In Fed Q&A Jerome Powell Wonders “How Did Bank Failures Happen?”

At roughly the 1:26:00 mark in the video below, Powell responded to a Politico reporters question on the failure of Silicon Valley Bank. 

https://www.youtube.com/watch?v=Co3WU9xjQkM

Politico: Can you speak to the role you will be playing in the Fed’s internal investigation on its supervision and regulation. 

Powell: Vice-chair [Michael] Barr is of course leading that review. And he is responsible for it in his capacity as vice-chair for supervision. We, uh, I realized right away that there was going to be a need for a review. I mean, the question we are all asking ourselves over that first weekend was how did this happen.

How Did This Happen?

1. The Fed held interest rates too low too long, once again.
2. The Fed even wanted to make up for lack of prior inflation, initially welcoming the pickup of inflation.
3. The Fed failed to understand how $9 trillion in QE would fan asset bubbles.
4. The Fed failed to understand how three rounds of fiscal stimulus, the largest in history, would fan inflation.
5. The Fed presidents believe in economic models such as inflation expectations that its own studies prove do not work. 
6. When inflation did pick up, the Fed kept inisting that inflation was transitory.
7. Even when the Fed finally realized inflation was not transitory, it kept QE going until the bitter end, not wanting to disturb prior forward guidance.
8. The San Francisco Fed, whose job it was to monitor Silicon Valley Bank (SVB) was asleep at the wheel.
9. The Fed considers treasuries a risk-free asset, ignoring duration risk.
10. The Fed ignored a record concentration of long-term treasury and mortgage assets at SVB despite understanding the interest rate risk of those assets.
11. The Fed’s forward guidance has been a disaster. It openly encouraged speculation. 
12. The Fed reduced reserve requirements on deposits to ZERO. 

Dear Jerome Powell

Dear chairman Powell, instead of wasting taxpayer money on a study that will undoubtedly attempt to whitewash the Fed’s responsibility, please address each of the above twelve points. 

ZERO Reserve Banking

Bank deposits, money that is supposedly 100% payable on demand, was in fact NOT payable on demand. It’s like leasing your car to two people simultaneously, banking on the notion one will not show up. 

If I lease a house to two people hoping that one would not show up, I would be arrested.

Amazingly, people defend this practice when banks do it. 

The duration risk of SVB coupled with virtually no reserves, both of which the San Francisco Fed ignored, guaranteed that once a run on the bank started, it was doomed. 

Some of us warned about these things in advance.

Even now, after the clear facts, the Fed wonders “What Happened?” 

Another View

Danielle DiMartino Booth has another take. 

OK, Powell inherited decades of garbage from Bernanke, Greenspan, and Yellen. And Powell is not King Louis. But, I’m sorry, Powell steered the Powell Fed and should be held accountable. He deserves a lot of blame for where we are right now. 

So, I respectfully disagree with the idea “Why not grow up?“

The Fed cannot defend those points I made. 

Too Small to Not Fail 

But “Why not grow up?” is just one small clip of her overall take.

In Too Small to Not Fail Booth also provides a great deal of insight into problems with the Commercial Real Estate Sector.

It’s well worth a read. 

It’s a serious mistake to judge a person by one or even a small number of viewpoints that you disagree with.

Fed Policy: It’s Not Fractional Reserve Banking, It’s ZERO Reserve Banking

For more details on zero reserve banking and my proposed solution, please see Fed Policy: It’s Not Fractional Reserve Banking, It’s ZERO Reserve Banking

This post originated on MishTalk.Com.

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