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The Biggest Confidence Game In History
Much of the debate around how the Fed should approach the tradeoff between the inflation fight and stress in the US banking sector seems to center on the merits of being proactive versus reactive.
It looks as though the swap line announcement+ was an example of the Fed preempting dollar-funding stress rather than addressing any that already existed, and you could argue that's the best approach when it comes to these kinds of issues. It's better to check and reinforce the scaffolding today than
Life is a confidence game. From determinism to meritocracy to free will to who will get the investment, job or be entrusted with capital. It’s why sociopaths excel they see it all as a game to be crafted in their favor.
Hello, Walt. Much appreciate your perspective of the current circumstances faced by the Fed. Your finger on the pulse view is right-on in my opinion. Thanks!
I’d like to see Powell express an assessment of the veracity of steps taken so far. Bank runs evidence the effects of rate increases already in the system. Because they were quick, diligent, substantial, and hard-hitting, I believe the current state merits a pause to allow those rate increases to wash through the system. The system needs to stabilize. Words about the hard work already done and impacts yet to be seen can be useful.
I reckon your view is realistic. But the chairman is dealing the cards.
The “backstop” is just getting started. There is an article in the Real Estate section of the WSJ today discussing the fact that smaller banks own about $2.3T of commercial real estate debt (estimated to be 80% of total commercial real estate debt) with about $270B set to expire in 2023. If borrowers can not repay at face, this is yet another massive, “too big to fail” problem that will likely result in bank failures unless the government backs these loans.
The only other option is continuation of “extend and pretend” ( extend the repayment date and pretend the loan value is still equal to the face value). However, higher interest rates might make this a non-starter for borrowers.
Japan, here we come!
I think CRE is such a diverse range of property types that the impact on regionals will be equally diverse. For those unfortunate enough to be concentrated in, say, San Francisco office, I don’t know how the US govt can backstop those CRE loans. The Fed can’t buy or lend against those loans, and certainly not when they become NPL.
https://wallstreetonparade.com/wp-content/uploads/2023/03/Loan-Advances-Outstanding-at-Federal-Home-Loan-Bank-of-San-Francisco-December-31-2022.jpg
I wonder if CitiBank has a lot of this commercial exposure
Hope and Denial.
The ancient Greeks thought that Hope got snuck into Pandora’s box, but Denial is the only way that hope is viable.
I sold my banks and Reits last year.
Pride goeth before a fall….