The Fed Props Up the Banks. But Who Props Up the Failing Fed?

We’ve seen a string of bank failures recently, some of them of spectacular size.

The recent run started on March 9, when Silvergate Bank announced it was closing its doors and may file for bankruptcy. The next day, the FDIC took over Silicon Valley Bank (SVB) and said they would wipe out over $100 billion of uninsured bank deposits; depositors would receive a “certificate” from the FDIC of uncertain value with no stated maturity.

FDIC said they would redeem certificates as and when they were able to sell bank assets. There was no estimate of what the final value might be. Two days later, on March 12, the FDIC also closed Signature Bank (a bank with close links to the cryptocurrency world) and reversed its decision to wipe out uninsured deposits of SVB announced just 48 hours earlier.

That decision blew up the $250,000 limit on deposit insurance (some of the SVB deposits were $3 billion or more). Now depositors everywhere were left in limbo as to whether their bank deposits are insured or not.

The answer is that your deposits might be protected without limit if your failing bank were “systemically important”, but there was no clear definition of who or what might be systemically important. That confusion still reigns.

Also on March 12, the Federal Reserve agreed to lend 100 cents on the dollar to banks that posted government securities as collateral for the loans, even if those securities were only worth, say, 80 cents on the dollar. The banks taking such loans would not have to record losses on the bonds even though they were worth less than face value.

This could result in the Fed printing trillions of dollars of new money to make the loans, even as the Fed claimed to be reducing the money supply to fight inflation. More confusion.

During the week of March 13, it was learned that First Republic Bank was hanging by a thread. JPMorgan, Citi, Wells Fargo, Bank of America, Goldman, Morgan Stanley, and a few other banks organized $30 billion in cash to be deposited in First Republic so it could meet withdrawal requests from its own depositors.

That was a band-aid approach, not a rescue, because the deposits were not equity. As of now, no buyer has been found for First Republic and it’s still hanging by a thread.

Finally, on March 19, the giant Credit Suisse was taken over by UBS in a shotgun wedding arranged by the Swiss National Bank, the central bank of Switzerland. In turn, the Swiss National Bank got dollars to prop up Credit Suisse and UBS from the Fed.

It’s clear that the Fed has gone to extraordinary lengths to bail out the banking system (again). This article asks the next logical question. How long can these bailouts go on? At what point will the Fed print so much money and offer so many guarantees that its own credibility is at risk? Will the next financial crisis involve the dollar itself?

The Fed has blundered in its forecasts, garbled its communications, and is now in the process of increasing and reducing the money supply at the same time. The next financial crisis won’t be about Lehman Brothers or SVB. It’s heading for the Fed itself.

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