“You are determined to destroy America!” reader Bill D writes furiously about our implication that regional banks who engaged in risky bets ought to be able to reap their rewards and fail. “More partisan BS…” We spare you Bill’s additional expletives.

“Let me take care of this for ya, buddy,” reader FL comments, as if in response. “B*tcoin.”

Our inbox is full of it. Uncertainty. Distress. Angst. Malaise. Not happiness. A fair bit of crazy.

The story, this week, remains. The banking crisis. Jerome Powell and Janet Yellen continue their Soothséance 2023 tour aiming to “calm nerves.”

“Policymakers have been criticized by some,” writes a rather sanguine James Politi at Financial Times, “for not sending clear enough messages after tumultuous two weeks.” Namely, the markets are wondering if Yellen will assure “blanket” safety to all banks, everywhere in the United States, enforcing the already implicit assumption that the authorities would jump in to protect Americans’ savings come crisis.

It’s a worthy concern considering how much money is at stake. There are $17 trillion in bank deposits in the country. But that’s a fraction of what’s held by non-bank financial institutions.

The Financial Stability Oversight Council will put “nonbank financial intermediation” back on the table as a priority for 2023, according to a statement from the Treasury Department. (Source: Bloomberg, Financial Stability Board)

The Financial Stability Oversight Council will put “nonbank financial intermediation” back on the table as a priority for 2023, according to a statement from the Treasury Department. (Source: Bloomberg, Financial Stability Board)
The non-bank financial institutions account for $250 trillion in accounts. Who’s going to bail them out if they can’t stomach their own risk?

The fact is, neither Yellen nor Powell can be perceived to be advocating for a guaranteed “lender of last resort.” They act a lot like the unreliable narrator in a book you would never read unless assigned to it in English class.

Or… as Charles Kindleberger famously pointed out in Manias, Panics and Crashes, the Federal Reserve can only be perceived as an uncertain “lender of last resort”.

Meaning, if the “last resort” is guaranteed it will create what economists call “moral hazard” – irrational risk taking because the investor knows he’ll get his money back even if the investment fails.

Sheila Bair, who was the FDIC Chair during the 2008 financial crisis is out and about– ironically perhaps– warning of said “moral hazards.”

With the cozy arms of the Fed & Treasury not far below, investors – both institutional and individual – will find more and more incentive to increase their exposure to risky trades because they will not have to bear the full cost of that risk.

The risks grow until the borrowers or investors have no chance of getting their money back. And we have our “Minsky Moment” when the whole system breaks down.

“If you see unlimited deposit insurance,” Bair said yesterday on CNBC, “then a lot of money that goes into money market funds will flow into banks.”

As a microcosm, my son Henry’s $10 bet on First Republic Bank turned around after Yellen all but guaranteed deposits in the bank. Instead of losing two Costco hotdogs, he’s now up one fourth… a whole bite. Yellen’s implied backstop restored investor appetite for risk in the trade.

So-called “fiscal reliance strategies” being touted by the dynamic duo have nothing at all to do with the real health of a bank, but rather where it stands in relation to other banks. The “strategies” are designed to maintain confidence, prevent fear and contagion. They are quite literally running a con game. In a con game, if you don’t know who the mark is… you’re the mark.

“I feel for the regulators.” Bair backpedals, having been a regulator herself. “You’re damned if you do and you’re damned if you don’t.”

“We’re all in this together,” they want us to say in unison. They want us to see the crisis confined to a small corner of the market.

Unfortunately, we see cracks in the whole dang thing.

So it goes,

Addison Wiggin

P.S. “We’re all going to die, rich or poor,” reader Richard P says cheerfully, then advises: “Know your maker, weaknesses and strengths. Have enough food, gold, shelter and protection for at least a month on hand. Now and until this terrible man-made greedy ego time passes.”