How To Crash The Economy, Big Government Style

We are facing a financial crisis that is imminent, even though we don’t want it.

According to Moody’s, Silicon Valley Bank (SVB), was worthy of an investment grade rating as of March 8, 2023. S&P Global Ratings also had high opinions of SVB. SVB was shut down the next day. Moody’s instantly made SVB junk. So did S&P Global Ratings. Within days, Signature Bank — with Barney Frank, co-sponsor of the famed and much-ballyhooed Dodd-Frank Act, on the board — went belly up.

Biden’s administration, proud of its heroism and quick response, immediately filled the gap. Team Biden was concerned that unsecured depositors might lose billions of cash. The Federal Reserve launched a Bank Term Funding Program to provide additional reserves for banks. Joe Biden claimed that he had stabilized banks.

He hasn’t.

We need to understand why SVB failed. It was due to three factors. From 2020 to 2022, the federal governments injected more liquidity in the American economy than ever before. SVB, trusting the liquidity would keep coming, put a large portion of this liquidity into bonds. These bonds had a low rate of interest. The Federal Reserve, having created an inflationary wildfire, had now to raise interest rates to lower inflation. SVB’s bond holdings fell due to higher interest rates. When depositors began to withdraw their money because they were unable to access easy money, SVB had no choice but to liquidate the bonds, effectively bankrupting them.

What then happened? The federal government set up a carousel for easy money; investors thought it would never end; however, it did stop. Now, the federal government blames capitalism — and in the process, claims that by injecting Increased liquidity to the systemIt will stop capitalism from destroying the banks. But instead, the federal government has created two new problems: first, the Federal Reserve has now given itself the unenviable task of simultaneously quashing inflation (which requires raising interest rates) and shoring up the banks (which requires lowering them and/or injecting more liquidity); second, the federal government has created a new and massive moral hazard, whereby bank managers know that if they promise outsized returns to their depositors, they can gain their business — and worst case scenario, the government will bail out the depositors anyway.

Now the experts tell us that the Biden team will achieve a soft landing – that they’ll somehow square the circle, lowering inflation while preventing bank assets from depreciating, incentivizing financial responsibility while simultaneously backstopping bad decision-making, promoting fiscal responsibility while proposing $7 trillion budgets. This level of power is rare, not even the Biden team. They have brought America four-decades of high inflation, the highest interest rates ever since before the 2007/2008 financial crash and an ever-growing national debt.

The crisis will come. It may feel like the federal government can fly. This is because you always feel that way when you leap out of a tenth story window, and you’re nine floors below. Joe Biden and Joe Economy aren’t immune to the forces that create financial gravity.

“From How to Crash the Economy, Big Government Style“

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