Janet Yellen, 20 June 2017
According to a recent study, the US banking system — heavily regulated by Janet Yellen, her forerunners, and successors — faces huge losses.
We’re not experts in banking, but we think we understand the basic model. Banks take in cash from depositors and ‘lend’ it out or ‘invest’ it. The depositors can ask for their money back at any time. But the loans and investments only come back when they are ready. Between the two time periods, long and short, the banks can get squeezed…if depositors suddenly want their money back. Central banks were set up to prevent it. In a crisis, they provide solvent banks with liquidity.
But what if the banks aren’t solvent? What if their ‘assets’ — loans and investments — go down? What if they loaned out money at 3% interest…and then interest rates go up to 5%? What if their investments — say in Amazon or Rivian — lose so much money that they can never give depositors back their money?
Broke and broken
Here’s the money line from academic researchers Erica Jiang, Gregor Matvos, Tomasz Piskorski, and Amit Seru:
‘The U.S. banking system’s market value of assets is $2 trillion lower than suggested by their book value of assets.’
The net worth (book value) of the entire US banking industry is only US$2.1 trillion. Which means, the whole banking system is already nearly insolvent. Busted. Broke. You can imagine what would happen if stocks went down another 10%…20%…or 40%. There would be hell to pay.
No one would suggest subsidising plumbers who install leaky pipes, nor providing grants for restaurants that make customers sick…but those groups don’t have lobbyists!
The gist of the next 500 words: better keep the Pepto Bismol on hand.
Banks that can’t manage their risks…and match assets to liabilities…are a threat to their depositors. Like a pig with an epizootic, they may need to be shot before they infect the whole herd.
Diners don’t starve just because a bad restaurant goes out of business. They simply go to a different one. Nor do they go hungry when poisonous food is removed from the grocery stores. Life goes on, better than before.
Cooks and crooks
But the banking industry is among the richest and most powerful in the country. It holds money…and money is what makes the world go ‘round. Money is also what the rich and powerful covet…and what they’ve given to the banks to hold for them. Banks are also protected by central banks, which can ‘print’ money.
So, to prevent paying hell, central banks worldwide are conspiring with large depositors to backstop the losses. Banks that are judged ‘systemically important’ are bailed out.
Which banks are ‘systemically important’?
Those with the worst cooks!
In the case of Credit Suisse, the bank lost US$143 billion last year — a record. It invested in jackass deals and overpriced assets…and lent out money at under-priced interest rates. Then, when interest rates rose and asset prices fell, Credit Suisse was no longer viable.
That’s the way it’s supposed to work. You make too many mistakes; you lose. But in the new world of managed markets and government-controlled finance the rules have changed: you make mistakes; someone else pays.
The banking sector that saw the most growth over the past 10 years was commercial real estate. In the Bubble Epoch, it paid to borrow money at very low interest rates — from banks — in order to buy commercial buildings.
But then, what happened? At first, prices rose nicely, and speculators made money. Cometh the COVID Hysteria, however, the bets went bad. Buildings emptied out. And still, three years after Trump’s emergency decree, they’re far from back to normal. Our employees in Baltimore, for example, have learned to work from home. They don’t want to come back to the office. And as a result, we have buildings that are half empty…and some that are completely empty.
We have no mortgages on the properties…and no loans against them. But what about those who do?
An important life lesson
The prime rate has doubled since 2021. Real estate investors now have to pay twice as much in interest as they did two years ago. And their rental incomes are going down, as renters negotiate for less space at lower prices. Office vacancy rates are rising. San Francisco reports that nearly a third of its offices are empty. On the other side of the country, in Manhattan, the office vacancy rate has jumped to 22%.
Not a good situation for the banks holding commercial property loans. Their collateral is falling in value as their borrowers have trouble repaying or refinancing their loans.
But no review of the bank crisis, 2023, would be complete without mentioning Janet Yellen, Ben Bernanke, and the other crackpot chefs who’ve been adding salmonella to the broth for the last 14 years. They were the ones who made it irresistible to lend money at impossibly low interest rates. The aforementioned Prime Rate, in 2021, was actually 3.5% BELOW the level of consumer price increases. James Freeman, writing in The Wall Street Journal:
‘Life appears to have delivered a perfect lesson in the destructiveness of government regulation in the failure of Silicon Valley Bank…But it wasn’t bank management or God who created the larger financial environment that did so much to roil the institution. For that we can thank official Washington for policy calamities, starting with banking rules, the massive economic distortions of the Covid shutdown policies, and the inflation created by the Biden Democrats and the Federal Reserve.’
Yes, life is delivering another lesson. Bad banks will be subsidised. The public will be punished.
For The Daily Reckoning Australia