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In 2008, the Treasury and Federal Reserve had a ton of ammo to use to provide liquidity. Since then, they have tried to inflate their way out of it using creati
by treebeard901 4y ago
In 2008, the Treasury and Federal Reserve had a ton of ammo to use to provide liquidity. Since then, they have tried to inflate their way out of it using creative accounting and quantitative easing.
The reason this could be worse than 2008 is that those methods will not work as well.
Part of the reason SVB failed so fast was because they held a lot of long term government debt, mortgages etc.
When they tried to sell it to provide liquidity for deposits they found there were not many buyers for it.
Since 2008, foreign purchases of long term debt have dropped from many of the main credit countries with no real replacement other than the federal reserve.
If the Fed moves from a buyer of last resort to the only buyer then that is game over. QE won't help because it will cause inflation. Inflation will move people, foreign countries and institutional investors away from long term debt.
Basically a hyperinflationary environment with systemic bank failures all caused by a sovereign debt crisis. Before long just funding the Govt will be impossible because the debt will no longer be seen as safe as it once was.
The difference is that the collapse won't be as immediate as 2008. It can be much more of a controlled demolition, until the methods they have used stop working.
It all just has to collapse at some point and reach an equilibrium again. It's only a matter of time...
- Retric 4y agoBanks don’t have nearly as many worthless assets today as they did in 2008, which completely changes the underlying economics. As long as they aren’t offering higher returns than their existing investments can support, the only thing they have to fear is bank runs.
- fuoqi 4y agoSVB also did not have "worthless assets", but the extreme rate hikes by the Fed significantly reduced its value. Wait until tightness of credit conditions will cause chain of defaults and we will see how well banks will fare. We already see the first signs of it in the auto loans market.
- Retric 4y agoSVB was offering both extremely high interest rates and suffered a bank run. Thus they both really messed up and happened to get punished, but it really doesn’t reflect the wider banking system.
- eqmvii 4y ago> Part of the reason SVB failed so fast was because they held a lot of long term government debt, mortgages etc. When they tried to sell it to provide liquidity for deposits they found there were not many buyers for it. What? That’s nonsense. There is an extremely liquid market for the securities and selling them was no problem. The problem is that they lost value when interest rates rose, were held in a “hold to maturity” portfolio to avoid having to mark down prices as interest rates rose, and the bank didn’t properly hedge its interest rate risk.
- Rury 4y agoYeah, there was a liquid market for it, but not for par value. No one wants to buy securities yielding ~1% when there's ample supply of safe securities yielding ~4%, so they had to discount them a fair bit to get them to sell. Which is how they lost value. But it mainly happened fast because once word was out on social media that they were bleeding out, it had stoked depositors to withdraw their deposits.
- spaceman_2020 4y agoThe core tool the FED has used to fight a crisis has been money printing, disguised in various forms. It keeps finding newer and newer ways to disguise it, all of which essentially keep kicking the can down the road. The results from this strategy will keep becoming worse and worse every year, however. Unlike 2008, America is too politically divided, there is too little distrust in USD after the confiscation of Russia’s reserves, and there are too many alternate currencies and power centres for the US to still print away.