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Sigh. I wish people would stop cribbing off Elizabeth Warren’s talking points and pretending like it’s actually smart analysis.
https://www.federalreserve.gov/publications/2022-Stress-Test-Scenarios.htm
Key paragraph: Short-term interest rates as measured by the 3-month Treasury rate remain near zero throughout the scenario. Long-term interest rates as measured by the 10-year Treasury yield drop to 3/4 percent during the first quarter of 2022 and remain unchanged in the second and third quarters of 2022, after which they gradually rise to 1-1/2 percent by the end of the scenario. Because short-term interest rates remain near zero, the path of the yield curve slope, as defined by the difference between the 10-year Treasury yield and the 3-month Treasury rate, follows that of long-term interest rates.
The stress test was meant to test a scenario where asset prices and equity prices are falling, loans are failing, and there’s a recession. Inflation is falling, not stubbornly rising. A stress test wouldn’t have detected that the Fed would hike interest rates to the point where 10-year treasuries would basically be worthless because no one would be willing to buy them / be a counterparty to the interest rate risk. Don’t believe me?
This entire thing is focused on loan losses, not interest rate risk. Trading and counterparty losses are an afterthought (p20). Look at the results for Bank of America (p34) and Charles Schwab (p40). Not a single mark to market loss in sight.
TIMELINE OF EVENTS
1. Oh, virus! Print 40% of cash ever printed in 2 months.
2. Oh, inflation! It’s transitory and the fault of greedy capitalist pigs anyway.
3. Oh, inflation real! Raise interest rates more in 3 quarters than ever in history.
4. Oh, bank runs! blame tech.
— Ale Resnik (@AleResnik) March 13, 2023
Mr. Lustig is more right than he knows.
Because banks *intentionally* hid their insolvency from depositors.
Once the Fed had saddled banks with massive losses, they decided to use an accounting trick to pretend this hadn't happened.
And then, surprise.https://t.co/E9ycW5V6Ih https://t.co/DND0TSI7iR pic.twitter.com/Glc8LJoR9n
— Balaji (@balajis) March 13, 2023
Just to be clear, SVB screwed up. Royally. Their risk management folks went AWOL for eight critical months. They didn’t hedge interest rate risk. But part of the problem was also that SVB trusted the Treasury and the Fed when the Fed said that inflation was transitory and they wouldn’t have to raise rates until 2024. Why did they tell the financial sector that? To cover up some of the worst fiscal policy since the 70’s, and the utter idiocy of quantitative easing and low interest rate policy since the 2008 financial crisis.
If you thought SVB was bad … The Fed is sitting on unrealized losses of ~$1.2 trillion on their $8.3 trillion bond portfolio.
And the Fed is losing money every day by paying $$$ to commercial banks via reverse repos. pic.twitter.com/qBMTq7mR3E
— Wall Street Silver (@WallStreetSilv) March 13, 2023
But bond traders have already priced in that the Fed is going to choose more inflation over liquidity problems and financial sector panic. We’ll see what the CPI print is tomorrow.
I’ve said it before, and I’ll say it again, inflation is the most regressive tax on the poor. Progressives don’t really care about the poor, because if they did, they would be screaming about inflation. (Also, inflation compounds, like interest, so a 4% target is lunacy). Progressives only care about power, and that includes pretending that more government control would have prevented whatever bad thing is happening right now. Repeal the repeal? Go ahead. Wouldn’t have changed what the Fed and the Treasury did to cover up what Congress was doing to the economy.
Oh, and for the record, the Trump rolled back regulations on brakes thing on the Norfolk Southern train derailment was also garbage. A ball bearing failed, generating heat and leading to an axle failure. The detection system didn’t detect, and the engineers didn’t notice the sparks and red hot wheels that were on video for 30 miles. Had nothing to do with brakes.
To me, the biggest culprit in SVB’s failure is that the fed’s most severe stress test scenario in 2022 didn’t even consider the possibility of rising interest rates. Asleep at the wheel. pic.twitter.com/pidlaMUDnm
— Will Diamond (@wdiamond_econ) March 15, 2023
With citations to the Fed’s 2022 stress test scenario, please explain how the stress test would have detected the interest rate duration risk.
US banks have roughly $620bn of unrealised losses. Their overall equity is $2.2tn. That is 28% of equity & includes banks like JPM or Citi where the ratio is much lower. For many smaller banks the ratio is close to 50%. So if a run were to occur they will be near dead like SVB! pic.twitter.com/vx5nrCTC7j
— Nouriel Roubini (@Nouriel) March 12, 2023
One of these banks’ risk management program, as shown by their assets w/ unrealized losses, was not like the others. Also, BAC, what are you doing?
Signature Bank was just closed by New York. Not a surprise, based on Friday’s stock trends (and other action last week). Buckle up, everyone. Inflation numbers drop next week. With some of the worst fiscal policy of the last fifty years, I don’t think the Fed will be in a position to stop raising rates.
https://www.realclearpolitics.com/epolls/latest_polls/
Tied to underwater single digits. Not one of the issues claimed to be the most concerning (inflation, the border, crime, etc.) have improved, yet people are no longer angry.
My uninformed opinion is that Japan style quantitative easing broke the economy in ways that will be difficult to understand. It created a giant pool of liquidity that now searches for a place to go, inflating serial bubbles that at some point will need to be decoupled from the debt that enabled it.
I know that sounds crazy, but if we keep inflating for political reasons, it will just make the correction to fundamentals that much more painful.
I would like to see historical correlation of this chart with the Fed’s zero interest rate policy and quantitative easing after 2008 global financial meltdown. Wealth inequality has worsened as a result of our central bank’s heavy intervention in credit markets. pic.twitter.com/vBxlis6sRa
— Judy Shelton (@judyshel) February 12, 2023
[quote quote=6864]I was all in until you got to “subsidizing”. I don’t believe people will stop having children without a subsidy. 🙂[/quote]
This is an interesting aspect of the debate. Part of the reason couples aren’t having children is the perceived economic cost. But people do respond to incentives. The Scandinavian countries have turned to subsidies to try to bring their birth rate up. China will start soon. At this point, a low birth rate is such a negative externality that I believe it should be subsidized through tax policy (not direct subsidy because that just increases inflation).
*singing* I believe that children are our future. Teach them well and let them lead the way….
All that aside, the only way a culture or nation survives is by having and raising children. There are many countries that are having a fertility crisis. Japan may cease to exist in a few generations, for example.
Study after study have shown that having children increases civil engagement and raises the happiness levels of people. Also, study after study have shown that depriving people of the ability / means of having children has extremely bad effects on mental health. Maybe it’s basic biology, but from a policy perspective, society should absolutely be subsidizing and encouraging people to have kids.
CBS Poll – Are Biden’s policies…
Making your own family's finances better or worse?
Better – 18%
Worse – 49%Making political division better or worse?
Better – 19%
Worse – 50%Making illegal immigration better or worse?
Better – 21%
Worse – 51%https://t.co/y1Og2QFF7a— InteractivePolls (@IAPolls2022) February 7, 2023
https://www.realclearpolitics.com/epolls/other/president-biden-job-approval-7320.html
The IBD poll has him at +2 approval! Going into his State of the Union where he will dunk all over everyone and finally take credit for the best economy ever.
No masks were required for kids from Ann Arbor at @GovWhitmer’s Inauguration Party a few days ago.
Sadly, masks are required when Ann Arbor Public School students go back to school today.
Appalling. https://t.co/P3rrLPrrBF
— Tori Sachs (@Tori_Sachs) January 9, 2023
