Big call. Huge. Got some data or similar to back it?
Edit: If there's clear picking of winners, or even plausibly so it's gonna look pretty bad. [1]
[1] https://www.theguardian.com/business/2021/jan/01/janet-yelle...
https://www.youtube.com/watch?v=Bcvl104tyRY
Yellen says unsecured depositors at TBTF banks will always be bailed out, but those at smaller banks are on their own. It's one of the most incredible moments I've witnessed. I'm not sure if there's some hidden agenda being pursued, or if Yellen is just so far removed from the real world that she doesn't understand the consequences of her statement.
I'm not sure why any company or individual would hold >$250k at a non-TBTF bank after this. It borders on financial malpractice.
Even if it some sort of a hidden agenda and [further] centralizing banking is just seen as a convenient stepping stone towards CBDCs or whatever, you'd come up with some passable explanation ahead of time. I mean it's not like the Senator there pulled out some gotcha she couldn't have expected.
Yes we all know the previous President famously kept his family far away from the levers of power.
I mean, if there was ever a time to know the people supporting the current regime are in a cult, look no further.
I’m assuming the point you’re trying to make isn’t actually about nepotism and you’ve simply misunderstood what the word means.
Like, say, John F. Kennedy's brother.
I think about these crises the same way. They had 48h to sort it out and they had to make a decision. The decision has side-effect-like consequences. Should she now lie about this?
So now, why did they only have 48h to make a decision? I don't know. I doubt nobody has thought about this before. But I assume that regulating banks is particularly hard, because of lobby pushback and the banks ability to exploit any loop hole quickly. They are literally organisations that look out for how to make money by exploiting asymmetries. These organisations work against the slow democratic decision making that involves non-aligned actors (who are also often not trained in this particular issue) in the upper and lower houses of parliaments of different countries.
Another question is. Why are small banks treated differently than big banks. I have read somewhere that small banks have less regulatory oversight. Maybe the decision is much more to support heavily regulated banks and not so much those which are for various reasons not as much regulated. Why would the government want to hold the bag that it was not allowed to look into?
OODA loop? https://en.wikipedia.org/wiki/OODA_loop
One would hope that there were some specialists at hand that know parts of the system, laws, implications on the overall economy etc.
There are likely a couple of plans available how to deal with this kind of situation. But likely not for this exact situation. Plans that exist but have not been implemented as policy likely are too rough around the edges or have significant opposition for different reasons.
On top of this, at this level of complexity and abstraction everything is kind of an opinion until tested and proven (but no time for that). Because no one truly understands all details and system connections.
On top of this in government you never know 100% what the motivations behind all these suggestions and plans is. What is factual, and what is politically tainted.
So all of the sudden things turn from certain to probabilistic. The leader has to figure out how to weigh the opinions and how to make a coherent enough decision (remember this is a system, and individually good decisions can be bad when taken together) to be net positive until the structured decision making can catch up.
Hopefully this is what is happening now and a general policy is decided on based on structured analysis. And hopefully it is quick enough to be ready before the next crisis hits.
Central bankers are appointed based on two criteria:
1. A willingness to print money for the government so it can spend more than it raises in taxes.
2. Looking presentable, sounding sophisticated and emitting enough bafflegab that (1) seems scientific instead of ideological.
Thinking deeply about economics and the role of banking/central banks in society is an anti criteria, because if you did think about those things you'd end up concluding that the only fair and stable solution is way less money printing and quite possibly none. That would directly undermine the government that appoints you. Your salary depends on you not understanding your own area of specialism.
I do feel like the defining characteristic of the 2020s is turning out to be people's struggle to accept the horrible truth that government officials/scientists who claim to be experts systematically have no idea what they are doing.
I agree SVB and Signature uninsured deposits shouldn't have been guaranteed, but that's not quite what Yellen said. The $250K guarantee applies to deposits at all insured banks. Having clarified that, Yellen said:
> A bank only gets that treatment [guaranteeing all deposits] if a [super] majority of the FDIC, a super majority of the FED board, and I in consultation with the president determine that the failure to protect uninsured depositors would create a systemic risk and significant economic and and financial consequences ...
From: https://www.cnbc.com/2023/03/16/svb-signature-bank-failures-...
> Treasury Secretary Janet Yellen told senators that government refunds of uninsured deposits will not be extended to every bank that fails, only those that pose systemic risk to the financial system.
The government outsourced this responsibility to the Federal Reserve at the same time that a federal income tax began.
There are 3 main ways to balance a government budget. Spend less, raise more funds through taxes, or make the scale of debt decrease through inflation.
More like government is privatized
And if you save one bank, it restores confidence in the other banks against a bank run. Otherwise I was thinking of removing money in all banks combined.
Instead, why don't you look at how many people have lost uninsured deposits since the FDIC was created in 1933? You'll find its extremely low to nonexistent. Thats because while the FDIC has a 250k insurance limit, it does its absolute best to not use it- Usually by coordinating a bank sale or private-public rescue plan.
He later got charges for corruption and there was a big investment scandal where some people who had done well with him before ended up loosing money later.
So many businesses have become financialized now. In the UK, John Lewis, which is/was an upmarket department store (and also owns Waitrose, a grocery store), is a mutual, owned by it's employees, but is now in the built-to-rent property market. Its literally burning the reputation and diversifying in to all kinds of gimmicks as it dies.
Sainsbury's, one of the biggest supermarket chains in the UK, has been in to lending (credit cards, loans) for decades now.
People used to be able to buy a house and raise a family on one salary. Tell me where exactly the standard of living went up since the 70s.
Sounds nice though.
That family with one salary probably also only had one car. That car needed a tune-up regularly, and was lucky to make it to 100,000 miles.
They had a house, but it was a small house by current standards - maybe 1000 square feet.
They had one landline phone - no cell phones, and certainly no computers.
The breadwinner could retire at 65, but the median age of death was 68. They could afford medical care, but the medical care that was available didn't lengthen their lives to what we expect today.
So that's where it went - bigger houses, more cars, computers and cell phones, and better medical care. But if you're willing to live in a 1000 square foot house, only have one car, no computers or cell phones, and inadequate (by current standards) medical care, you can probably raise a family on one income still today.
I have no idea why those are mentioned. Do we somehow pay for development and manufacturing of those with exorbitant rents and mortgages?
When people talk about standard of living they talk about living, not various forms of entertainment brought on by sheer technological progress.
If you want to mention technology mention things like washing machines, dryers, dishwashers and fridges. Those contribute to standard of living. Not whether people figured out how to do astral projections or whatnot cheaply.
In the 1970s houses were already getting larger, but not to today's. Nearly everyone had one 19 inch color TV, but few two. Only a few weird people had a computer in the house, and it connected to the TV for a monitor, for the rest a computer took up large buildings but many people had a terminal to use it via some time sharing system. Most women had a drivers license, but families only had one car unless the woman worked outside the house (which was most by this time). Cars with advances like electronic ignition cars need much less maintenance, but if your car was about to reach 100,000 miles you gathered your best friends to go for a drive to see it at all zeros: you had to add oil before you left (in a cloud a blue smoke), rebuilding engines was still common, but not something most people did. You had a private phone in your house.
Today most new houses are the size of what would have been considered upper middle class in the 1950s. Today people consider it normal to have a TV in every room. Today everybody has a computer in their home. Most families have a car per driver, and those cars often last 300,000 miles (though many people don't keep them that long). Everybody has a phone/computer in their pocket, few have them in the house at all.
There are a lot more things I could point out that have advanced. If you were willing to live like 1950 or 1970 you could get by on a lot less money.
Maybe we could measure living standards by looking at mental health statistics? Percent of population on prescription mind-altering drugs?
Do bigger houses, leading to greater social isolation, actually represent an increase in living standards? I get that bigger house == bigger house, but maybe the metric is flawed.
Housing is a weird examples, since that's actually been getting worse, due to housing construction largely being banned.
Increased (and arguably unneccessary) complexity that hides simple truths. For example, SBF and his colleagues were committing fraud.
Whether this added complexity is intentional is left as question for the reader. Regardless, obfuscation has its benefits.
Arguably same critique can be applied to software.
I feel bad for your friend, however. He was not systemic enough.
You /can/ manage short term liability mismatch against long term assets in one sense but it's actually useless when you think about why you have long term assets at all.
Just like you can manage the risk by selling your long term assets and buy short term to make the mismatch not exist.
The cost of managing using swaps will be about the same as selling your long term assets and buying t-bills. If it isn't, you hit it as hard as you can knowing it won't last and it's free money.
SVB shouldn’t need to hedge the interest rate increasing by .5 or 1%, but they definitely should have hedge the risk of it jumping 4% and more.
It's not going to be much different in cost. You see it? Derivatives aren't magic pixie-dust insurance. They will cost about the same as a rebalance on that scale or you hit them as hard as you can because they're mispriced and represent free money.
1) Buy loads of long term debt and some swaps.
2) Buy less long term debt than that and t-bills.
These two options are exactly equivalent from a financial perspective. Same risk, same reward, quite similar costs.
If instead you've bought loads of long term debt and not hedged, why did you do that? This is the nub of the thing. Why? Because you couldn't make it pay otherwise with the given market conditions? So you took a punt on inflation and the official rate staying low? Could you have done that differently? Should you have? What were the implications for your business if you didn't take a massive bet on interest rates?
Swaps are entirely beside the point here. Swaps here are just "hey let's not actually make the bet we just went out of our way to make." It's likely going to cost you a little more than not exposing yourself to that risk in the first place. It's like betting on both teams in the superbowl. The house takes a cut.
"Should have hedged with swaps" misses: "why did they have an exposure of that size at all?" Recklessness? Idiocy? Should they be prosecuted for extreme negligence? Were they between a rock and a hard place and took a fairly desperate measure? (Which I'm also not excusing either fwiw).
No no no, that's not how financial markets work. It's the stuff that happens after dinner over drinks that makes the difference
I have been working in several trading companies, both as trader and in IT, and the first thing they teach you when trading, is that the market always knows better than you. So hedge your risks and don't trust that you have some kind of vision that knows better than the markets. Actually 'vision' was used jokingly when someone accidentally made a profit by not hedging and ending up on the right side of the market.
Bankers know this. In this case, SVB could have hedged their risk with interest rate swaps, for instance. But for those they would have to pay a premium. Why? Because the market believed there was a real chance the rates would go up. If at SVB they really planned on zero rates to stay for a decade or more, they have simply been gambling.
Anyway, the problem with svb was exactly that they decided to not hedge against the possibility of raising interest rates. And for much of the market, that was a bad call. So anyone defending them needs to explain the rational of keeping the zero interest rate regime post-Covid. And it’s got to be better than “line goes up and to the right” for your chosen asset
On a Treasury or guaranteed bond, there is no credit risk.
On a Treasury there is no prepayment risk.
Therefore if you hedge out the interest rate risk, you’re essentially left with 0 risk.
0 risk = 0 or near 0 premium.
e.g. there’s no point in doing the trade if you hedge.
Besides that, financial institutions don't only make money on re-investing deposits. They charge all kinds of fees as well, which make for a steady income.
SVB got greedy. They thought that zirp would continue forever and they made long term bets on that basis and lost. Banks should not be making long bets on macroeconomic conditions: that’s not a bank, that’s a hedge fund.
Obviously not.
I suspect the upvotes are because you're technically correct, treasuries are not literally cash. The downvotes are because grandparent obviously meant that treasuries are considered cash equivalents (whether or not they actually should be, given liquidity concerns).
Treasury bills may be cash equivalents. They present (almost) no interest risk.
Long-term treasury notes/bonds is what was being discussed. There is interest risk in that case and neither your broker nor anyone else would consider them cash equivalents (unless they are already close to maturity).
A bank would indeed be crazy to hold onto fixed rate 30-year loans with interest rates at near zero.
The naïveté was thinking the deposit base wouldn’t shrink (after growing 3x in as many years)
I would suggest a read of https://en.wikipedia.org/wiki/Credit_Suisse#Controversies and consider that each time that happened they lost money and trust.
At this point, they have neither.
For any other investment of any amount of your deposits, a run of sufficient size combined with an investment loss of sufficient size will ruin a bank.
That being said, SVB had by a wide margin the flightiest deposits and the most IR risk. But it was an error of magnitude, not category. There is no run-proof fractional reserve bank.
I think "the market always knows best" is correct in most cases and if you think you know better you are probably wrong but there are empirical counterexamples like the Buffets of the world (unless one would claim that his gains come from some sort of other unfair advantages like the deals only he gets to make). I also think that human behaviour isn't always rational and herd effects and the like are a thing and not always priced in correctly. And while the flow of information feels pretty efficient in this day and age, I also think that there have to be some pockets where individuals can gain informational advantages.
I do like Sorros' book (Alchemy of Finance) which is dense and hard to get through but vibed well with me philosophically.
Yes, this is very best the advise to invest your money (except if your name is Warren Buffet). Buy it and hold it. There have been so many papers published that show this. You cannot predict the market, what you can do is save yourself some risk and some transaction costs. Any investment advisor that tells you different is plain wrong and probably has a second agenda.
The problem is the above is similar to a zero sum game in that there is a fixed total profit to be made in that way, and that money is shared between everyone who is correct (including index funds!). Since there are a lot of people trying to make the above trades the total profit you can make is reduced as they have already moved the price above what a pure index fund market would have it at. (a true zero sum game every winner is paired with a loser, while the above doesn't actually have losers in the same way, but I don't know any other way to explain it)
I concluded long ago that if I made studying the market my full time job and hobby I could make a good income doing it. However reading all the reports is boring, while writing code is fun, so I just invest in index funds.
I'd be curious how you reached this conclusion. The outside view (lots of academic papers on this) is that nobody beats the market over a long time frame. I've often thought this assumes scale-invariance; as I look to make lower volumes of money, I'll see things that aren't worth a real trader's time. Another way I can see this as true is if you don't need to have the money invested all the time - if you strategically pick 1 investment every 5 years, can I expect to beat the market by picking the absolute best trade?
Despite those ideas, I concluded long ago that nobody can beat the market over time, with maybe 1-2 exceptions.
I would have completely missed amazon and google, but there were other companies that would for a while grow at better than market rates that I would have found (or so I think!), and would have been able to get out of in time (this isn't hard because I don't need to call the top, I can be off by many months and still have a nice return). These companies carry much less downside risk vs dot coms - most of which failed, and part of doing well long term is ensuring that your losses are not good because you will have them from time to time.
Note that you don't have to beat the market by much to pull this off so long as you live cheap those first years.
Apologies for the poor wording. Agreed there do appear to be a few people who beat the market regularly. My perspective is those people are not using the same tools available to even elite traders - Buffett gets really good deals because of who he is. That kind of thing isn't available to anyone else and in the context of "could GP beat the market if they worked really hard and were really smart", it rounds to "nobody can beat it".
1. Many people trading on the stock market are professional traders who do it as a full time job, and they have access to information and tools that you don't. So unless you expend similar amount of time in studying the markets, it's highly unlikely you'd beat them.
2. Even the best traders generally beat the market by a couple percent on average. So in order to compensate for time cost of equivalent to a full time job on studying the markets, the fund you're investing needs to be: (your salary / x%) -- Let's say you expect 100k salary, and somehow you can beat the market by 5% if you put in the time, then you need a fund of 100k/0.05 = 2000k for the enterprise to "break even" so to speak.
3. Most people don't have 2 million to invest. And even if they do, they don't want to spend 40+ hours a week studying the stock market. So, since trading is basically a zero sum game, most people who invest small amounts of money perform worse than the market.
This doesn't even go into the tricky details of determining whether your performance is due to skill or luck (or lack thereof). The 5% is subtle enough, but not having any degree of certainty at all makes reviewing your decisions and trying to improve your trading skills even harder.
That said, there's probably more than a couple people besides the big names who can pull this off. It's just that even if you consistently beat the market, it takes a long time for people (including yourself?) to notice, because the effects are so subtle at first. In a sense Warren Buffet owes his fame not only to his skill but also to his age, and his willingness to engage in the activity even when he has all the money in the world. I suspect most other people find other interesting things to do once they earn a hundred million or so since it's more money than they ever need...
https://www.nytimes.com/2022/12/02/business/stock-market-ind...
You may not. It doesn't follow that the market doesn't. Long term US stock investment isn't the only reason people use capital markets. And even for passive etfs, your counterpart is likely hedging their exposure with someone who you didn't buy the etf from.
"The Market" is the spontaneous order generated by millions of individual transactions seeking equilibrium.
Individual traders can fail, be greedy, or succeed, and the market as a whole still balances out.
Think of it like a biotope pond, which exists and naturally adjusts to all sorts of conditions, and think of the Federal Reserve and Banks lending practices as a corporation dumping 40 metric tons of mislabled organic fair-trade ketchup into that pond.
Too much of even a good thing, still poisons the system.
Wouldn't that be equal to holding short-term treasuries. In that case, they'd be sitting at billions of "worthless" money. Question is, who is the other bank that took that risk. Because of the nature of the market (ie: competition) they had to produce yield comparing to their peers.
So either their peers were smarter or the big unfolding is yet to happen.
https://www.bloomberg.com/news/videos/2021-05-20/innovation-...
If humans could predict the future, we wouldn't have gambling.
And the domestic angle isn’t even the worst. Breton-Woods put America in a sort of custodianship which they have betrayed. Raising and lowering rates to promote your domestic economy without even considering the global impact is fucked up if you promised the world that your currency can serve as a trusted foundation.
World order is still fluctuating all as a result of these betrayals.
How do people get this backwards?
The US didn't say, "use our currency as the global reserve currency!" Countries chose and continue to choose to use the USD for global commerce. No one is forcing them, the USD really is valuable.
>World order is still fluctuating all as a result of these betrayals.
So raising rates is a betrayal, but allowing inflation to eat away at savings of those with USD holdings is not betrayal?
You might argue that to keep printing this country needs to invest into aircraft carriers to keep everybody else in line and well behaved. But it's still a very profitable arrangement as the recent history of USA shows.
This is an honest question, that may be naive. But, what are institutions formed, founded, and ran inside of the US, overseeing the US government and policy, supposed to do instead of considering what is best for their own country?
Are you arguing that, because the world chose the US dollar as its de-facto global currency, that the US is obligated to consider the entire world first, instead of its own citizens?
The very basic thing you learn when studying banking is durations and how your primary job is balancing that for your debts and assets.
Bankers also have various tools to short circuit any issues, inclusing raising rates on deposits, getting wholesale funding, matching various duration bonds, etc.
Also, while historical data is not an indicator of future data, the average long term interest rates in the US have always been higher than what it was in the past decade.
Yes, hindsight might be 2020, and this applies to even my comments. But we literally are paying these bankers exorbitant sums to know these and do better than the average Joe
The key being, SVB, etc are symptoms. And while we should certain chat about it the focus should be on The Fed. Again. Just like it played a key role circa 2007/2008.
Given The Fed's mandate, how is it once again missing the mark? And where has Congress been? They're mandated with overseeing The Fed, yes?
Yet we're led to believe this is a banking problem? With little of no legitimate dicussion of foundational problems?
=^\
Until when? Until there were only billionaires left and all the poors died off? This is delusional thinking and it was the same thoughts the banks and the Fed had which is really why we are in this situation.
It is also why I left Economics behind.
This would not have been an issue if the Fed raised rates gradually over years and kept the bonds more or less even because of time value. But they panicked and very possibly because they have been politicized. They should have started raising rates in 2021 but with the election and the Fed seat up for appointment they sat on their hands.
There’s blame to spread around but there’s a reason 100s of banks are in this situation right now. They were all following the Feds regulations and guidance. And now they’re holding all these lousy bonds and the deposits that back them want to be moved into high interest accounts now. Whoops.
Had they guided for this then banks would have went shorter term.
[1] Normally. Sometimes the Fed does something like Operation Twist or QE or something, where they intervene in the markets of other rates. But that is not the normal way this works.
Understatement of the year. It's based entirely on what they think the Fed will do in the future.
Of course I could still be right. These higher interest rates could be a blip.
No one has lost their deposits yet: I can't tell whether you are inaccurately describing the status quo, or making a prediction?
The government controls interest rates, therefore the fact remains: it has in-fact been the feds fault all along. When you lower the cost of money (interest rates) so, so low, you send a signal to the market that says, "Hey, everyone -- invest, invest, invest!". That signal makes it look as if a lot of things are a good investment, thereby causing malinvestments all over the economy that eventually go bust.
> Wrong. This is corruption. Janet is picking winners and losers. Some people are losing their deposits and some are not. You are systemic if you had dinner with Janet yesterday.
When the government sets up a borrowing program and immediately shells out 300+ billion to banks, and when they bailout the 16th largest bank in the US to the tune of 100+ billion, Janet is certainly picking winners and losers, but at that scale, I think an argument could be made that fiscal policy is loosening, just like it was loosening when Bush and Obama handed out their bailouts.
Politicians are addicted to cheap money.
Rates were far too low for far too long. Why was the Fed still aggressively expanding their balance sheet into 2022 when inflation was obviously happening?
This is a problem created by monetary theory academics with access to too powerful of tools. If you have it, you're going to use it.
Imagine if we gave generals the same kind of unrestricted access to weapons and allowed them to wage war at will with no oversight. That is the Fed.
Bankers know that. That's kind of the first or second lesson they'd teach you at a basic financial course. Everything is priced in terms of interest rate and time. They have been trading these things for decades.
Here is an article I wrote in 2020 that explores that volatility, though from another angle: https://omarabid.com/zero-rates-world
Another thing that I find funny is that everyone has "hindsight" now. Everyone is surprised how these banks are surprised that interest rates went up!
Here is a quote from that article in 2020:
> Maybe, but it's also possible that these high prices are here to stay.
I honestly was thinking we will stay in this zero-rate regime for the next decade or more. I suspect the people at SVB thought in a similar fashion and plan accordingly. The responsibility of the blow up is fully on them, however.
> now finding itself both tightening and loosening fiscal policy simultaneously
Wrong. This is corruption. Janet is picking winners and losers. Some people are losing their deposits and some are not. You are systemic if you had dinner with Janet yesterday.