WSJ Editorial: The Bill for Bad Policy Comes Due

Biden and his ruling Left-wing Democrats thought they could just game the laws of economic physics by rampant blank-cheque-spending profligacy, doubling down on this in defiance of the inflationary consequences. Yet the inevitable follow-on consequences of rising rates are now manifesting themselves by wreaking destruction on banks and their bottom lines. Silicon Valley Bank is just one of many banks which are now exposed and vulnerable to failing. Welcome to the new Sub-Prime Crisis.

https://www.wsj.com/articles/the-silicon-valley-bank-bailout-chorus-yellen-treasury-fed-fdic-deposit-limit-dodd-frank-run-cc80761e?mod=hp_opin_pos_2

In a world of near-zero interest rates, SVB put the money in long duration fixed-income assets in search of a higher return. Regulators after the 2008 crisis had deemed these Treasury bonds and mortgage-backed securities nearly risk-free for the purpose of measuring bank capital. If regulators say they’re risk-free, banks and depositors may be less careful.

But those securities declined in value as the Fed took interest rates up quickly to break the inflation it helped to cause. SVB had enormous capital losses if it were forced to liquidate those assets before maturity. That’s exactly what happened as SVB customers withdrew their deposits. The San Francisco Fed regulates SVB and somehow missed this rising vulnerability. The Fed and Treasury will try to blame the bankers, but they are as much if not more culpable. The idea of elevating San Francisco Fed president Mary Daly to the Board of Governors seems preposterous after SVB.

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All the more so because the duration risk at banks may not be limited to SVB, as last week’s selloff in regional bank stocks shows. The FDIC created an entity to protect SVB’s insured depositors up to the legal limit of $250,000. But something like 85% to 90% of SVB’s deposits are uninsured. The worry is that depositors in other banks will now flee.

Where is Mr George Soros now? He was so busy hurling stones from his glass house, that he didn't care to notice the looming peril in his own yard. What about Hindenberg? These mercenaries may now be laughing all the way to the bank -- until that bank itself fails.