[nmhancoc]

No one expected interest rate rises like we’ve experienced.

FOMC meeting minutes November, 2021:

  The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‐term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. [1]

Rather than earn the 0.1%, which likely wouldn’t have even covered the cost of servicing the deposits, the more principled stance, which for example Singapore banks took, was to simply reject the extra deposits.

But let’s not pretend that consumers, finding that they can’t deposit money with the bank, wouldn’t have likely bought long duration assets themselves (crypto, NFTs, meme stocks, and tech stocks were the market leaders in inflows over this time period, after all).

[1]: https://www.federalreserve.gov/monetarypolicy/files/monetary...

[cs702]

> No one expected interest rate rises like we’ve experienced.

At least one person did: Buffett. During the pandemic, he put much of the free cash flow earned by Berkshire Hathaway on safe short-term assets like treasury bills, and otherwise used it buy back shares at a stagnant price. Now he looks like a genius -- in hindsight, as usual.

But even if you're right that "no one expected" rates to go up to historical norms, banks should not have taken such excessive duration-matching risks!

[nmhancoc]

> I think at least one person did: Buffett. During the pandemic, he put much of the free cash flow earned by Berkshire Hathaway on safe short-term assets like treasury bills, and otherwise used it buy back shares at a stagnant price. In hindsight he looks like a genius, as usual.

Banks are a heavily regulated industry. If despite that we're dependent on bankers operating at the level of Buffett in order to avoid failure our systems are seriously broken.

> But even if you're right that "no one expected" rates to go up, banks should not have taken such excessive duration-matching risks.

The issue I take with this argument is that taking duration-matching risk is literally the entire business model behind banking as a fractional reserve affair. Banks borrow short term deposits and lend further out along the yield curve. It turns out that when short rates rise this business model doesn't work well.

And central banks and the regulatory framework around banks exist because there's a large body of knowledge surrounding the bank run tail risk fractional reserve is subject to.

As a final laugh, back in 2017 when people attempted to do the responsible thing, and create The Narrow Bank, a bank with the express purpose of just storing demand deposits with the federal reserve so that there would be no duration risk, the Federal Reserve itself refused to approve the bank's operations because they didn't want to reward depositors for not "supporting the real economy" [1].

Remember at that time there were a lot of concerns about the US following the footsteps of Japan and not being able to generate growth or inflation. The federal reserve took steps to push people further along the risk and yield curve by lowering rates to negative real rates and signaling their intent to keep them there on a sustained basis. Then they rug-pulled everyone with the quickest rate raises in history. Do they really get to escape blame for this behavior?

[1]: https://www.spglobal.com/marketintelligence/en/news-insights...