David R. Malpass, President, World Bank Group; Kristalina Georgieva Managing Director, International Monetary Fund; Janet Yellen, U.S. Secretary of the Treasury. Photo: World Bank / Brandon Payne License.
Andy Kessler, a longtime favorite of Your Survival Guy’s, hits the nail on the head: Be wary of those who wrap themselves in capes. He writes in The Wall Street Journal:
Isn’t it bizarre that so many people who cause problems then turn around and become heroes fixing the same problems they created?
Between the Biden administration’s $1.9 trillion American Rescue Plan and the green-laden $738 billion Inflation Reduction Act and paying people not to work, Bidenflation is roaring. It peaked last summer at 8.5% but is still running at 6%. In December President Biden, the newly self-declared inflation warrior, said, “My goal is simple: get prices under control without choking off economic growth.” And there it is: The Biden administration is trying to slay an inflation dragon that it created.
To help fight this inflation, the Federal Reserve has raised the federal-funds rate from near zero to 4.5% to 4.75% since January 2022. This has caught a lot of banks, such as Silicon Valley Bank, holding portfolios of underwater bonds and mortgage-backed securities. Treasury Secretary Janet Yellen, in her previous role as Federal Reserve chair, kept rates too low for too long.
Now to save banks, Ms. Yellen says the Treasury, along with the Federal Deposit Insurance Corp. and the Fed, will act “in a manner that fully protects all depositors,” which means those not insured above $250,000. Catch that? She helped cause inflation and now is a hero for saving depositors. The press release notes, “No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.” Uh huh. Pay no attention to those losses behind the curtain, which “will be recovered by a special assessment on banks.” Maybe no one will notice.
This D.C. trio of heroes are effectively guaranteeing all bank deposits, which by the way total $17.7 trillion even though the Fed’s balance sheet is only $8.4 trillion. Hmmm. This creates a classic moral hazard, encouraging bankers to let risk rip—no need for a chief risk officer—and then maximize profits because the federales will step in later. The only thing this guarantees is future bailouts.
Fed Chairman Jerome Powell is also playing this “saving us from his own mistakes” game. He has kept rates below the consumer-price index level for most of his five-year tenure. Now that inflation is running wild, which this page has repeatedly warned is what happens when you run negative real interest rates, Mr. Powell is all of a sudden an inflation hawk. He’s said he will “use our tools forcefully but thoughtfully and get inflation under control.” And he will raise rates “until the job is done.” A hero—solving the problem he helped create.
Meanwhile, there’s a trail of failed banks in his wake. While Silicon Valley Bank management clearly burned down the bank, they were handed the gas and matches by the Biden administration and the Fed, which now demand credit for racing their firetruck to the rescue.
Kessler concludes: “Be wary of those who wrap themselves in capes.”
Action Line: Don’t rely on those who created the mess to clean it up. Click here to subscribe to my free monthly Survive & Thrive letter, and we’ll weather this storm together.
E.J. Smith - Your Survival Guy
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