It’s time for the government to relent. The past few weeks have seen chaos in our financial system as the run on Silicon Valley Bank and the closure of Signature Bank have demonstrated. The 2 year has rallied over 120 basis points in days in the ensuing flight to safety (and after a Fed increase in the target funds rate); the MOVE Index has increased 40% throughout March as bond volatility has spike; the Federal Reserve Balance sheet has reversed in it unwind and now added nearly $400B in the past 2 weeks; and the S&P Regional Banking Index has lost nearly a quarter of its value throughout the month. Coupled with this individual bank stocks have fallen, as First Republic has shed 90% of its value, amidst rumors of failure.
At the focal point of this crisis Janet Yellen and Jerome Powell have offered the Bank Term Funding Program and banks have availed themselves of borrowing at the discount window. Unfortunately the Government has not done nearly enough to stem this crisis. Both Treasury Secretary Yellen and Chairman Powell have their hands in this. Yellen’s inveterate dovish stance on monetary policy and reluctance to stop the growth of the balance sheet helped get us here. And Jay Powell, paradoxically, was too slow and too fast in his application of monetary policy. Too slow to raise rates and too fast once he began.
Both Powell and Yellen have so far proven unable to quell the crisis. In our digital age bank runs can now start by a swipes and taps on our phones. Until the Government announces a specific policy about what they intend to do about bank deposits to stop this crisis we will likely have instances of instability, doubt or panic about particular financial institutions. Moreover, money will flow from regional banks and smaller depository financial institutions into money center banks crimping all types of lending for the foreseeable future.
Instead of issuing vague pronouncements about he health of our system, Chairman Powell and Secretary Yellen need to issue a specific, understandable statement about the government will and will not do hence forth to restore some confidence in the banking system. Until such time we will likely have bouts of panic and concern in the markets that will have real world consequences in the larger economy. This is history: the markets will collectively push until the government gets its narrative straight.
I usually write on environmental and general investment observations; but as a long time market practitioner and someone who worked at the Federal Reserve earlier in my career I feel compelled to speak.
Opinions are expressed are solely my own. Any investments mentioned do not constitute a recommendation to buy or sell anything. If you do act on the opinions of errant writings without doing your own research you might consider talking to an investment advisor, a psychologist, foregoing that third drink or reexamining your decision-making process. I do cite sources and use end notes but amidst other responsibilities and foci I apologize for any inadvertent plagiarism or regurgitation of other’s ideas though we all know that true originality is a rare commodity - Marcel Duchamp's dictum applies. If you disagree with my content or opinion you are welcome to comment or write your own article.
