Inflation is a topic of concern, with claims that it is transitory and manageable by the Federal Reserve (FED). However, recent events have raised doubts about the ability of central bankers to effectively manage the economy. The incident involving an impostor posing as Volodymyr Zelensky, fooling the FED during a video conference call, highlights the alarming vulnerabilities within the system. This raises questions about the competence of those entrusted with managing the economy. Furthermore, the FED’s decision to raise interest rates in response to inflation has sparked debates, as it may inadvertently lead to a recession. This essay explores the repercussions of these actions and delves into the fragile state of regional banks, emphasizing the potential risks and consequences faced by depositors and the overall economy.
The Fallacy of Interest Rate Policies and Impostor Vulnerabilities
During the call, Powell made statements that differ from what he tells the American people. He admitted that the growth in 2022 was positive but modest and subdued, around one percent or less. Most forecasts project continued but subdued growth for the U.S. economy this year, with less than one percent growth. Seriously, does anyone believe that growth of less than one percent is actual growth?
It’s likely within the margin of error and hardly significant, especially when compared to the recession that economists are predicting. According to Powell, a recession is just as likely as very slow growth. And why is that? It’s because the Fed is raising interest rates in an attempt to control inflation.
So, let me get this straight: the Fed is causing a recession by raising interest rates. Apparently, raising rates makes it harder for people to find work and put food on the table. This is a whole new concept for me to digest. If we have too many dollars in circulation and too few goods, there are two solutions: increase production or reduce the number of dollars. But instead, the Fed is raising rates without addressing the underlying problem of excessive money printing.
The Dilemma of Excessive Money Printing and Low Interest Rates
It seems logical to stop printing money if we want to get rid of excess dollars, just like turning off the water when your house is flooding. But the government is doing the opposite—they are printing even more money. Powell’s statement does not suggest that we should stop our out-of-control spending or address the root cause of the problem. It’s concerning to see the lack of decisive action and the potential consequences it may have on the economy.
At present, there is a growing concern among depositors of regional banks regarding the low rate of return on their savings. While the FDIC has assured the public that their deposits are safe, the issue at hand is the lack of competitive interest rates offered by these banks. In contrast, money market accounts provide a much higher rate of return, up to five percent, compared to the meager point one percent offered by regional banks after inflation. The reason for this discrepancy lies in the asset base of these banks. They simply do not have the resources to offer higher rates of return to their depositors.
As a result, many individuals are withdrawing their funds from regional banks and opting for more lucrative investment options. It is important to note that the FDIC will step in to fill any gaps in the event of a bank failure. However, this does not address the underlying issue of low interest rates. As such, depositors must weigh the security of their funds against the potential for greater returns elsewhere. While the safety of deposits is not in question, the low rate of return on savings in regional banks is a cause for concern. Deposit holders must consider their options carefully and make informed decisions based on their financial goals and risk tolerance.
The Fragile State of Regional Banks and the Threat to the Economy
The current state of regional banks in the United States is cause for concern. As individuals withdraw their funds from these banks, their asset base diminishes, making it difficult for them to pay out at higher rates. This poses a significant problem, as the continued withdrawal of funds could lead to the collapse of these banks. If this were to happen, liquidity would dry up, and investment in businesses would come to a halt, potentially leading to a recession similar to that of 2007-2008.
According to a recent USA Today story, three regional banks have failed since March, with another on the brink of collapse. Bloomberg reported that San Francisco-based Pac West Bancorp is considering a sale, and First Republic Bank became the third bank to collapse, marking the second-largest bank failure in American history after Washington Mutual. The fragility of the U.S. banking system is further highlighted by a study that found 186 more banks at risk of failure, even if only half of their uninsured deposits were withdrawn. It is imperative that steps are taken to prevent further bank failures and ensure the stability of the banking system. Of their uninsured depositors again, those are the people who stand to lose a part of their deposits if the bank fails, right?
People who have more than $250,000 in their account at these banks because the FDIC is only supposed to ensure up to $250,000 of deposits. They’re long; I mean, they will now ensure pretty much all deposits. But if half of those people decide to withdraw their funds, these banks go under. Most bonds are currently paying a fixed interest rate that becomes attractive when the interest rates fall. But the problem is that all of these regional banks basically trusted the federal government. Moral of the story, folks: Do not trust the federal government because the federal government is there to aggrandize itself at the expense of everybody else.
Reflecting on the Past: Comparisons to the 2008 Financial Crisis
A bunch of banks took all of their assets, they put them in bonds, figuring that the federal government was not going to increase interest rates tremendously over the course of the next couple of years. Inflation was a thing of the past. We lived in the new modern monetary theory universe in which you could just spend endless amounts of money, and inflation never hit. Inflation hit, and now all of those banks have an asset base that is just garbage because the federal government has devalued the bonds in which all of those banks put their money and investments.
As the USA Today points out, many banks increased their holdings of bonds during the pandemic when deposits were plentiful, but loan demand and yields were weak. For a lot of banks, those unrealized losses will stay on paper, but others will face actual losses if they actually have to sell those securities for liquidity or other reasons. We could be watching a run on those banks pretty soon. And you can see that as the stock market opens, regional bank stocks tumbled on Thursday, despite assurances from the Federal Reserve that the banking system was on solid footing. PacWest Bancorp dropped by about 50 percent.
PacWest said in a statement after midnight Eastern time on Thursday that its core customer deposits were up since the end of the first quarter and that it hadn’t experienced any unusual deposit flows since the collapse of First Republic. But that doesn’t mean there won’t be a run on the bank. Western Alliance is another bank whose stock has been hit hard. It fell by 38 percent. Christopher Maranack, an analyst at Janney Montgomery Scott, described the nosediving bank stocks as a temper tantrum, according to the Wall Street Journal.
But it’s not really a temper tantrum when all of the regional banks are sinking all at once. In fact, there are so many short sales on these regional banks at this point that the federal government is thinking of coming in and stopping short selling. That is the rumor on the street today, is that the federal government is afraid that short selling is going to lead to a cycle wherein people start selling off the stocks in anticipation that these regional banks are going to fail. And if that happens, then the possibility of raising new liquid at ether issuance of new stock goes away as well.
Are We Headed for Another Financial Crisis?
The present situation raises valid concerns regarding the management of the economy and the stability of regional banks. The contradictory policies and vulnerabilities exposed by the impostor incident highlight the need for more stringent security measures and better decision-making processes.
Furthermore, the effects of excessive money printing and low interest rates pose risks to depositors and the economy as a whole. It is crucial for policymakers to address these challenges promptly and take measures to prevent further bank failures, safeguard the banking system, and ensure a stable financial environment for the future.
