The problems at giant banks like Silicon Valley Bank (SVB), Credit Suisse, and others have been allayed. We chose that term carefully, meaning that doubts about the health of the banking system have been calmed. But we fear that the problems behind them have merely been papered over for now.
We recall that in 2017, then-Federal Reserve chairman Janet Yellen averred that there wouldn’t be another financial crisis, at least in her lifetime. But we have since had two years of serious inflation followed by a banking crisis, and yet, Yellen is now head of the U.S. Treasury and still very much alive. We know this because we have seen her again and again on TV in the last week assuring us that the U.S. banking system is “sound.”
The Banking System is Not Fine
As for Federal Reserve chairman Jerome Powell, he says the Silicon Valley Bank’s failure was an outlier and not “a sign of wider failures to come in the U.S. banking system.”
Powell says, “The question we were all asking ourselves over that weekend was ‘How did this happen?’” Yet, if Fed officials were caught up short by SVB—just as they were caught unaware by inflation’s breakout two years ago—how comforting are their assurances that everything is fine today?
Surging gold and silver bullion sales initiated by the bank failures suggest that such assurances are not being universally well received. If everything is fine, why are investors racing from banks to government-guaranteed money market funds? Wall Street on Parade calls it a stampede, one that is confounding the Fed’s efforts to bring down inflation by raising interest rates.
That is the problem with the Fed’s monetary management. It created $8 trillion out of thin air after the last financial crisis. Now it is playing whack-a-mole, trying to slap down one consequence of this money creation after another.
The Fed’s Role in Bank Failures
Consider this: SVB’s problems stem from its bond portfolio tanking due to the Fed raising interest rates. But at almost the exact moment the Fed papered over SVB’s illiquidity at a cost of $20 billion to the FDIC, it raised rates again, delivering a body blow to other institutions deep in bond losses of their own.
In papering over losses at SVB and Signature Bank by issuing implicit guarantees for all depositors, it dealt another body blow to smaller banks with no such deposit guarantees.
Ray Dalio of Bridgewater Associates, the world’s largest hedge fund, says the US has “a pervasive problem,” one that is now global. It is characterized by financial institutions in the U.S. and abroad, banks, and insurance companies, that have borrowed money to acquire assets that have since gone down in value. The Fed’s efforts to raise interest rates to corral inflation drive the value of those assets lower still, exacerbating the problem. Each measure the Fed takes to alleviate one crisis makes another consequence pop up. Whack-a-mole.
Dalio is wise to have pointed out the global dimensions of the problem since Swiss megabank Credit Suisse failed for the same reason as SVB. Such banks don’t mark the value of their assets accurately, or “at the market.” They do not carry these bond portfolios on their books at their true, currently prevailing market value. Thus, their illiquidity remains concealed.
More Problems Ahead?
A Yahoo Finance story this week puts the problem succinctly: “These paper losses across the U.S. banking sector suggest that other banks with high levels of uninsured depositors and large losses are also prone to solvency crises that could trigger bank runs.”
A Columbia Business School professor, Tomasz Piskorski, explains: “You have about 190 banks in a precarious position, meaning the remaining value of assets is not enough to cover the face value of the insured deposit obligation.”
It is not a pretty picture. Since the problems at SVB emerged, retail investors seeking wealth protection have turned to physical gold and silver. But more problems loom. The FDIC estimated that last year the banks had $620 billion in losses, reflected in the chart above. Professor Piskorski estimates that the banking industry now has accumulated $2.2 trillion in unrealized losses.
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Red Rock Disclaimer
The opinions, beliefs, and viewpoints expressed in this article do not necessarily reflect the opinions, beliefs, and viewpoints of Red Rock Secured LLC or the official policies of Red Rock Secured LLC. Red Rock Secured LLC is not a financial advisor, is not licensed to provide investment or tax advice, and neither provides investment nor financial advice. Red Rock is a product specialist that can help evaluate your precious metals purchase options.
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