Juggling Dynamite

Will spreading strife in banks prompt the US Fed to pause its tightening efforts this month? We will soon find out. Some worthwhile insights in this segment…

We’ve had the 2nd, 3rd, and 4th largest bank failures in American history in the last two months, notes Jim Bianco. He discusses what collapse of First Republic Bank (FRC) means for the overall banking systems. He highlights that all of the movement in the economy is pointing to a slowdown. He goes over how the banking system is very complicated, so the market has a habit of misunderstanding and misjudging the banks. He also notes that futures are muted Monday ahead of this week’s FOMC meeting. he highlights that he thinks Powell is leaving the door open to hike and will hike again. Here is a direct video link.

An April 2023 NBER paper warns that the Fed’s rapid tightening actions since 2022 were a monetary shock that has negative economic impacts for this year and next. Mind the lags. See Does Monetary Policy Matter? The Narrative Approach after 35 years; the conclusion:

“Based on the empirical estimates of the effect of previous shocks, one would expect substantial negative impacts on real GDP and inflation in 2023 and 2024.”

A decade of near-zero policy rates allowed banks to boost profits by paying next to nothing on customer deposits from 2011-2021. Then, everything changed.

Below is a list of the largest seven US bank failures by asset size courtesy of BankRate.com.  Suddenly and all at once, three of the four largest have happened over the last two months. See the WSJ: Why First Republic Bank Collapsed for valuable insight.

Central bank policies are evident in both leaping bank assets to 2022 and the record failures now unfolding—no free lunch. See, Too much Fed liquidity has led to a whack-a-mole world of problems:

While the decision by the FDIC to cover uninsured deposits remains controversial, enhanced deposit insurance, funded by higher fees, may become necessary for a period of time. It is not the fault of savers that the banking system is drowning in excess deposits. Savers, in aggregate, are captive victims of the Fed’s dogmatic “ample reserves regime”. Until it winds down this misguided experiment, global policymakers will continue their scramble to create new special programs, acronyms and emergency facilities to manage the whack-a-mole world of complications it has produced.