After SVB, the dominoes continued to fall with Signature, First republic and Credit Suisse. While pundits were so sure that the causes of SVB failures were rooted in mismanagement and a flagging US tech sector, they are not so sure that it stops there anymore.
The FDIC and the US Government stepped in to provide unlimited insurance on deposits, yet they continued to gush out to the safety of larger banks or money market accounts. BoFA recorded a $15bn inflow of deposits in the following days of the SVB collapse. In the meantime, the US financial sector is still going down. Same thing across the Atlantic, where the Swiss government support did little to arrest the fall of Credit Suisse and the contagion across the European financial sector, down 17% since Thursday19Mar.
The Fed made the “discount window” borrowing available to all banks a week ago. Since then, it lent out more than $160bn to financial institutions trying to shore up their balance sheet.
This is not a small feat. These measures combined have brutally reversed the quantitative tightening experience that the Fed started only a few months ago. Bond yields came into reverse, with the 2-year crashing down from 5% to 3.9%, leaving pundits wondering what policy move comes next. The market now predicts that rates will drop by 60bps by the end of this year.
After contracting for a while, the Fed balance sheet jumped by $300bn over the last few days. Brutal reversal of the past 6 months of balance sheet tightening.
Where do we go next?
Western government have in principle unlimited measures to quell systemic risk. In short, they can print money like there is no tomorrow. Doing so, it affects the balance sheet of their central banks, and further digs down the hole of public debt deficits. It shows how difficult it is to kick our addiction to debt. The Fed balance sheet was multiplied by 10x from $0.9TN before the 2007 GFC to $9TN in Mar22. In % of the US economy, it grew from 6% to 37%.
Such abondance of safety net opens up the risk of turbo-charging inflation, saddling on taxpayers with more national interest repayment, and creating a moral hazard. It is no doubt a tough time for policy makers caught between a hammer (need to increase money supply to advert crisis) and a hard place (inflation).
360 Advisory LLC is a Boston-based RIA managing investments, including crypto