Thread by @arijitchakrav

Ugh. More trouble to come.

Unrealized mark-to-market losses on regional bank balance sheets are potentially destabilizing.

(Sorry, married to a banker): plain English translation is that high fed interest rates are creating conditions for bank failures (details below) (1/)

https://twitter.com/benitoz/status/1638955703460302848

Some months ago, I pointed out that the @federalreserve’s approach to fighting inflation - relying on high interest rates to curb wage growth- was ignoring the elephant in the room.

As long covid continues to exert pressure on the labor supply, small (& large) businesses (2/)

will have no choice but to bid up the cost of labor. (That’s called the free market, by the way. “Dead hand of Adam Smith”, for the capitalists out there ;> )

Chairman Powell seemed to get that LC was an underlying driver of wage growth for a while, as I pointed out (3/)

in a previous 🧵 (👇), but then he backed off those statements (4/):

https://twitter.com/arijitchakrav/status/1603784705228550145

So here’s where things get really screwy (based on conversations that I’ve had with a former CFO of a regional Federal Reserve Bank (IYKYK)): thanks to this misguided“tight money” policy of the Fed, long-term Treasury Bills are now loss-making for many banks. (5/)

The long term T-Bill rate (what a bank can earn from money it put into a T Bill) is 3.7%. Meanwhile the Fed funds rate is close to 5% & inflation is expected to clock in at ~6% this quarter. Which means -in practical terms- many banks are racking up *theoretical* losses (6/)

Normally, this is not a big deal, as these assets are held to maturity (HTM). The trouble arises- as it did with SVB- when creditors start freaking out & want their money back. Banks reinvest the vast majority of their deposits (there are federal regulations governing this) (7/)

(Now, these bank reserve requirements were actually set lower than usual for T bills, so hold that thought in your mind for a sec).

In fact, these banks could’ve avoided this risk by simply matching the duration of their deposits to their investments, a Banking 101 concept (8/)

But they didn’t, because Profits & Irrational Exuberance about the pandemic, and the regulatory body whose job it was (the NCUA) was asleep at the switch. (9/)

Crucially- if the administration had leveled with the public about the fact that covid was going to negatively impact business conditions for years to come, banks may have played it differently. But in 2021-2022, we were all being gaslit about the “post-pandemic” economy (10/)

So, a lot of these banks chose wrong.

Now the Fed funds rate is high (wrong solution for a Problem That Dares Not Speak Its Name) and banks are piling up losses because they were gaslit into believing in post-pandemic Never Never Land. (11/)

Okay, so what does that all mean? Now the unrealized losses from all those HTM T-bills are a ticking time bomb on the balance sheets of many regional and smaller banks. All it takes is for depositor sentiment to shift, and we will see a cascade of bank failures (12/)

Which, trust me, is bad news for absolutely *everyone*. So, to recap, this is what happens when you try to lie your way out of a f*cking pandemic. Raising interest rates to solve a problem (wage growth-driven inflation) that can’t be fixed without dealing with said pandemic(13/)

Gaslighting businesses into believing that the economy would be fine because covid was “endemic” (lol).

All it’s done is drive the banking system -particularly small and regions banks- close to insolvency (14/)

Now monetary policy- one of the only levers the Fed has at its disposal- is out of the game. The Fed is left with no choice but to back away slowly and hope the bear doesn’t charge.

This is a consequence of the “gaslighting first” approach to crisis management (15/)

Millions disabled, a million or more dead, our children’s futures in hock to a wildly pleiotropic virus.

And what do they have to show for it? Stagflation & economic instability. So much for your Sacred Economy.

The history books will be harsh in their judgment (16/16)