SVB Fed/FDIC Bailout Commentary
The combined might of the FDIC and the Federal Reserve may have stemmed the hemorrhaging, but they only increase inflationary risks that will ultimately require significantly higher interest rates.
As widely recognized, the Federal Reserve’s new policies to contain SVB fallout are sophisticated market operations that essentially equate to “money printing.” The problem is that, while these actions might temporarily contain systemic risk and contagion, ultimately, they will only fuel inflation further and necessitate even more significant rate hikes to stop the re-acceleration of inflation, as seen in recent data. Something is going to break, for real. First was the British pension system, then SVB, and a regional NY bank; what domino is next?
It is necessary never to forget that the government essentially wrote a blank check to "too big to fail" institutions in 08 by buying toxic assets off their balance sheets at 100 cents on the dollar. They also initiated policies that led to the significant nationalization of major corporations, from the auto industry to major banks. These operations, asset purchases, zero interest rate policy, quantitative easing, and other lending facilities resulted in the longest bull market in US history, running for 12 years straight and saw stock indexes tripling or more in that period.
Furthermore, during the peak panic of COVID, the same Fed committed to major asset purchases on the order of 100s of billions that included the potential for not just treasuries and MBS, but also corporate debt and equity ETFs, making the government an equity holder of public companies. Probably not legal, and unprecedented. They also created a lending facility where fixed-income collateral could be posted for fresh, ample liquidity. And if that wasn’t enough, they committed and executed massive liquidity injections to the system in the form of interest-free capital transactions that swap illiquid assets off bank balance sheets for extremely liquid cash.
The scale of this was also unprecedented, as through this mechanism, the Federal Reserve conducted market operations to the tune of 1 Trillion USD a day, for two straight weeks. This exploded the money supply, led to a surge of sustained inflation, skyrocketed the affordability of real estate, and led to a nearly 150% rally in. equity markets, before ultimately starting to collapse on itself in 2022.
They have managed to walk a tightrope over the last 15 years, patching the system with special lending facilities and quantitative easing. Still, there is no such thing as a free lunch. The chickens are now, for that ride fueled by virtually free money chickens have come home to roost in the form of historical rates of sustained inflation, eroding the wealth of most Americans and causing significant market distortions that the economy is still strained under to this day.