Nearly two years ago, I wrote a blog piece about Credit Suisse. The gist of my post was that the esteemed bank/holding company had finally gone too far, and was destined to fail. So what is happening right about now? Yesterday, the Swiss government had to backstop its failure with a fifty billion dollar bailout. It’s lost 75% of its stock price. It has to redo its books for the past two years. In other words, a bank too big to fail appears on the verge of failure. So what can we learn from this?
First of all, once again I foretell the future. I figured it would happen last year, but these things do that time. Second – the Swiss government sure has a lot of money in its coffers. No big surprise there. All those billions stashed by oligarchs and other assorted criminals generates fees and interest. Finally, after a decade of mismanagement, Credit Suisse is finally getting its comeuppance. Even a French derivation of Swiss in its name can’t save it this time.
So what’s different from last year or before? Interest rate hikes. Global interest rate hikes. All those central banks working in synch to make money more expensive. The management at Silicon Valley Bank ignored the trend and now they’re likely going to have to give back a whole bunch of dough. All those crypto investments hawked by Tommy Boy Brady and Matt Demon (oops, Damon..sorry, autocorrect didn’t catch that one) are collapsing, because there never was anything behind them anyway. This is clearly a return to the heady days of late 1929, where everybody everywhere all at once was investing in crazy market offerings.
I’m changing the subject slightly, but it will tie in with the above, I promise. We’ve taken to gathering in the evenings that I’m not working and watching serials on television. We did Deadwood (previous post), The Man Who Fell to Earth (ditto – I think?) and now we’re doing Babylon Berlin. Berlin – in 1929. The series does a good job of capturing all the elements of what went on in that hotbed of hedonism in that time frame. But the main thesis is the rise of Nazism, in reaction to those excesses and a desire to ‘make Germany great again’. Kinda like today. With the likes of Ron DeSantis (ooh: am I going to have to register as a blogger since I mentioned that bully’s name?) worrying about ‘wokism’, we’re on the verge of rewalking the path that led to world wide disaster.
The other thing I watched was Frontline from Tuesday night, talking about easy money since the crash of ’08. There were lots of sound bites, but it was more about furthering the blame game than truly explaining the situation that we face at the moment. So let me try to do that (back to talking about economics).
There are conflicting pressures at work. Inflation has finally arrived. Where did it come from? The Covid pandemic. Supply vs demand. Demand stayed constant; supply dwindled. Not too many dollars at first: too few goods. Then we got used to prices increasing at Publix. We didn’t stop buying toilet paper; we just paid P&G more for the Charmin. That was the case throughout 2022. The Federal Reserve and Central Banks worldwide finally decided that inflation was not temporary or even transitory: it was pretty much now baked in, some places more than others. So they used the only tool they had at their disposal and raised interest rates. Since they were late in acting, they undoubtedly went too far too fast. The objective was to cool the economy and stimulate layoffs. That hasn’t happened. It isn’t likely to happen. However, now we’re seeing the real fallout from their actions. Bank holdings are diminishing in value. It’s all about bonds they hold to park their money. Old bonds are worth less because new bonds carry higher interest rates. When the bank attempts to shore up its balance sheet before getting a ratings hit, word gets out through Twitter that depositor’s money isn’t safe, and what happens? The age old phenomenon of bank runs. People standing in line to withdraw their capital. In the case of Silicon Valley Bank, those withdrawals totaled about forty billion dollars. That’s a whole lotta money. Signature’s failure was too much crypto. Same with Silvergate Capital, which didn’t fail, it just closed up shop.
But there are other factors at work here, ones you don’t hear much about. They’re causing great confusion amongst the bankers because they are contrary to ‘normal’ inflation dynamics. Those factors are demographics and mortality. We were already short of workers because of reduced birthrates over the past two decades. Add in the half a million American workers who died from Covid. Then there’s the hundred thousand per year dead from overdoses. Finally, consider the effect of all those layoffs when everything shut down . Lots of people went from the workplace to early retirement. The net result? A giant hole punched in the pool of available workers for business. It doesn’t matter how much interest rates rise. Business can’t layoff workers because they don’t have enough to begin with. A true conundrum, eh?
But I just read that the European Central Bank raised interest rates another half a percent a short while ago. No flinching on their part. Stay the course. Even if it’s heading to that iceberg, it’s what is expected of us. Give me a break. What will happen? We will see more pain coming soon as central banks keep trying to build levees to hold back the rising tide of the financial collapse, greatly exacerbated by their actions. It’s like Andrew Mellon is back at Treasury, advising Herbert Hoover in 1929 not to intervene with direct financial support, because the downturn will burn off the bad stuff. Think of the consequences. Guess we’re about to see a live version of Babylon Berlin.