2023-03-13 11:07:32 ET
Summary
- Three commercial bank failures have just been identified over the past week and the government and the regulators have moved to protect the economy from the appearance of more.
- The irony of the current situation is that the money pumped into the economy in 2020 and 2021 is leaving and more and more failures are coming to the surface.
- How many more failures are "out there" we don't know, but it is highly likely that the policymakers are not through with their "heavy" work.
- Radical uncertainty clouds the horizon.
Today is March 13, 2023.
The Federal Reserve began its monetary tightening on March 16, 2022.
We have now had considerable disruption in the cryptocurrency sector.
We have had disruption in the "blank check" space. This space is for SPACs, Special Purpose Acquisition Companies.
I have written posts about the troubles being experienced in the world's of private equity and venture capital .
Now, we have the commercial banking sector to talk about.
Just this past week, three commercial banks have bitten the dust.
Silicon Valley Bank (SIVB), Signature Bank (SBNY), and Silvergate Capital Corp. (SI) have all "gone under."
Is something going on here?
Too Much Money
The problem is, and the problem has been, too much money floating around.
The past three years or so has been pointed to as the time that the Federal Reserve generated an asset bubble and then turned to the other side and tried to slowly let air out of the bubble to combat the inflation that had built up in the economy.
The Federal Reserve pumped up market liquidity so as to avoid the United States economy going into an economic, and/or financial collapse due to the spread of the Covid-19 pandemic and the economic recession and supply chain problems that followed.
The "collapse" was avoided.
However, once the crises stage was passed, a new problem arose. What does the Federal Reserve do with all the money left in the banking system, stimulating inflation?
Will, if you are the Fed, you start removing some of the liquidity and you see to it that interest rates start to rise.
The Fed did just that.
And various sectors of the economy were hit in different ways.
The Silicon Valley Bank experience can give you a picture of both sides of the narrative.
First off, Silicon Valley Bank had lots and lots of cash hanging around with very few places to put the funds except into securities that paid relatively higher rates of interest, especially securities with longer maturities.
Silicon Valley Bank put lots and lots of its cash into corporate and government securities with long maturities.
This worked very well for a time.
But, the Federal Reserve started to "tighten up" and remove reserves from the banking system.
And, the Fed saw to it that interest rates rose. And, even though the term structure of interest rates inverted, longer-term interest rates rose and rose by a substantial amount.
Silicon Valley became faced with a situation where "money" was needed.
Securities had to be sold.
The securities were sold at a considerable loss.
Solvency was threatened...and the bank was closed.
Signature Bank and Silvergate faced narratives that were also based upon the changing nature of the financial markets brought about by the Federal Reserve.
And, boom, the regulators showed up at the front door of these banks and said that they were "taking over."
I know that this is not a very detailed description of the situations that faced each of these banks, but the overall stories that can be told carry with them a consistent theme.
And, so the beat goes on.
How many more banks will follow these three to regulator control?
How many more financial organizations will be forced to sell their businesses or close?
This is the other side of the bubble.
The Transition
The transition is taking place.
One reason that these "failures" have caused so little trouble so far is that the financial markets are still awash with money.
The commercial banking system has more than $3.0 trillion in "cash" on its balance sheets.
Most financial sectors of the economy have lots and lots of cash around.
Consequently, we are only finding that one company here and one company there is failing.
But, will this pace pick up?
Will, the Federal Reserve continue to tighten up on the banking system, forcing other organizations that have made "bad" decisions, to pay for choices?
And, what about all the other "issues" that are hitting the financial sector at this time, like, for example, the debt ceiling crisis?
There are many, many issues out there that need to be resolved.
As I have been writing over the past several months, between the Covid-19 pandemic, the response of the Federal Reserve to the economic problems, and the excessive spending of the federal government, financed by debt, and all the other issues going on in the world, there is a lot of things the policymakers must respond to in the near future.
How this will be done and over what time span are major questions?
The Future
The future is unknown. The future is faced with radical uncertainty.
The failures that have come about in recent months are only the tip of the iceberg of problems that exist within the U.S. economy.
Note, however, the massive amounts of money that are still floating around the financial system are keeping the failures from piling up faster.
Will more commercial banks fail?
Undoubtedly.
Will there be more problems in the cryptocurrency area?
For sure.
And, in venture capital, angel finance, and private equity?
Yes!
It is a funny time.
In a period where monetary tightening really removes financial resources, the break toward a recession can occur quickly and painfully.
We, however, are in a period of monetary tightening, resource revision, and economic adjustment where there is lots and lots of money still "out there."
There are many, many commercial banks and other financial organizations that are "on the brink." We don't know about them because of the nature of the situation.
But, they are there. And, time must pass before they come "to the surface."
The disruptions will continue. This radically uncertain world is just resulting in our knowledge of what disruptions might be coming and when, to be hidden in the fog.
For further details see:
The Disruption Continues: Money, Money, Money