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by claytongulick
1186 days ago
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I don't understand what you're saying. I'm far from an expert, but the situation seems to be the opposite of your points? In 2008 we had crazy financial instruments that were derivatives of bad home loans. Now we have good loans, but a low interest rate on them so they aren't worth a lot compared to new loans at a higher rate. The thing that seems to get missed in all the hand-wringing is that these new loans at higher rates are quite profitable. The issue today seems to be the same as always, if there's a run on a bank, it'll be in trouble. If not, banks should finally be able to make money in normal ways with the higher rates. |
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Money supply went up, up, up, therefore inflation went up, up, up.
Now bonds are paying 5%.
SVB needs to sell its 1% bonds because they have to pay their actual depositors cash for payroll or whatever.
SVB goes to sell 1% bonds, which have been fine for forever.
Since new bonds pay 5%, SVB cannot sell their 1% bond because who in their right fucking mind would pay for a 1% bond when you can get a 5%.
How does SVB sell them? It cannot.
And now, the government is going to have to print even MORE money to rescue the bank depositors, throwing even MORE supply of money into our system, increasing inflation by even MORE. We are in a vicious death spiral, boys.
Normally, to my understanding, you have a certain % of deposits in different instruments. For example, maybe 30% in bonds.
It is very well known that if interest rates go up, value of bonds goes down. No surprise.
So what you do is hedge your bet. You put 30% into a financial instrument that goes UP when inflation goes up. So while one goes down, the other goes up, and you end with a net zero. Maybe $500 billion more, or $500 million less, but at least you don't get your ass handed to you. Like SVB did because they had like 70% in bonds and fucked themselves.
SVB lost $160 billion in 24 hours.
https://www.washingtonexaminer.com/policy/economy/svb-collap...
"Many of Silicon Valley Bank's investments featured treasuries, or government debt, which have historically been viewed as safe assets."
"Easy money policies coupled with pandemic-induced supply chain snares then led to inflation, according to many economists. As a result, the Federal Reserve began jacking up interest rates, which eroded the value of many of Silicon Valley Bank's assets."
"This is because higher rates meant that new bonds and treasuries earned more for investors than older ones. As a result, the older assets that Silicon Valley Bank stockpiled became less desirable and therefore shed value."
Same exact thing happened at Signature Bank.
It is NOT limited to SVB or Signature Bank.
"Banks were sitting on $620 billion in unrealized potential losses by the end of last year, according to the FDIC." For the same reason.
It's NOT a run, it is that value has been catastrophically been erased at banks. banks cannot pay their depositors. Even if there is no run, banks won't be able to give depositors money for rent, for mortgages, for payroll, for utilities. You get the message.
At some point, new loans cannot cover massive losses on the downside. If you lose 95% of the value of treasury bonds, a 5% loan is not going to do it to it.
Also, the banks won't even have money to give people loans, even if they wanted to. They can't even give current depositors money for payroll kind of thing.
We all need some luck here and how we can pull out of the nosedive that our jet airplane is in. Hope you are all puckered up in the sphincters.
Also, as I wrote, the risk manager went away, so there was no one to balance the risk. Nobody to say "No" we only can invest 30% into bonds and 30% into real property that goes up if inflation goes up, for example, so you get a wash. I don't know if it is 30%, I think I read that somewhere, but it doesn't really matter, that is the gist of it. Balancing different risks against each other to minimize risk and staying smooth and steady with assets.