We are in a looming financial crisis, even if we don’t want to see it.
Silicon Valley Bank (SVB) was rated investment grade as of March 8, 2023 according to Moody’s. S&P Global Ratings also had a high opinion of the SVB. Two days later, SVB was closed; Moody’s immediately dropped SVB into junk territory. So does S&P Global Ratings. Within days, Signature Bank – with Barney Frank, co-sponsor of the famous and much-hyped Dodd-Frank Act on its board – went bust.
The Biden administration, touting its own heroism, immediately stepped in to fill the void. Concerned that unsecured depositors would lose billions in cash, Team Biden announced that all unsecured depositors would get their money back; The Federal Reserve launched a Bank Term Funding Program to create additional reserves for the banks. Then President Joe Biden himself claimed that he stabilized the banking system.
He hasn’t.
To understand why throwing money at the problem with the banks will not solve the underlying problem, we need to understand why the SVB failed in the first place. It failed due to three specific factors: From 2020 to 2022, the federal government injected more liquidity into the American economy than at any time in history, barring none; The SVB, confident that liquidity would continue to flow, placed much of that liquidity in bonds, which carried a low interest rate; The federal government, now creating an inflationary wildfire, had to rely on the Federal Reserve to lower inflation by raising interest rates. These higher interest rates reduced the SVB’s bond holdings; When depositors, hampered by the lack of easy money, began withdrawing their cash, the SVB was forced to liquidate the bonds at a loss, effectively bankrupting them.
So what happened? Simply put, the federal government created a carousel of easy money; investors thought the carousel would never stop; it stopped. Now the federal government is blaming capitalism – claiming that by injecting more liquidity into the system, it will prevent capitalism from crashing the banks. But instead the federal government has created two new problems: First, the Federal Reserve has now taken on the unenviable task of simultaneously suppressing inflation (which requires a hike in interest rates) and propping up the banks (which requires a cut and/or higher interest rate). injection of the banks required). Liquidity); Second, the federal government has created a new and massive moral hazard where bank executives know they can win their business by over-promising their depositors with inflated returns — and worst-case scenario, the government will bail out depositors anyway.
Now, the pundits are telling us the Biden team will achieve a soft landing — that they will somehow square the circle by lowering inflation while preventing bank assets from depreciating, incentivizing financial responsibility while discouraging bad decisions , promote fiscal responsibility while proposing $7 trillion budgets. Nobody has that kind of power, least of all the team that gave America four decades of high inflation, the highest interest rates since the 2007-2008 financial crash, and an ever-rising national debt.
No, the crisis will come. If it feels like the federal government can fly, it’s only because it always feels that way when you jump out of a tenth-story window and are nine stories down. Joe Biden and the economy are not immune to the forces of financial gravity.
Ben Shapiro, 38, is a UCLA and Harvard Law School graduate, host of The Ben Shapiro Show, and co-founder of Daily Wire+. He is a three-time New York Times bestselling author; his latest book is The Authoritarian Moment: How The Left Weaponized America’s Institutions Against Dissent. To learn more about Ben Shapiro and read contributions from other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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