Join institutional investors, analysts and strategists from the world's largest banks: Subscribe today
Already have an account? log in
Moment Of Truth Arrives For Fed In Crisis Mode
There was little utility in parsing the macroeconomic nuance ahead of this week's FOMC meeting.
Less than two weeks ago, traders were on edge about the prospect of the Fed returning, however briefly, to a half-point hike cadence amid scorching-hot US economic data and concerns that services sector inflation wasn't moderating consistent with efforts to restore price stability. Seven trading sessions and one banking sector crisis later, the idea of a 50bps hike at the March meeting was laughable.
I never have understood the Fed’s obsession with shrinking their balance sheet. The time has certainly come to end QT. A bank run is on, so draining liquidity makes little sense. For those that say, if the FOMC stops raising rates, that will spook the market since it will be indicative that the Fed is panicking. Duh, there is a bank run, the panic is already out there. There is nothing wrong with the central bank saying in light of the changed circumstances, we will at least take a temporary pause in raising rates. If inflation stays sticky and the situation calms down more, and warrants rate increases we are very open to doing that as soon as the next meeting. As for the argument that the lender of last resort function is separate from broader monetary policy- that is a straw man. It is all monetary and financial stability policy- whether it is the Fed’s balance sheet, bank regulation, short term policy rates or any other policy. It all goes into both financial stability and regulating the economy. Separating the functions is just not how the real world works. You can live in your ivory tower and think otherwise if you so choose but that is just not how things work. If you are a practicing economist, if your model does not bear some semblance to how our market economy functions then you have to change your model or start from scratch.
And if the government is constantly backstopping the banks shouldn’t the government just own them?
Instead of being the “lender of last resort”, just be “the lender.”
Excellent point. Most Smaller banks can’t afford to pay depositors a yield that is competitive with short term US Treasury bonds or money market funds. I’d be curious to know what percentage of depositors in small and medium banks have money in a checking/savings account or CDs in excess of $250,000 FDIC insured limit. What if FDIC raised insured limit to $500,000, or $1million AND increased fractional reserve capital requirement instead of backstopping everything. I bet confidence in banking system would get stronger if nearly half of small banks would be bought by only the stronger medium size institutions. We should avoid backstop/bailout of all banks forever because that smells too much like “nationalizing” the banks. And I totally agree that promising something for a year or two will invariably morph into a commitment for perpetuity.
Then the government would be in the business of allocating credit. Not a good idea.
See Fannie Mae.
So El-Erian is on bloomberg urging a 25 at this meeting. What a shock. Not a good idea in the middle of a bank run. Will be interesting to see the market reaction to forced Swiss Bank merger tonight. Trouble still lurking in the USA for non sifi banks.
As disingenuous and self-serving as Ackman can be, he makes a valid point about not wanting stronger banks incurring any risk by using their precious capital deposited in weak or poorly managed banks to create the appearance of confidence. It’s not fooling anybody as shown by First Republic Shares dropping double digits on Friday despite the announcement of the capital infusion. Depositors in strong banks aren’t thrilled about even a nickel of their deposits allocated to a bank that Moody’s and Fitch have downgraded to junk status if I’m not mistaken.
The risk in FDIC backstopping all deposits is that people start wondering how that’s even realistically possible. So going down that road is best avoided by maintaining rock-solid iron-clad confidence in FDIC by not imposing unrealistic mandates on them.
There needs to be tighter regulation of non “sifi” banks. Raising insurance limits for deposits is an ok idea if premiums are set by profit making firms for a tranche with fdic picking up the tail and the banks paying for insurance on a bank by bank basis. Rates could vary by bank depending on the bank’s risk.
And so it continues, socialism for the rich, blame for the poor. Where’s all the blame for banks that ignored the Fed’s transparency and invested as if QE was coming back last year? On the Fed? And remember when inflation was all the working class’s fault for having too much money and buying things they want and need? It definitely wasn’t the Fed’s fault for keeping QE going too long nor the banks fault for providing too much credit liquidity. It was the people spending the money that were the problem! Borrowing 6X what you are capable of earning to purchase an overpriced house? Love it! How about a 10 year auto loan on an overpriced truck that will cost you even more when oil spikes, let’s do it!
When I make bad investments, no one blames the government for why I made them. But when the banking industry (who always wins) screws up, well, we need to protect them and deregulate them and make sure that they keep making money no matter what happens without consequences forever.
We seriously need to wake up here. Do we want intrenched hyper inflation? Do we really want to keep relying on a banking sector that only still exists because the Federal government protects them? Why in the world is Wells Fargo even still a company? Because the banks always win even when they continuously screw over their customers ever single year for the past two decades. Rant = over.