Things that go bump in the night
Weekend insomnia
Chris Johns
The overwhelming consensus amongst economists and other financial types is that the demise of a bank called SVB in the United States is no big deal, no ‘canary in the coal mine’. In particular, it isn’t the start of another financial crisis. Here’s a view from a Nobel prize-winning economist:
This is one FT story:
We should all hope that these analysts are correct. On balance, I agree with them. But there is a good chance that we could all be wrong.
I am reminded of how the Great Financial Crisis started. Weird things started to happen in strange corners of the financial system. Things started to go bump in the night. And (almost) everyone said they didn’t amount to anything. Of course, none of these were bank failures, not at least until Lehman went under.
One expert does think we are in trouble:
Kotlikoff lists many reasons why he is worried. It starts with the quality of SVB’s balance sheet. The asset side of which was predominantly ultra-safe, blue-chip US government Treasury bonds. This was not, from what we know, some flaky institution taking depositors funds and having leveraged punts on obscure derivatives or wrongly priced mortgages.
SVB was not a bank with millions of small, Federally insured, depositors. It had a lot of large customers, many with sums well in excess of the deposit guarantee offered by the US government. Kotlikoff estimate there is $18 trillion on deposit in the US banking system, $8 trillion of which is uninsured because they are in excess of the $250,000 guarantee supplied by Uncle Sam. He thinks the Feds shut SVB down because it had too many uninsured depositors.
The scary thought is that the owners of that $8 trillion will, on Monday morning, judge their money to be in unsafe - or at least uninsured - hands and take it out. That will amount to the mother of all bank runs.
It’s interesting, in a scary sense, that the two very different blow-ups in financial markets in recent months, SVB and pension funds in the UK, had a common cause: rising government bond yields.
I’ve long thought that one of the risks taken by current (and prospective) central bank interest rate hikes (the driver of higher bond yields) risks exposing something very nasty in the financial system. I worry that the central banks are going to raise interest rates not to the level that causes inflation to be licked, but to the level that causes something to break in the financial system.
The Bank of England skilfully resolved the UK’s financial blow-up, although it cost a Prime Minister and a Chancellor of the Exchequer their jobs. I sit here hoping that the US authorities will display similar skills. But will not cause similar job losses.
If we didn’t have enough to keep us up at night….
One more bump in the night that has me worried. While we are all (rightly) infuriated with the BBC and the Tories over the Gary Lineker affair, things are not going well in Iran. In this podcast, Maitlis and Sopel (after their discussion of Sunak’s boats) point to evidence that Iran’s nuclear enrichment program has reached weapons grade uranium. They discuss the possibility that Israel will now keep their promise not to let Iran get the bomb.
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