Zanny Beddoes, Editor-in-Chief for The Economist, brings us back to the great financial crisis in 2008 and explains how we can learn from the past.
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Transcript
You were covering the 2008, 2009 great, great financial crisis. Do you have PTSD? I certainly have a sense of déjà vu. I mean, you’re right. I lived in Washington throughout that crisis and I’m here. I was here in the U.S. this last weekend when the whole news broke about Silicon Valley Bank.
And there was definitely a sense of deja vu. It’s not on the scale yet, but it’s also, I think, more systemic than people thought. Even a week ago. So I think we are seeing a realization that the banks are more fragile than
People thought they were because after the 2008 financial crisis and we can we can talk about this, but there was a huge amount of, you know, regulation and recapitalization and focus on strengthening the banks. But two things kind of we’ve not realized happened since then.
One is that some of that regulatory framework was rolled back in 2017 and 18. And so Silicon Valley Bank would have been required to have much more rigorous supervision and to have had a kind of what’s called a plan for its own demise, which which the systemically important
Big banks have to have. And the original rules, whether any bank bigger than with assets, more than 50 billion would have to do that. That was raised to two hundred and fifty billion or so. Silicon Valley Bank and others didn’t. We’re no longer subject to that rigor.
Had they been subject to it. This might not have happened. Secondly, and more importantly, the the whole reorganization after 2008 2009 was designed to focus on problems of credit because that was the cause of the financial crisis. Inflation was low and people worried about deflation. No one worried about duration risk.
No one worried about what happened to the value of treasuries on banks balance sheets when interest rates rose very sharply. That wasn’t part of the thinking in 2008 9, 2010, when these regulatory reforms were done. And now we’re in an environment where
We’ve had obviously the fastest and rate interest rate rise in decades. And we’re seeing the consequences that actually these large holdings of government bonds, which were deemed to be part of making banks safer, are less safe than you thought because the banks have effectively, if you want to market,
They have big losses on them and sent and we do have the Sunday announcement that basically said everything’s gonna be fine. We’ll backup all the deposits no matter what. I mean, when I was a young boy, long before your time, Groucho Marx had a
Program on television, as it were. You had to say the magic word. You said the magic word. Systemic. Systemic seems to be a get out of jail free card. Now, everything seems to be systemic. The government steps in, makes it all better. We did have that.
And that’s the. I think when we look back at this episode, that is going to be the extraordinary development that on Sunday, not only were all depositors in those two banks bailed out and of course, there wasn’t FDIC limit of two hundred fifty thousand, that’s, you know, exemption made all depositors bailed out.
But in addition, the Fed instituted for one year, supposedly a facility that banks could get liquidity at the poor value of any treasuries and any government bonds that they hold. And the idea of a lender of last resort is to lend freely, quickly against good collateral and at a punitive rate.
But what we’ve seen really in the last few years, few decades, actually has been an expansion of the Federal Reserve’s kind of definition of what being a lender of last resort is lending. It gets much more collateral, lending more freely coming in.
Know, after 2008 2009, people took to the Fed as a market maker of last resort, much broader. And what happened last Sunday was a very big shift because in effect, it wasn’t imposing any haircut on the banks ability to borrow. They can borrow at par, which meant, in
Effect, they’re getting subsidized by the central Federal Reserve for their liquidity. And it’s supposed to be a one year facility. I don’t have those kind of 1 year facilities have a habit of changing. And that’s a big shift in what the Fed does. So I don’t wanna go too far with this.
But The Economist does take us to larger thoughts here. Are we somewhat redefining capitalism? Everybody wins. Nobody loses. It’s sort of like when your children every gets a trophy, nobody gives. You want to hurt his feelings. Are we creating a better society where there’s no alpha?
I think the short answer is yes. And I think this is we will this is a big, big step that the Fed has taken. And it’s couched in the language of we only for one year and so forth. But I think it really is a big step and
It’s a big step that perhaps we might come to regret. And it’s it’s not just central banks. And now I’m going to get really big picture. But I think there is a sense in which governments have over the past few years bailed out, support it in all manner of
Areas. People we are we are no longer so comfortable with failure and with shock. What worries me now and what more is me really about what the Fed has done is that we’re doing this in an environment where inflation is uncomfortably high. And the really worrying tradeoff will be
When the Fed’s goals of financial stability. Clash with the goals of getting inflation down and the more support you give and the more you bail out, the more you try and focus on short term financial stability. You may be making it harder to reach
Your inflation target. And that, I think, gets you into a very, very uncomfortable world. Is there a risk of by limiting the downside, you also limit the upside? That is to say, everyone’s protected. As a result, we are not as innovative. We don’t have the creative destruction, destruction. The Schumpeter talked about that.
In fact, we don’t have the growth in productivity and otherwise we might otherwise have. Well, I think you’re right in the sense that by limiting the downside, you keep zombie companies, zombie banks that should be dissolved alive for longer than they otherwise would be.
And that’s absolutely the downside of any broad bailout that you you don’t have the Schumpeter area and creative destruction. And you also have, I think, a society that rightly people that kind of get profoundly disillusioned with because, you know, the wealthy are sort of heads I win. Tails you lose.
You know, if you get it. I’ve heard it a lot this week. You know, it is it is striking that, you know, these venture capitalists and Silicon Valley people who have been making a fortune a sudden and essentially, you know, mostly a sort of libertarians who want the government off
Their back. The minute something like this happens, they were all screaming for assistance. And it’s a little bit uncomfortable. So I can see why the politics of this is really quite tricky.
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Let’s talk about a subject that is rarely discussed: the system of bonuses for the bank management, especially for the investment banking. The bank bonus system is based on the profits at the end of the year. The managers are totally focussed on the short term. They become risk near-sighted; they do not care about the medium-term risk!
The best example to illustrate this case is the CEO of the defunct Layman Brothers. In the years prior to the collapse of Layman Brothers, the CEO has amassed 500 million in salary and bonus. He could care less about the future of Layman Brothers.
If a major bank buys a smaller one like SVB and merge with it, the possibility of customer security is higher and at the same time a defaulted smaller bank, investor to buy will be a lot cheaper compared to prior. E.g. HSBC bought SVB in UK for just 1 pound after it defaulted.
DO THE MATH THAT NOW UBS IS BEING FORCED TO TAKE OVER CREDIT SUISSE HOWEVER UBS ITSELF HAS LOTS OF PROBLEMS THAT MEANS IF UBS DOES TAKE OVER CS MEANS UBS ALSO WILL BE GOING BANKRUPTCY PRETTY SOON THIS YEAR ——– > MEANS MORE THAN 2.2T$ – 2.5T$ +/- FINANCIALLY DEFAULT COULD HIT THE MARKET SOOOOOOOOOOOOOOOOOOOOOOOOOOOOO HARD!!!!!!!!!!!!!!!:)
It is interesting to hear that one thing that has not changed is that the world and its challenges are understood in hindsight.
AGAIN AND AGAIN AS I'VE SAID MANY TIMES ALREADY THAT ——– > WE MAY SEE A REAL DEFAULT OF US ECONOMY THIS YEAR BECAUSE AGAIN AND AGAIN IT WILL BE MUCH BETTER THAN CIVIL WAR!!!!!!!!!!!!!!!!!:)
AGAIN AND AGAIN CHINA USA EUROPE HAVE TOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO MUCH DEBT TO GO FURTHER FROM HERE BECAUSE THEY ARE TOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO BEHIND THE CURVE!!!!!!!!!!!!!!!!!!!! —— > NOW MORE AND MORE AND MORE AND MORE BANKING SYSTEMS FAILURES IN CHINA + USA + EUROPE INEVITABLY HURRICANING THEIR ECONOMIES!!!!!!!!!!!!!!!!!!!!!!!!!!!!:)
NO QUELLING INFLATION MEANS NO FINANCIAL STABILITY!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
AGAIN AND AGAIN GOLD + ENERGY ARE THE SAFE HAVEN ASSETS THAT ———– > NOW ONE CLEAN AND CLEAR FACT IS THAT THERE ARE MORE AND MORE AND MORE AND MORE AND MORE BANKING SYSTEM'S FAILURES HURRICAINING THE ECONOMY BECAUSE AGAIN ANDA AGAIN CENTRAL BANKS ARE TOOOOOOOOOOOOOOOOOOOOOOOOOOOOO BEHIND THE CURVE TO QUELL THE MOUNTING AND MOUNTING AND MOUNTING AND MOUNTING DEBT PROBLEMS EVERYWHERE ESP CHINA + USA + EUROPE!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!:)
NOW ONE CLEAN AND CLEAR FACT IS THAT THERE ARE MORE AND MORE AND MORE AND MORE AND MORE BANKING SYSTEM'S FAILURES HURRICAINING THE ECONOMY BECAUSE AGAIN ANDA AGAIN CENTRAL BANKS ARE TOOOOOOOOOOOOOOOOOOOOOOOOOOOOO BEHIND THE CURVE TO QUELL THE MOUNTING AND MOUNTING AND MOUNTING AND MOUNTING DEBT PROBLEMS EVERYWHERE ESP CHINA + USA + EUROPE!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!:)
this is absolutely true how long do we have to sugarcoat structural finacial problem in the sake of finacial stability.
AGAIN AND AGIAN AS I'VE SAID MANY TIMES THAT ——- > USA CHINA EUROPE HAVE TOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO MUCH DEBT TO GO FURTHER FROM HERE THERE WILL BE MORE AND MORE AND MORE AND MORE FAILURES OF FINANCIAL ENGINEERING HURRICAINING THOSE ECONOMY!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!:)
INEVITABLY OF COURSE THERE WILL BE MUCH MORE BANKING SYSTEM FAILURE ESP FROM THE DEMS STATES = SO CALLED BITCOIN STATES BECAUSE OF TOOOOOOOOOOOOOOOOOOOOOOOOO MUCH CORRUPTIONS AS I'VE SAID BEFORE!!!!!!!!!!!!:) ——— >. P.S GOLD PRICE IS GOING HIGHER AND HIGHER AND IT IS RECOVERING ITS 2K$ RANGE NOW!!!!!!!!!!!!!!!:) AGAIN US$ IS NO LONGER A SAFE HAVEN ASSET!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!:)
BY 50BP HIKING MARCH 14TH ——— > ECB JUST RECOVERED ITS LOST CREDIBILITY PARTIALLY MEANS THE ECB MUST GO MORE AND MORE AND MORE ITS INTEREST RATE HIKING FURTHER AND FURTHER AND FURTHER MUCH FURTHER THAN NOW THE ECB IS TOOOOOOOOOOOOOOOOOOOOOOOOOOO BEHIND THE CURVE!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!:)
AGAIN AND AGAIN GOLD PRICE HAS NO OTHER OPTIONS BUT TO HIKE INTO 3K$ – 3.5K$ THIS YEAR + OIL PRICE IS IN ANYWAY GETTING BACK TO ITS 130$ BB/LS – 140$ BB/LS IN THIS YEAR + YEN IS GOING TO APPRECIATE MORE AND MORE FURTHER AND FURTHER INTO +68YEN +/- LEVEL AGAINST US$!!!!!!!!!!!!!!!!!!!! IT IS TOOOOOOOOOOOOOOOOOOOOOOOOO LATE TO FIX THE FINANCIAL ENGINEERING PROBLEMS IN THE ECONOMY AS I'VE SAID MANY TIMES SINCE THE END OF DEC OF 2021YR THROUGH WHOLE YEAR OF 2022YR TILL NOW!!!!!!!!!!!!!!!!!!!!!!
AGAIN AND AGAIN THERE IS NO SUCH THING LIKE SOFT LANDING AS I'VE SAID MANY MANY TIMES SINCE THE END OF DEC OF 2021YR THROUGH WHOLE YEAR OF 2022YR TILL NOW!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!:)
AGAIN AND AGAIN THAT ———- > IT IS VERY A VERY SIMPLE QUESTION THAT WHAT ARE YOU GOING TO DO + HOW DO YOU QUELL THE SUPER STAGFLATION WITHOUT HIKING INTEREST RATE MORE AND MORE FURTHER AND FURTHER? JUST MORE AND MORE AND MORE AND MORE INFLATION TO HIT THE ENTIRE ECONOMY UNTIL GETTING INTO HYPERINFLATION FROM STAGFLATION NOW IN JUST A COUPLE OF YEARS?!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!:)
US FED AS ITS CHAIRMAN JEROME POWELL EMPHASIZED SOOOOOOOOOOOOO MANY TIMES ALREADY SINCE THE END OF 2ND Q OF 2022YR TILL TWO WEEKS AGO 2023YR THAT —— > US FED'S POLICY TARGET IS THAT 1. 2.0% NEUTRAL INFLATION % + 2. FULL EMPLOYMENT RATE = +3% RANGE UNEMPLOYMENT RATE < ——— ONLY WAY TO ACHIEVE ITS GOALS IS TO DEFLATE TREMENDOUS DEBT PROBLEMS IN THE ECONOMY < ————— THAT IS 1+1 = 2 MATH QUESTION TO FIGURE OUT!!!!!!!!!!!!!!!!!!!!!!!!!!!!!:)
CENTRAL BANKS MUST BREAK NOT JUST SOMETHING BUT THEY MUST BREAK ENORMOUS THINGS!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!:) BECAUSE USA CHINA EUROPE HAVE TOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO MUCH DEBT TO GO FURTHER FROM HERE OR THERE WILL BE MUCH MUCH MUCH MUCH MUCH MORE SYSTEMIC CONTAGION LIKE CS SVB CHINA HUARONG ETC AND ETC!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!:)
WE KNOW WHO THEY ARE IN VERY VERY DANGEROUS SITUATION NOW ——— > AGAIN AND AGAIN NOW FED'S BALANCE SHEET IS SWELLING AGAIN THAT ——– > IT IS TOOOOOOOOOOOOOOOOOOOOOOOOOOOOO LATE TO FIX THE FINANCIAL ENGINEERING PROBLEMS FROM TOOOOOOOOOOOOOOOOOOOOOOOOO MUCH DEBT AS I'VE SAID MANY TIMES ALREADY THAT WE MAY SEE EVEN SOME OF BIG WALL ST INVESTMENT INSTITUTIONS GOING TO BANKRUPTCY!!!!!!!!!!!!!:)
AGAIN AND AGAIN NOW FED'S BALANCE SHEET IS SWELLING AGAIN THAT ——– > IT IS TOOOOOOOOOOOOOOOOOOOOOOOOOOOOO LATE TO FIX THE FINANCIAL ENGINEERING PROBLEMS FROM TOOOOOOOOOOOOOOOOOOOOOOOOO MUCH DEBT AS I'VE SAID MANY TIMES ALREADY THAT WE MAY SEE EVEN SOME OF BIG WALL ST INVESTMENT INSTITUTIONS GOING TO BANKRUPTCY!!!!!!!!!!!!!:)
AS I'VE SAID MANY TIMES ALREADY SINCE THE 1ST Q OF 2022YR THAT WHO IS GOING TO BUY FED'S 9T$ DEBT?!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!:) AGAIN AND AGAIN THE ANSWER IS NOBODY!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!:)
DO THE MATH!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!:) ——— > IN COMING MARCH 22ND FOMC MEETING ——– > US FED EVEN THOUGH IT RAISES 50BP, MORE AND MORE AND MORE AND MORE DEBT PROBLEMS ARE GOING ON AND ON AND ON AND ON HOWEVER IF IT SLOWDOWNS ITS RATE HIKING TO 25BP, AS I'VE SAID MANY TIMES BEFORE EVEN DEBT PROBLEMS IS GONNA BE MUCH MUCH MUCH MORE ACCELERATED THAN EVER!!!!!!!!!!!!!!!!!!!!!!!!!!!:0
MAKE NO SENSE AT ALL THAT —— > US (LOCAL) BANKING SYSTEM IS BEING DEMOLISHED MORE AND MORE FURTHER AND FURTHER BY TOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO MUCH DEBT HOWEVER US T – DEBT (BONDS) YIELDS ARE GETTING DOWN AND DOWN AND DOWN MEANS MORE AND MORE AND MORE THOSE TOOOOOOOOOOOOOOOOOOOOOOOOOO MUCH DEBT PRICES ARE EXPENSIVE?!!!!!!!!!!!!!!!!! < ——– THIS SORT OF ABSURD ' SO CALLED US$ EXCEPTIONALISM HAS CAUSED MORE AND MORE AND MORE AND MORE DEBT PROBLEMS + MORE AND MORE AND MORE AND MORE BANKING SYSTEM FAILURES!!!!!!!!!!!!!!!!!!!!!!:)
DO THE MATH THAT NOW US T – DEBT YIELDS ARE COLLAPSING AGAIN MEANS MORE AND MORE AND MORE EXPENSIVE BECAUSE OF FAILURE OF US (LOCAL) BANKING SYSTEM FROM TOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO MUCH DEBT PROBLEMS BUT US T – DEBTS ARE GETTING MORE AND MORE AND MORE EXPENSIVE??!!!!!!!!!:) < ——– MAKE NO SENSE AND IN OTHER WORDS US$ IS LOSING ITS THE BIGGEST RESERVE CURRENCY STATUS REALLY FASTER THAN MARKET' S EXPECTATIONS NOW!!!!!!!!!!!!:)
AGAIN AND AGAIN DO THE MATH!!!!!!!!!!!!!:) ——- > THERE WILL BE MUCH MUCH MUCH MUCH MUCH MORE ECONOMIC DISASTERS HURRICANING THE ECONOMY IF THE FED STOPS ITS FUNDS RATE HIKING CYCLE OR JUST RAISE 25BP IN MARCH 22ND FOMC MEETING!!!!!!!!!!!!!!!!!:)
CORRECT!!!!!!!!!:!) —— > THE FED'S ONLY TOOL TO BRING DOWN INFLATION IS ' INTEREST RATE HIKING'!!!!!!!!!!!!!! THAT'S IT!!!!!!!!!!!!!!!!!!! AND THERE IS NO MAGIC BUT INTEREST RATE TO QUELL THE STAGFLATION ALREADY SUPER ENTRENCHED IN THE ECONOMY!!!!!!!!!!!!!!!!!!! HOWEVER THERE ARE MORE AND MORE AND MORE AND MORE AND MORE AND MORE DEBT PROBLEMS MOUNTING AND MOUNTING AND MOUNTING MUCH FASTER THAN THE FED'S RATE HIKING CYCLE BECAUSE US FE D HAS BEEN TOOOOOOOOOOOOOOOOOOOOOOOOO BEHIND THE CURVE! SO FAR AS I'VE SAID MANY TIMES ALREADY!!!!!!!!!!!!!!!!!!!:)
That man must be off his rocker if he thinks so.
Inflation is cancer.
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