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Sure, it's great that they cleaned up the SVB mess quickly and decisively. But it was also irresponsible for the Fed to raise rates so quickly that it put mass

Sure, it's great that they cleaned up the SVB mess quickly and decisively. But it was also irresponsible for the Fed to raise rates so quickly that it put massive banks in danger of insolvency. They understand how bond pricing works, and they understand that banks are heavily invested in t-bills. SVB was a predictable situation that could have been prevented through slower rate increases. Since we don't live in the timeline where rate increases were less aggressive, we don't know exactly how the economy would have reacted. But seeing as inflation was largely attributed to lack of supply and buyers' willingness to pay higher prices (see: corporate profits rising), I think it's safe to think inflation would have come under control if rates hikes were less aggressive.

codyb 3y ago
Seems like the vast majority of banks avoided this situation, regional or national, so... maybe it's on the banks at some point?
- xen2xen1 3y ago
  I mostly agree, but there were lots of signs the fed ignored and waited too long, and had to do large and sudden hikes. It could have all been less abrupt. They still have done a very good job so far, and it could have been very different.
  - dragonwriter 3y ago
    > but there were lots of signs the fed ignored and waited too long, and had to do large and sudden hikes. It could have all been less abrupt. I disagree. Yes, there were inflation signs that they didn’t act on, but that’s because the exceptionally sharp and deep recession being over and securely so in unprecedented time wasn’t clear except in retrospect. Fed policy isn’t driven by a unitary mandate.
- ericd 3y ago
  I think this is largely because the Fed quickly set up a massive facility to save the others? Looks like its usage has passed $100B so far: https://twitter.com/LynAldenContact/status/1666944000626925568 https://twitter.com/LynAldenContact/status/16669440006269255...
  - codyb 3y ago
    After I posted I remembered I knew that, yea that definitely helped! But some of the fault is on the banks as well for not managing interest rate risks well. As Matt Levine pointed out, they haven't had to worry for a decade! SVB's liabilities were also highly concentrated among large uninsured by FDIC accounts that all moved in tandem which didn't help anything.
xscott 3y ago
> But it was also irresponsible for the Fed to raise rates so quickly that it put massive banks in danger of insolvency. It was also irresponsible of them to have the rates near zero in the first place. It's one huge whiplash, and the low before the high is all part of it.
dragonwriter 3y ago
> But it was also irresponsible for the Fed to raise rates so quickly that it put massive banks in danger of insolvency. No, it wasn't, and protecting banks from bad gambles isn’t either side of the dual mandate.
- xscott 3y ago
  Calling bonds a bad gamble is questionable. The Fed rate goes up, the price of bonds at the old rate goes down, a minor bank run forces them to sell the bonds at a loss to cover the withdrawals. Were they supposed to invest in stocks, options, or real estate instead? The answer is complicated, but calling bonds a "bad gamble" is weird
  - dragonwriter 3y ago
    > Calling bonds a bad gamble is questionable. Protecting banks at all is not part of the Fed’s monetary policy mandate, so the “bag gambles” was surplus verbiage, ultimately. Price stability and employment are; protecting banks from failure is a non-goal except insofar as it might instrumentally serve the actual dual mandate goals, and there are mechanisms in place to protect the economy from bank failure impacts, and if the people responsible for them (which include the Fed, but in a supporting rather than leading role, abd outside of monetary policy) are on the ball, the impact of such failures on the things that are in the monetary policy mandate are minimal.
    - deleted 3y ago
      [deleted]
  - HDThoreaun 3y ago
    They were supposed to invest in short term bonds instead of long term at the very least. If SVB had one year maturity dated bonds instead of 10 years they'd be fine today.
HDThoreaun 3y ago
No, it was irresponsible for banks to shove so much money into long term fixed rate bonds when they should've known inflation was likely in the wake of covid. They surely knew that inflation will lead to the fed raising rates and that raising rates lowers the value of bonds, nothing here should've been unexpected at all.

codyb 3y ago

Seems like the vast majority of banks avoided this situation, regional or national, so... maybe it's on the banks at some point?

xen2xen1 3y ago
I mostly agree, but there were lots of signs the fed ignored and waited too long, and had to do large and sudden hikes. It could have all been less abrupt. They still have done a very good job so far, and it could have been very different.
- dragonwriter 3y ago
  > but there were lots of signs the fed ignored and waited too long, and had to do large and sudden hikes. It could have all been less abrupt. I disagree. Yes, there were inflation signs that they didn’t act on, but that’s because the exceptionally sharp and deep recession being over and securely so in unprecedented time wasn’t clear except in retrospect. Fed policy isn’t driven by a unitary mandate.
ericd 3y ago
I think this is largely because the Fed quickly set up a massive facility to save the others? Looks like its usage has passed $100B so far: https://twitter.com/LynAldenContact/status/1666944000626925568 https://twitter.com/LynAldenContact/status/16669440006269255...
- codyb 3y ago
  After I posted I remembered I knew that, yea that definitely helped! But some of the fault is on the banks as well for not managing interest rate risks well. As Matt Levine pointed out, they haven't had to worry for a decade! SVB's liabilities were also highly concentrated among large uninsured by FDIC accounts that all moved in tandem which didn't help anything.

xscott 3y ago

> But it was also irresponsible for the Fed to raise rates so quickly that it put massive banks in danger of insolvency. It was also irresponsible of them to have the rates near zero in the first place. It's one huge whiplash, and the low before the high is all part of it.

dragonwriter 3y ago

> But it was also irresponsible for the Fed to raise rates so quickly that it put massive banks in danger of insolvency. No, it wasn't, and protecting banks from bad gambles isn’t either side of the dual mandate.

xscott 3y ago
Calling bonds a bad gamble is questionable. The Fed rate goes up, the price of bonds at the old rate goes down, a minor bank run forces them to sell the bonds at a loss to cover the withdrawals. Were they supposed to invest in stocks, options, or real estate instead? The answer is complicated, but calling bonds a "bad gamble" is weird
- dragonwriter 3y ago
  > Calling bonds a bad gamble is questionable. Protecting banks at all is not part of the Fed’s monetary policy mandate, so the “bag gambles” was surplus verbiage, ultimately. Price stability and employment are; protecting banks from failure is a non-goal except insofar as it might instrumentally serve the actual dual mandate goals, and there are mechanisms in place to protect the economy from bank failure impacts, and if the people responsible for them (which include the Fed, but in a supporting rather than leading role, abd outside of monetary policy) are on the ball, the impact of such failures on the things that are in the monetary policy mandate are minimal.
  - deleted 3y ago
    [deleted]
- HDThoreaun 3y ago
  They were supposed to invest in short term bonds instead of long term at the very least. If SVB had one year maturity dated bonds instead of 10 years they'd be fine today.

HDThoreaun 3y ago

No, it was irresponsible for banks to shove so much money into long term fixed rate bonds when they should've known inflation was likely in the wake of covid. They surely knew that inflation will lead to the fed raising rates and that raising rates lowers the value of bonds, nothing here should've been unexpected at all.