The weekend is coming up and my best advice to anyone interested in a potential banking crisis is to keep an eye on the news.
We learned today from one of the Federal Reserve statistical sheets called H.4.1 that the Fed discount window loaned out $318 billion of loans. That’s a big number. Plus, another $165 billion from the Fed’s two new backstop lending facilities. We haven’t seen numbers like that since 2008. No, I don’t think it’s 2008, but large discount lending like this does suggest a lot more banks than just SVB and First Republic and Signature are getting assistance.
First and foremost, the biggest evil in this story is Joe Biden’s inflation from massive spending on social welfare programs, radical climate green new deal programs, infrastructure that really went to climate-related issues. Let me quote from our friend Kim Strassel of The Wall Street Journal who will be here in a little while. This is a wonderful paragraph.
“A clean energy tech frenzy, electrical grid modifications, solar, carbon capture, battery storage, electric vehicle charging infrastructure, geothermal smart community widgets, microgrids, CO2 transport, hydro, wind, fuel cells, waste management and efficiency gains.”
ONE YEAR INTO ITS INFLATION FIGHT, THE FED FACES A MURKY FUTURE
There’s got to be a trillion dollars’ worth of that stuff. Not to speak of the $2 trillion of the unnecessary, so-called COVID emergency bill back in 2021, which triggered Bidenflation in the first place. By the way, inflation under Mr. Biden is up 14% over his two-year-plus term.
Everybody got caught flat-footed. Biden was in denial. Yellen was in denial. Stock and bond markets were in denial. Jay Powell was in denial. Banks were in denial, and all these denials have caught up with us. It’s a sad tale and speaking of doing too little, too late, the Federal bank regulators were late to the party just like they always are.
As I said before, Mary Daly at the San Francisco Fed was much more worried about climate than she was about her district’s bank liquidity and solvency problems. In fact, the principle San Francisco supervisor was pulled off the job. SVB didn’t even have an official risk manager for most of last year when bond prices and the bank’s capital collapsed. Meanwhile, SVB was making loans to all these so-called tech startups engaged in what Ms. Strassel calls “social credit,” essentially subprime loans that probably had no use at all.
Think of Barack Obama’s Solyndra to the hundredth power. Now it turns out that First Republic owned a ton of illiquid municipal bonds and equally illiquid commercial property loans in a failing market. Speaking of late to the party, the Fed for some reason didn’t use the discount rate soon enough or for that matter, their backup lending facility, and instead the FDIC decided to go into the moral hazard business by guaranteeing uninsured loans.
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None of this should’ve happened. None of it, but that’s always the case when these crises come up. We don’t yet know how contagious all this will turn out to be. At the moment, the big banks are loaning $30 billion of their excess reserves to First Republic and the Fed has its own basket of tools for containment purposes.
Most of the banking system is well capitalized despite all the mistakes that have been made. So, it still doesn’t look like 2008, but it doesn’t look pretty either, and there are plenty of risks still out there. You know what? I still yearn for J.P. Morgan keeping a bunch of banks in his library until the system could be turned right-side up, or the great banker telling President Teddy Roosevelt, “Have your man call my man and we’ll fix this.” As John Maynard Keynes tried to teach us about 100 years ago, inflation is the cruelest tax of all.
This article is adapted from Larry Kudlow’s opening commentary on the March 17, 2023, edition of “Kudlow.”