Economics revisited

 "Be cheerful also, and seek not external help nor the tranquility which others give.  A man must stand erect, not be kept erect by others." - Marcus Aurelius

 In the early days of blogging on this website, I would occasionally post about this or that economic trend or event.  It was quite clear to me at the time that a massive housing bubble was about to burst and bring down the economy with it.  

It was really frustrating learning about all these over-the-top stories of housing fraud, with no apparent regulatory oversight - let alone consequences for the miscreants.  It was clear that this would end in tears, but nobody seemed to be concerned over it.  Then everything collapsed, and the bad guys who *knowingly* issued fraudulent loans were made whole, instead of put in jail - as the rest of the economy crashed.  I quit blogging about economics (and pretty much everything else) out of disgust.  Moral Hazard, thy real name is Ben Bernanke.

Seriously... at a minimum, Dick Fuld (Lehman Brothers) and Angelo Mozilo (Countrywide) very likely should have gone to prison.  There are others.

It appears that we have quietly arrived at a similar, less obvious or disastrous point in banking, just 15 years after the previous contemptible episode.  This one is due to the rapid increase in the Federal Funds Rate from essentially zero to 5% over the course of a year, to combat rising inflation.

Below are charts of the latest inflation indexes, courtesy of Advisor Perspectives

And below (again courtesy of Advisor Perspectives) is a long-term chart of various rates, which is a method the Federal Reserve uses to combat inflation.  We are interested in the Fed Funds Rate, which is the red line.

At the right side of that chart, the red line shows where the Federal Reserve woke up and decided to begin fighting the inflation that the rest of us have been aware of for years now.  They panicked and started *rapidly* raising interest rates, in an attempt to catch up with inflation.  However they were way behind where they needed to be.  Thus the rapid increase.  The chart below explains how they messed up:

Below:  The EFFECTIVE Fed Funds rate.  This is the Fed Funds Rate adjusted for measured inflation.

The *effective* Fed Funds Rate has been deeply negative for two years, which is why everything has gone up in price - or rather, why your dollars are worth much less.  It has rapidly gone from very negative, to positive, and so borrowing money is no longer free for those with the right connections - private equity types.  The lack of easy money is causing problems with the stock markets, because easy money is good for buying things like your own company stock.  However the increased Fed Funds Rate is causing much bigger problems for banks.

Banks take depositor's money, and invest the bulk of it in "safe" assets, like treasury bonds.  Sadly, treasury bonds aren't all that safe when you buy them with at a zero percent rate of return.  Once interest rates go up, the value of the treasury bonds drops, and you end up with a chart like the one below.  

Below: Unrealized losses on bank balance sheets.  Source - Federal Deposit Insurance Corporation. (FDIC)

This chart indicates that there is a lot of dirty laundry (losses) from Treasury Bonds on bank balance sheets, just waiting to be triggered.  If people lose faith and start withdrawing money, those underwater bonds will have to be sold at a loss, to come up with enough cash to cover the withdrawals.  And then, things get very ugly, very fast.

On Friday 10 March, 2023, Silicon Valley Bank was hurriedly seized by the FDIC mid-day, in the midst of a bank run.  Depositors had panicked about the bank's solvency and were trying to be the first depositors out the door.  

Normal practice for the FDIC is to wait for the close of business Friday, seize the bank, and open the bank under a new name with new management on the following Monday.  The fact that the FDIC intervened mid-day shows how fast-moving and potentially damaging this event was.  They were clearly worried about contagion to other banks, and wanted to nip it in the bud.

One really must wonder about the risk-management team at that bank, and one might even conjecture about the wisdom investing huge amounts in treasury bonds at a near-zero rate of return.   And someone was on the risk-management team at a bank, could they possibly realize that rates can only go upwards from zero and hedge the risk somehow?   What do I know though?

By the way, here's my face when a badly-run money operation fails.

Over this weekend, a few other panicky events have taken place as well.  New York state regulators took over Signature bank in New York - so that one was suddenly on shaky ground.  Also, to prevent further panic and contagion, the FDIC and Federal Reserve jointly announced a brand new "stabilization fund" called the Bank Term Funding Program.  This will issue loans to failing banks against "high-quality" assets.  One would assume that means Treasury Bonds, but knowing these clowns, it could also mean Beanie Baby collections.

Below is the old Bank Run scene from the movie "It's a Wonderful Life".  Jimmy Stewart, who owns the bank, is trying to convince members of his community to keep their money in the bank so that it doesn't go into receivership - explaining that their money has already been loaned back out into the community.

And here's the modern version, referencing Silicon Valley Bank, which catered to start-up companies funded by venture capital:

Then there's this hilarious set of Tweets.  The original guy, who obviously favors censorship, starts the conversation, and a member of the US House of Representatives is the first reply.

As usual, never bet against the house.  People with money are seldom allowed to lose either their job or their money.  The banks will not be allowed to fail, and your tax money will see to that - regardless of how poorly they were operated.

Onwards to happier things.  I had a few good tunes roll around on the random thumb drive.  I don't do Pandora or iHeartRadio, or Spotify.  Internet corporations don't need to know my listening habits or program me to listen to what they want me to hear.  If I want certain music, I'll purchase and rip it on my own, and I don't need a company between me and the music.  Does that make me antisocial or just anti commercial.  Are those the same thing nowadays?

Anyway, back to the music.

The Spinners - I'll be around.  I always loved the rhythm guitar chords in this song. 

I wanted to learn how to play the licks, but it's a little bit more difficult than I could pull off, since I haven't played in forever.

Then an old Seals&Crofts tune rolled around.  I haven't heard this in a very long time.  It was a 70's day I guess.  King of Nothing.

Then an early 2000's tune popped up, The Energy by Audiovent

Followed by some pleasant 1600's Lute Music!  It's fascinating and very peaceful to listen to this sort of music, but it's also odd, because the music never takes you anywhere.  It doesn't have the conventions of modern music with different parts of a song, like refrain, chorus, chord changes, solo.  No it just plays out...  cool though, if you like a change of pace.

And lastly a very cool bit of modern swing.  Zoot Suit Riot by the Cherry Poppin' Daddies.

Also, I didn't hear this on the way in to work, but watching it never gets old.  I wish the video was of higher quality.