the inflation. If the FED had made the interest rates negative and that caused inflation then I understand how raising the rates can fix inflation. In this case other “knobs” were turned which caused inflation and now by turning the “interest rate knob” to a new position while leaving the others as they are the economic system will get into a new state which is not the low-inflation state it was in before the pandemic. Why do we believe that this new state will be better than the state the system is currently in?
They were not the cause - that was the heedless use of stimulus funds and the supply chain problems leading to (the former) an increase in demand and (the latter) a reduced supply - but now that inflation has reared its head it needs to be tamed. As it stands now it is better to purchase 'today' instead of 'tomorrow' since prices rise while there is no benefit in keeping funds in interest-bearing accounts given the low interest rates. As long as this remains true demand will stay high leading to higher prices. This can really spiral out of control as has been shown in e.g. Weimar Germany or more recently Argentina and Venezuela although the cause of the rise in inflation there is different from the subject discussed here.
Comparing USA single digit inflation to Argentina and Venezuela is quite far fledged. Instead of destroying peoples’ livelihoods with interest rate hikes maybe the government can opt for trying to fix supply problems and improve efficiency, which will tame inflation in the long term. For example, they can reverse the deglobalization movement by signing new free trade agreements with developing nations, they can reduce or eliminate the validity of patent laws which will allow for cheaper products to be produced, they can negotiate an end to the war and remove all obstacles from the extraction and trade of natural resources. All of these policies will lower inflation while increasing employment, a win-win-win situation.
The FED did what it did because they know they have to keep hiking rates to reign in inflation and deflate the asset bubble. Allowing banks to go under and take depositors with them would generate far too much pressure to lower rates to salvage the poor investments these banks chose to make.
111 comments
[ 3.0 ms ] story [ 179 ms ] threadthese people don't live in the real world and now we are going to be stuck with stagflation for years most likely
You're going after a strawman.
If I deposit cash at a member bank that the government says is compliant with their rules and regulations, that should not imply any risk taking on my side.
If I use a payroll provider like rippling that uses SVB as their payment rails, I shouldn't have to worry about that.
If I use a service that goes under because they can't fund payroll because of a banking supply chain issue, that seems rather hard to due diligence.
If you honestly hold that position, I suggest you get a little bit of empathy for decision-makers. It will make you a better member of society.
And yes, to add insult to injury there is people offering the service of splitting up your cash between banks in a way which should give every startup enough leeway to "make payroll" for some months (https://twitter.com/ddayen/status/1634925784271036417)... It just doesn't work with monopolistic structures and you can't bankrun it, when you feel like it, so maybe not as en vogue with our hosts?
The same thing can be done in reverse: e.g. BigTech firing gazillions of people and suddenly "Ah, no we're not paying the kind of salaries that were common in the before times".
Houses never lose value, let’s give those loans out to everyone - housing bubble. Heck, housing inflation goes back to the GI Bill.
Everyone should go to college - let’s give kids hundreds of thousands of dollars to spend at an institution of their naive choosing! Student loan “crisis”.
If I’m charging $1 for something and I know you have $5 to spend on it, the price is now $5.
What sort of dumb comment is this?
Another issue is that economist forecasts tend to be heavily influenced by politics.
Who do you think figured all this out? Surely not economists, the dumbest creatures on earth.
China and other manufacturing behemoths are producing dramatically more than they were before the pandemic and we are importing and buying all of those foreign goods. https://fred.stlouisfed.org/graph/?g=117Ig
I don't know about where you live but I see a lot more automation in service industries where I live. We continue to innovate. There's a labor shortage and we are below the natural unemployment rate, and it's not that those workers are doing less, as real GDP continues to grow https://fred.stlouisfed.org/graph/?g=117IF
The inflation we've seen is almost all demand driven. There's plenty of supply of goods and services compared to pre pandemic. Your narrative doesn't fit the data.
On the other hand, Bridgewater's October 2021 analysis has been spot on. https://www.bridgewater.com/its-mostly-a-demand-shock-not-a-...
Everyone got their stimmy check, paid down their debt, quit commuting, and realized they could buy more stuff. They did that for a couple of years. Now that credit card balances are peaking again (and at higher rates!), demand will slow and there will be a recession. The fed, always looking in the crystal ball but mostly reacting to what's in the rearview, will ease off rates and the economy will level out. The fed can't get rid of business and credit cycles, but they can try to quiet the amplitude. They have blunt tools to do that. https://fred.stlouisfed.org/graph/?g=117MH
I don't think they're stupid, I think they say what they're paid to say via the old fashioned benefactor -> foundation -> employment bribery scheme.
The rapid move away from ZIRP might be the real culprit here.
Rates returning to normal is just the flood waters receding and letting us see the carnage below.
And the worst part is the majority of this country and the world are too stupid to realize it. Gotta slow boil that frog.
The main people who should've been fuming about inflation are retirees on defined benefit pensions.
OH NOES! How dare we let workers benefit from increased wages while we let those poor boomers laze around in retirement. God forbid they can't take a 4th cruise this year.
Lol, lmao even.
Nitpick: the real value of wages paid has been declining since 2020. Individual real wages increased because of workforce composition effects, but you can't run an economy on workforce composition effects.
https://www.dallasfed.org/research/economics/2022/0215
So far no bank has been bailed out. e.g. SVB had assets to cover deposit liabilities (just not in a liquid form).
Releasing that cash out into the wider economy when it was initially locked up in loans increasing inflation which is a tax on all of us.
It very much is a bailout and everyone who uses the dollar is paying for it.
I'm not sure the same argument applies for the other bank(s) with huge MBS investments with lower yields than equivalent Treasury bonds. I don't know enough about those casees.
Either Daily Caller is calling it incorrectly or at least one bank is being bailed out as of now. All comes down to the definition of 'bailing out', does it mean that depositors are made whole past the $250K limit, that investors are being made whole, that banks are simply taken over with their losses covered by the government which hopes to recoup the costs when the banks are sold on the market?
[1] https://dailycaller.com/2023/03/13/former-dem-rep-landmark-f...
Inflation hurts everyone. It is particularly cruel to the poor and middle class, but business also suffers because it is an unpredictable business climate. Are you actually suggesting higher inflation would be the smart strategy if not for the pesky mob?
If you believe the arguments of Matt Stoller, the current round of inflation isn't actually inflation, it's just coordinated price increases and corresponding profit increases by the biggest corporations.
Definitionally, it's not inflation if wages aren't keeping up with consumer prices.
B probably wins because of Bank.
And as a cherry on top, no depositors lost anything. I guess the losers are everyone else who get to eat inflation with nowhere to escape it.
The management of SVB messed up massively, and some VCs noticed. They would have been every bit as insolvent if the VCs in question had kept their mouths shut, and if rates went higher they would have been even more insolvent, on account of being massively short interest rates.
SVB likely would have made it through the immediate term if companies did not pull out money en-masse. However, they were in fairly dangerous territory no matter what, and highly susceptible to the ongoing pattern of declining deposits (as burn rates remain high but new capital is not being injected at the same rates it was 18 months ago).
All that said, there were companies (not VCs) flagging SVBs risk on the weeks and months prior to this incident. Some were already pulling money out, albeit much more slowly.
The very nature of bank runs is that as soon as the fundamental trust that we can withdraw tomorrow is gone, everyone wants to withdraw today. That can, as we just saw, happen in a very short period of time. Once that happens, it is objectively in each individual party's best interests to get money out.
So sure, you could say that everyone should have just stayed put and not reacted. But in doing so, you'd be asking depositors in a bank that just announced they were unable to meet liquidity obligations to keep their money where it is, and that as long as everyone else did the same, then we'd all be fine, knowing that:
1. We would still likely have faced problems in the months and quarters ahead, and 2. That if enough of them did not heed the advice, you'd be caught holding the bag and unable to pay employees or vendors
So I'm not quite sure what those blaming VCs were expecting here. Would you leave your money in a bank with demonstrable liquidity issues?
They are such bad actors, their words were all pretending this is something bad, but their actions weren't to recapitalize the bank but to let it blow up intentionally, while spreading FUD. They made a very successful gambit here that they could blow the system up to get what they want (rate hikes stopped). And they won with that gambit.
If they get away with this, this gambit to them was totally worth the risk that the Fed won't chicken out.
It's a case of murdering and keeping the inheritance.
If I were the Fed, I would see this as a jackpot that finally the rate hikes are creating deflation in the best possible location and continue straight ahead. This is even better deflation than you can get by rising rate hikes for everyone.
What are you talking about? What possible interest would they have in killing the by far best capital partner they've ever had (and maybe will ever have had)?
The death of SVB makes things significantly harder for VC and startups in the future.
As I understand it, VCs manage pools of money that are structured as limited partnerships. Each pool has an investment objective, and presumably “recapitalize a failing bank” is not one of them. Any VC who did this would probably have been sued by their investors.
It only takes one of them to do this calculation and take the gambit, and the rest of them just follow because they have to.
The shitty bank choices were independent mistakes, and were the major mistake. But the reason it blew up so strongly is because key players had an interest in a blow up.
I keep saying this, but "The management of SVB" was a core part of the VC ecosystem. These weren't remotely separate entities. This bank was being run like a cartel, not a competetive service provider in an efficient market. And the VC's were, 100%, in on it. Exactly how, I suspect, is going to be revealed in the coming months.
Imagine you run a largish financial company. Over the course of a year or two, your customers like your service and ask you to hold on to a few tens of billions of dollars for them. And they only ask for 0.20% interest. Wow!
You could invest this money in the usual money-market things (short term treasuries, etc), and earn very little money. Still plenty in the grand scheme of things (you're multiplying by tens of billions!), not you see dollar signs in your eyes and want more. And you look at the yield curve:
https://home.treasury.gov/resource-center/data-chart-center/...
Wow, you can get 2% net if you buy long-dated treasuries, and 2% of tens of billions is hundreds of millions of dollars a year! And those dollar signs in your eyes get really big and you ignore the fact that this shiny yield curve is in part because no one sensible actually expects rates to stay low forever. And you also think "wow, this is such a good deal that I'm not going to think about the fact that a long-dated treasury is also a short bet on interest rates". So you decide to pull the trigger and buy these things with customer money.
And then the plot actually gets a bit nefarious, because you discover that this will violate Basel III. So you lobby Congress to exempt you, and you succeed, and you go for it. And you make a killing, at least until it blows up completely.
(The whole "liquidity" story is a red herring here. If SVB had been solvent, liquidity would likely have appeared. But SVB was actually insolvent, and no one really wants to lend money to an insolvent institution.)
If the VCs had actually been paying attention, I bet some of them would have said to their portfolio companies "here are a few million dollars in capital -- kindly store it in a Basel III-compliant bank or maybe a money market operated by one of the big players" and not "SVB is down the road and they're great!". Because the VCs were not playing the "screw up the Fed's monetary policy next year" game -- they were playing the "throw lots of money at portfolio companies and hope some of them make it big" game.
the shot across the bow for other banks was "no investor bailout." in short, this isnt 2008, we will continue to de-escalate quantitative easing through rate hikes, and we arent above letting these banks fail spectacularly in the future with a cold indifference. Your landlords humbly insist upon the crow for supper.
(Well maybe Peter Thiel is that smart. But not the rest of them.)
The middle class eats the entrenched inflation.
Boom and busts are created by central bankers manipulating the money supply and not by the market players that act on their natural interests. Central banking is hubris pretending to know how much money an economy needs. It’s a dead end of an economy policy. It only serves governments running their deficit and those who run unsustainable businesses.
Today it is VCs tantrum. It's actually ridiculous. We've reached the point where the riskiest sector in the financial system gets to cry and get rewarded for bad behavior and self destruction.
This isn't a problem of a strong Fed in control choosing what to do. It's a problem of a spineless Fed that gives in to manipulation. It isn't a problem of central banks manipulating, but being manipulated.
Once the financial system realized it's in their own interests to be fragile, it was game over. They will keep on holding everyone hostage.
Unless we figure out how to rescue the hostages without paying the kidnappers, this will continue happening.
If anything as long as this doesn't get out of hand this seems like what should be happening in an environment of raising rates - more speculative investments/companies get killed and we return back to normalcy.
People seem to think the backstop is some sort of moral hazard. But they’re ignoring the decision making principals, equity holders, and unsecured bond holders are all being left holding the bag on the bailouts and they’re not faced with a moral hazard. The only ones being protected are the customers of the bank, who had absolutely no say in the management of the bank. So, yeah. Not impressed with the moral hazard and “let them fail” argument.
The difference is that in banking specifically, the regulations seem to have some amount of teeth, so it's tantalizing to see executives receiving any material consequences at all.
Meanwhile I don't see the Norfolk Southern shareholders losing money or their executives losing their jobs. The incident is barely visible in Norfolk Southern stock prices.
Also remember in banking a large percent of your annual compensation is in deferred compensation and often with a long clawback period. These folks could have stood to lose something like 5 years or more of their total compensation. They’re not billionaires, and they’re not likely all that rich (just a wee rich). This will hurt them a lot. Maybe not as much as a kick in the balls but this isn’t a no-op as many people seem to think. It’s enough that no one will look at this with “ooo I should do that” intent for sure.
The fed announcement yesterday said no depositors will lose any money.
>Depositors will have access to all of their money starting Monday, March 13. [...] All depositors of this institution will be made whole.
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch...
2-year US treasury rate has moved from 5% to 4% over the last few days:
https://www.cnbc.com/quotes/US2Y
Money is loaned into existence and the Fed's funding rate affects how easy or difficult it is for banks to get that money when they need it. The banks are turning around and using that money to pay interest, to make their own loans and financial products, etc. Those products' rates will always be compared to the rate the Fed lends at.
A higher Fed rate make new money more scarce, a lower rate makes it less scarce. The market behavior follows that.
So it controls the rate at which money flows into the economy. It also indirectly affects the cost effectiveness of other loans that aren't directly connected to the Fed, and also how risky people and institutions are willing to be with their money. That's a crucial piece here, not only does the Fed's rate control how much "new" money flows into the economy, it also influences the ways people behave with existing money.
In the beginning of COVID times, the Fed lowered rates to near 0%, which meant people/institutions were getting money much more easily than before. A whole host of zero interest loans meant it was easier for people to buy cars and houses and all kinds of stuff.
From what I gather it is supposed to work like this:
Any economists around here who want to correct my simplified picture?