Cryptocurrency: BANK RUN PANIC Spreads Around Globe, Crypto and Gold Demand Skyrockets, FDIC Coverup

grarpamp grarpamp at gmail.com
Mon Mar 13 22:26:14 PDT 2023


Why The Banking System Is Breaking Up

by Michael Hudson

The collapses of Silvergate and Silicon Valley Bank are like icebergs
calving off from the Antarctic glacier. The financial analogy to the
global warming causing this collapse of supporting shelving is the
rising temperature of interest rates, which spiked last Thursday and
Friday to close at 4.60 percent for the U.S. Treasury’s two-year
bonds. Bank depositors meanwhile were still being paid only 0.2
percent on their deposits. That has led to a steady withdrawal of
funds from banks – and a corresponding decline in commercial bank
balances with the Federal Reserve.

Most media reports reflect a prayer that the bank runs will be
localized, as if there is no context or environmental cause. There is
general embarrassment to explain how the breakup of banks that is now
gaining momentum is the result of the way that the Obama
Administration bailed out the banks in 2008 with fifteen years of
Quantitative Easing to re-inflate prices for packaged bank mortgages –
and with them, housing prices, along with stock and bond prices.

The Fed’s $9 trillion of QE (not counted as part of the budget
deficit) fueled an asset-price inflation that made trillions of
dollars for holders of financial assets – the One Percent with a
generous spillover effect for the remaining members of the top Ten
Percent. The cost of home ownership soared by capitalizing mortgages
at falling interest rates into more highly debt-leveraged property.
The U.S. economy experienced the largest bond-market boom in history
as interest rates fell below 1 percent. The economy polarized between
the creditor positive-net-worth class and the rest of the economy –
whose analogy to environmental pollution and global warming was debt
pollution.

But in serving the banks and the financial ownership class, the Fed
painted itself into a corner: What would happen if and when interest
rates finally rose?

In Killing the Host I wrote about what seemed obvious enough. Rising
interest rates cause the prices of bonds already issued to fall –
along with real estate and stock prices. That is what has been
happening under the Fed’s fight against “inflation,” its euphemism for
opposing rising employment and wage levels. Prices are plunging for
bonds, and also for the capitalized value of packaged mortgages and
other securities in which banks hold their assets on their balance
sheet to back their deposits.

The result threatens to push down bank assets below their deposit
liabilities, wiping out their net worth – their stockholder equity.
This is what was threatened in 2008. It is what occurred in a more
extreme way with S&Ls and savings banks in the 1980s, leading to their
demise. These “financial intermediaries” did not create credit as
commercial banks can do, but lent deposits out in the form of
long-term mortgages at fixed interest rates, often for 30 years. But
in the wake of the Volcker spike in interest rates that inaugurated
the 1980s, the overall level of interest rates remained higher than
the interest rates that S&Ls and savings banks were receiving.
Depositors began to withdraw their money to get higher returns
elsewhere, because S&Ls and savings banks could not pay higher their
depositors higher rates out of the revenue coming in from their
mortgages fixed at lower rates. So even without fraud Keating-style,
the mismatch between short-term liabilities and long-term interest
rates ended their business plan.

The S&Ls owed money to depositors short-term, but were locked into
long-term assets at falling prices. Of course, S&L mortgages were much
longer-term than was the case for commercial banks. But the effect of
rising interest rates has the same effect on bank assets that it has
on all financial assets. Just as the QE interest-rate decline aimed to
bolster the banks, its reversal today must have the opposite effect.
And if banks have made bad derivatives trades, they’re in trouble.

Any bank has a problem of keeping its asset valuations higher than its
deposit liabilities. When the Fed raises interest rates sharply enough
to crash bond prices, the banking system’s asset structure weakens.
That is the corner into which the Fed has painted the economy by QE.

The Fed recognizes this inherent problem, of course. That is why it
avoided raising interest rates for so long – until the wage-earning
bottom 99 Percent began to benefit by the recovery in employment. When
wages began to recover, the Fed could not resist fighting the usual
class war against labor. But in doing so, its policy has turned into a
war against the banking system as well.

Silvergate was the first to go, but it was a special case. It had
sought to ride the cryptocurrency wave by serving as a bank for
various currencies. After SBF’s vast fraud was exposed, there was a
run on cryptocurrencies. Investor/gamblers jumped ship. The
crypto-managers had to pay by drawing down the deposits they had at
Silvergate. It went under.

Silvergate’s failure destroyed the great illusion of cryptocurrency
deposits. The popular impression was that crypto provided an
alternative to commercial banks and “fiat currency.” But what could
crypto funds invest in to back their coin purchases, if not bank
deposits and government securities or private stocks and bonds? What
is crypto, ultimately, if not simply a mutual fund with secrecy of
ownership to protect money launderers?

Silicon Valley Bank also is in many ways a special case, given its
specialized lending to IT startups. New Republic bank also has
suffered a run, and it too is specialized, lending to wealthy
depositors in the San Francisco and northern California area. But a
bank run was being talked up last week, and financial markets were
shaken up as bond prices declined when Fed Chairman Jerome Powell
announced that he actually planned to raise interest rates even more
than he earlier had targeted, in view of the rising employment making
wage earners more uppity in their demands to at least keep up with the
inflation caused by the U.S. sanctions against Russian energy and food
and the actions by monopolies to raise prices “to anticipate the
coming inflation.” Wages have not kept pace with the resulting high
inflation rates.

It looks like Silicon Valley Bank will have to liquidate its
securities at a loss. Probably it will be taken over by a larger bank,
but the entire financial system is being squeezed. Reuters reported on
Friday that bank reserves at the Fed were plunging. That hardly is
surprising, as banks are paying about 0.2 percent on deposits, while
depositors can withdraw their money to buy two-year U.S. Treasury
notes yielding 3.8 or almost 4 percent. No wonder well-to-do investors
are running from the banks.

The obvious question is why the Fed doesn’t simply bail out banks in
SVB’s position. The answer is that the lower prices for financial
assets looks like the New Normal. For banks with negative equity, how
can solvency be resolved without sharply reducing interest rates to
restore the 15-year Zero Interest-Rate Policy (ZIRP)?

There is an even larger elephant in the room: derivatives. Volatility
increased last Thursday and Friday. The turmoil has reached vast
magnitudes beyond what characterized the 2008 crash of AIG and other
speculators. Today, JP Morgan Chase and other New York banks have tens
of trillions of dollar valuations of derivatives – casino bets on
which way interest rates, bond prices, stock prices and other measures
will change.

For every winning guess, there is a loser. When trillions of dollars
are bet on, some bank trader is bound to wind up with a loss that can
easily wipe out the bank’s entire net equity.

There is now a flight to “cash,” to a safe haven – something even
better than cash: U.S. Treasury securities. Despite the talk of
Republicans refusing to raise the debt ceiling, the Treasury can
always print the money to pay its bondholders. It looks like the
Treasury will become the new depository of choice for those who have
the financial resources. Bank deposits will fall. And with them, bank
holdings of reserves at the Fed.

So far, the stock market has resisted following the plunge in bond
prices. My guess is that we will now see the Great Unwinding of the
great Fictitious Capital boom of 2008-2015. So the chickens are coming
hope to roost – with the “chicken” being, perhaps, the elephantine
overhang of derivatives fueled by the post-2008 loosening of financial
regulation and risk analysis.


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