Fed Faces Impossible Optics, Difficult Tradeoffs After Banks Collapse

As the US prepared to grapple with a fresh read on inflation, the market discussion centered on whether the Fed should, shouldn't, would or wouldn't hike rates next week given the turmoil in the banking sector. In the wake of the emergency actions taken to stabilize the situation, Goldman said the Committee will likely pause in March and Barclays reversed a call for a 50bps move. Following the jobs report, Barclays said a re-escalation to a half-point cadence from Jerome Powell was the most lik

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15 thoughts on “Fed Faces Impossible Optics, Difficult Tradeoffs After Banks Collapse

  1. I’ve been told many times to fear the steepening, so I’ll use the nascent rally to position accordingly, this time will not be different.

  2. I get that things are not black and white. But consider this, if the shoe was on the other foot, what would the Vulture Capitalists have done in this scenario? Considering the damage they have inflicted on health care, elder care, farming, and housing all to maximize profit. It seems to me that it is a “moral hazard” to use government funds to keep them in business.

    1. What about the people at the startups who’d be out of a job? “Oh well, you should’ve asked your CEO if she had properly assessed the duration risk on the balance sheet of your company’s bank”?

      I mean, if something terrible happens to you tomorrow, and it’s the fault of your employer and your employer’s bank, and the government steps in to save you, do you want to go online and hear everyone talk about what a free-loader you are? Are you going to turn down the assistance and then proudly take to Twitter to declare yourself a virtuous individual who’d never take a “hand out”?

      No, you wouldn’t do either of those things, and we all need to stop pretending like we would.

      1. Do note: That doesn’t mean you’re “wrong” in your assessment. Nor does it mean anyone is “wrong” to criticize this entire fiasco as a “bailout.”

        What I’m saying is: Keep it real. Seriously. All day long, every day, Americans are online deriding other Americans based on the idea (implicit) that if they were in dire straits, they’d behave in this or that way, when in reality almost nobody would. It’s just posturing for the sake of it.

        1. I’m not criticizing the employee here. I’m criticizing the people who typically cause unemployment in industries they infiltrate are being taken care of by the government. We have no guardrails that prevent VC’s from taking over a hospital and gutting it of it’s staff and forcing it to turn away patients who need care because they don’t have any or the right kind of insurance. And then when those same VC’s make bad investments the government jumps at the opportunity to take care of them? So we can watch them infiltrate another industry (daycare centers?) and force under-supported Americans to either pay way more than they should or to find another option.

          Let’s be clear, when a person goes to the hospital to get treatment for an active pandemic, the Fed doesn’t come in and bail them out of their 30k hospital bill. They go bankrupt.

          When a VC invests money at a questionably managed bank that goes under, they get a bailout 2 days later.

          The distinction is disgusting.

          1. I think you’re conflating a whole bunch of different stuff here in an effort to make yourself as mad as possible. For example, private equity isn’t the same thing as venture capital. And I could go on, but I’m not going to, because it’s not constructive.

          2. CD may be getting the player names wrong, but his observations about hedge fund/PE “investments” in the hospital space should concern everyone. Exhibit One has been the takeover of emergency room staffing leading to egregious “out of network” bills if you bring a child with a sports injury in for treatment. More recently a little light has been shined on the firms that bring in travel nurses from the Philippines and such. (They are often treated as indentured servants.)

            That said, blame for these is shared by hospital administrators who delight in outsourcing everything to juice up returns.

          3. Well getting the player names right is pretty important, no? If I say “Derek broke into my house and stole my TV” when in fact I meant Darrell, that’s a pretty big deal when the police come knocking on your door, isn’t it?

          4. Good point there, Dear Leader. Politicians are not always careful with their words.

            But the private players face no real threat since the SVB failure was due to over-attention to woke ESG issues.

            PS – I always knew that Darrell was a criminal!

        2. But isn’t the idea of raising interest rates to fight inflation to put people out of work to increase unemployment? Instead of putting people who work in real estate, construction, auto industry out of work, why not put it on the VC and startups?
          Maybe they’ll have to sell their foosball tables and massage chairs.
          I’m not unsympathetic to people who lose their job, but seems like this would get the unemployment numbers up and fight inflation just as well as choking the economy from the other end.

    2. Its disappointing to read a comment here, where most are more sophisticated than anything I can usually offer, that seemingly lumps together practitioners of venture capital, private equity and vulture capital – 3 very different investment styles. Per Investopedia, “A vulture capitalist is an investor who seeks to extract value from companies in decline. The goal is to swoop in when sentiment is low–and the company is trading at a rock bottom price–and take whatever action is necessary to engineer a quick turnaround and sell it on for a profit.”

      The broad brush characterizations may be valid for actual vulture capitalists, and many in the PE world – but the venture capitalists and their progeny caught up in the SVB disaster are largely of a different stripe (perhaps deserving of criticism, but not for the sort of damage suggested above.

    3. My two cents as someone in tech (although the company I work for didn’t bank with SVB nor is it funded by VC/PE): the shakeout in tech is already happening and many VCs will lose a lot of money as companies go under. However, a bank run is not an orderly way to manage the situation and letting SVB go under without backstopping depositors would have made everyone far worse off.

      As has been alluded to in these pages many times, the reality is that even in downturns where capital takes a huge hit, the wealthy will still have millions (or billions) in assets and won’t see a significant change in quality of living. Advocating for bankruptcies and job losses in order to punish the investor class is the ultimate cut off your nose to spite your face move.

      If we ever got our political act together, we’d focus more on progressive taxation and UBI, but those are pipe dreams for now. In the meantime, I’d just second H’s advice about keeping it real and constructive.

  3. “…inflation isn’t anywhere close to ‘contained’…”

    Say what you will about the rest of it, that’s a true statement.

    1. Right. And it’s like the fact that the US just experienced the second and third largest bank failures is just kind of a meh…thing. Inflation is not coming down until enough regular folks are scared. Bank runs used to be scary, but it seems it’s baked into our collective conscience the Fed, or Congress, or the Treasury will make all scary things go away. Let’s face it, most regular folks don’t really know much about how things work, or don’t work. And losing a job hasn’t been scary for quite a while come to think of it. Too much money in the system, for too long has helped created this un-reality. No other actor than the Fed can really make a difference at this point. I think their work is far from done.

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