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The Federal Reserve and the Treasury Department are preparing emergency measures to shore up banks and ensure they can meet potential demands by their customers to withdraw money, as the US seeks to stave off a deeper crisis after SVB Financial Group’s failure.
The Fed is planning to ease the terms of banks’ access to its discount window, giving firms a way to turn assets that have lost value into cash without the kind of losses that toppled SVB’s Silicon Valley Bank. The Fed and Treasury are also preparing a program to backstop deposits using the Fed’s emergency lending authority.
The changes under discussion were described by people with knowledge of the matter, who asked not to be named because the talks are confidential. Representatives for the Fed and Treasury had no comment.
Regulators are discussing extraordinary measures as banks face the prospect of booking losses if customers pull uninsured deposits after the swift collapse of SVB rattled financial markets last week and left its clients in the lurch. A flood of withdrawals can force banks to sell assets such as bonds that have deteriorated in value amid interest-rate increases — the dynamic behind SVB’s demise.
© 2015 Mutual Fund Observer. All rights reserved.
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"Just as there are no atheists in Fox Holes, there are also no Libertarians during a financial crisis..."
~Barry @Ritholtz,
https://twitter.com/sruhle/status/1634703830032998400?s=12
@Anna - If it’s raining where you are I envy you. Still the land of ice and snow here.
The poor spend almost all of their wages on items they consume, and the prices of those items are going up. They have no means of saving in ways that can keep up with inflation.
https://news.yahoo.com/silicon-valley-bank-collapse-2018-dodd-frank-rollback-warren-warner-212435471.html
Seems to me that it's quite likely that uncontrolled inflation can be a real PITA for average people without framing it in 70's America, Thatcher's England, Weimar Germany, or what is going on in Turkey at the moment.
Today, a lot of people arguing for a soft Fed response are very much the sort of people that ran SVB. And they are in a much better position to benefit from inflation than I am.
At the same time, the push for organized labor is showing more vigor than it has since Reagan crushed PATCO. And the people that oppose that are very much the sort of people that have profited, and grown fat, on easy money from the Fed.
@WABC -You weren’t pleased with Nixon’s 1970 wage & price freeze?
I was pretty irresponsible with money 50 years ago, so I doubt any Fed policy would have helped. Fortunately, we had a strong labor union where I worked and so wages kept up with inflation. With annual raises based on seniority, I stayed ahead of inflation. I do not remember a lot of public yelling and screaming about it in the 70s. It crept up on us slowly; started creeping up bit by bit in the 60s. Once we went off the gold standard (‘71) it quickened. For the most part we took inflation in stride as part of life. In Michigan the “Big Three” auto plants were still humming. The unionized workers there did very well. Could afford to own nice new vehicles and suburban homes. Some even owned second homes in the northern reaches of the state.
While I contributed automatically to a 403B from my pay, I wasn’t really attuned to investing. But left alone the global equity fund (run by John Templeton then) did quite well and paved the way for the future. A gold & silver craze developed in the late 70s. There was tremendous media hype as the price of gold soared from $35 a decade earlier to around $800 an ounce. I grabbed off a couple K-Rands near the top and watched it slide to $400-$500 over a few years before selling. It was the best lesson in investing I ever received. And the Hunt Brothers somehow managed to buy enough silver back than to push the price over $50 an ounce - an astronomical height it has never reclaimed.
Whatever we’re facing now by way of inflation is mild compared to the 60s thru 80s period. And I think the Fed for reasons I don’t fully understand is engaged in some serious overkill. Throwing the baby out with the bathwater might apply.
A blast from the past
”With inflation on the rise and a gold run looming, Nixon’s administration coordinated a plan for bold action. From August 13 to 15, 1971, Nixon and fifteen advisers, including Federal Reserve Chairman Arthur Burns, Treasury Secretary John Connally, and Undersecretary for International Monetary Affairs Paul Volcker (later Federal Reserve Chairman) met at the presidential retreat at Camp David and created a new economic plan. On the evening of August 15, 1971, Nixon addressed the nation on a new economic policy that not only was intended to correct the balance of payments but also stave off inflation and lower the unemployment rate.
The first order was for the gold window to be closed. Foreign governments could no longer exchange their dollars for gold; in effect, the international monetary system turned into a fiat one. A few months later the Smithsonian agreement attempted to maintain pegged exchange rates, but the Bretton Woods system ended soon thereafter. The second order was for a 90-day freeze on wages and prices to check inflation. This marked the first time the government enacted wage and price controls outside of wartime. It was an attempt to bring down inflation without increasing the unemployment rate or slowing the economy. In addition, an import surcharge was set at 10 percent to ensure that American products would not be at a disadvantage because of exchange rates.
Shortly after the plan was implemented, the growth of employment and production in the United States increased. Inflation was practically halted during the 90-day wage-price freeze but would soon reappear as the monetary momentum in support of inflation had already begun. Nixon’s new economic policy represented a coordinated attack on the simultaneous problems of unemployment, inflation, and disequilibrium in the balance of payments. The plan was one of the many prescriptions written to cure inflation, which would eventually continue to rise.”
Source
Rehashing the favorite arguments of the geriatric right, and left, from the 1970's may be of historiographic interest. But the fall of the Wall put paid to the whole "Cold War order" thing.
Of course no one said that today's labor movement is close to what it was at the beginning of the 70's. My point is that the people that oppose what little is happening now are very much in favor of easy money from the Fed.
OTOH. In this very forum I see people arguing for punishing depositors at SVB without regard to the knock-on effects of failure to pay workers or vendors. Stick it to 'em.
But the chance for an average saver to get a safe return of 5-6% on their money will raise Maggie Thatcher from the dead, legitimize neocolonial revanchism, bring back the Cold War order, destroy unions that no longer exist, and, wait for it, throw people out of work.
https://prospect.org/economy/2023-03-13-silicon-valley-bank-bailout-deregulation/?utm_source=substack&utm_medium=email
We still dont know how many of these accounts were really “ small businesses”. Roku apparently had half a billion dollars on deposit without any protection
Why should we bail out Roku?
Given the choice, I would rather see targeted fiscal stimulus than monetary stimulus to help the specific areas of our economy that are struggling via government programs, and tax hikes to constrict things when we get overstimulated. But there are obvious political roadblocks to fiscal stimulus. Interest rates are a blunt instrument that helps and hurts multiple parties.
As for SVB, I am fine with making all depositors whole just so long as the rich people getting bailed out stop complaining about the "moral hazard" of helping poor people. Moreover, the capital standards from Dodd Frank need to be restored and SVB should be nationalized, and the government collect all future profits to give back to taxpayers.
Not so much, if you are on a fixed (non-governmental) pension.
Perhaps he was thinking about Social Security increases? I don't know about you, but after the amount Medicare increases, there's not a lot left over.
It's those folks with fixed-rate mortgages that should love inflation.
(I find Axios informative on "facts," but annoying on their interpretation.)
Your individual account was insured up to $250,000.
Your spouse's individual account was insured up to $250,000.
Your joint account was insured up to $500,000.
Seriously, how many couples are keeping $1MM in cash?
The banks pay for this insurance coverage, which means we all pay in some way.
If all deposts are going to be insured, clearly banks will be charged more for the increased coverage.
I suggest banks should recover these extra costs by charging corporate accounts a fee on the basis of average balance, and perhaps a risk premium.
Be careful extending any of this to other US banks. Use deposit titling and distribution tricks available.
Businesses may use the commercial IntraFi network for auto-distribution of large deposits (NOT a free service). https://www.intrafi.com/solutions/depositors/
How ironic that the European banks were supposed to be in trouble and some are just near the edge of insolvency. BUT instead, 3 US banks were closed in 4 days, and now SVB Bank is #2 bank failure in the US history, and Signature Bank #3.
@WhollyTerriers: Exactly right. Those accounts should be offered a "not insured/no-charge/you're on your own" option or an "insured/insurance-charge/you're covered" option.
This isn't rocket science. And to minimize potential losses for insured accounts, the banks could forward those larger insured amounts to the FDIC, who in turn could redeploy them in smaller amounts across a large number of banks to minimize the exposure to stupid banking management.
https://www.vox.com/policy/23636583/silicon-valley-bank-collapse-fdic-deposit-massachusetts
Also worth noting you do not pay state income tax on interest from a MA bank. But my local bank only pays 1% on their MM account, and next to nothing on savings