Did you think the Federal Reserve would just sit idly by and watch the US banking system completely collapse? In response to the resounding failures of Silicon Valley Bank and Signature Bank, the Federal Reserve announced a bailout on Sunday evening that will radically change the American banking system forever. All deposits at Silicon Valley Bank and Signature Bank will be fully collateralized and will be available on Monday. Of course, the Federal Reserve cannot make an exception for these two banks. If they have to do it for themselves, that means they will have to do it for everyone else as well. So that means that from now on, the Federal Reserve is essentially promising to guarantee every bank account in America. Considering the fact that more than 19 trillion dollars is deposited with American banks, it is quite a promise to make.
I want to show you that I am not exaggerating at all. Here is the announcement of this new plan that has just been published on the official website of the Federal Reserve…
To support U.S. businesses and households, the Federal Reserve Board announced Sunday that it will make additional funds available to eligible deposit-taking institutions to help ensure banks have the capacity to meet the needs of all of their depositors. This action will strengthen the ability of the banking system to protect deposits and ensure the continued supply of money and credit to the economy.
The Federal Reserve is ready to deal with any liquidity pressure that may arise.
The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year to banks, savings associations, credit unions and other institutions. depositories pledging US Treasury bills, agency debt and mortgage-backed securities, and other eligible assets as collateral. These assets will be valued at par. BTFP will be an additional source of liquidity against high-quality securities, eliminating the need for an institution to quickly sell these securities in times of crisis.
With the approval of the Secretary of the Treasury, the Treasury Department will make available up to $25 billion from the Exchange Stabilization Fund as a safety net for the BTFP. The Federal Reserve does not anticipate that it will be necessary to dip into these support funds.
After receiving a recommendation from the boards of the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, Treasury Secretary Yellen, in consultation with the President, approved measures to enable the FDIC to carry out its resolutions on Silicon Valley Bank and Signature Bank in a manner that fully protects all depositors, whether insured or uninsured. These measures will reduce stress across the financial system, support financial stability, and minimize any impact on businesses, households, taxpayers, and the broader economy.
The Board closely monitors developments in the financial markets. The capital and liquidity positions of the US banking system are strong and the US financial system is resilient.
Depository institutions can obtain liquidity against a wide range of collateral through the discount window, which remains open and available. In addition, the discount desk will apply the same margins used for BTFP-eligible securities, further increasing the loanable value at the desk.
The Council is closely monitoring conditions across the financial system and stands ready to use its full range of tools to support households and businesses, and will take additional action as needed.
Please don’t just skim these paragraphs.
Take the time to read them in detail, because what the Fed has just done literally changes everything.
From now on, no one will have to worry about their bank going bankrupt, and the Fed has decided to end the war against inflation completely.
If the technical language confuses you, here is Translation of Zero Hedge…
Translation: The Fed’s hike cycle is dead and buried, and here comes the next round of massive liquidity injections. It also means that the Fed, Treasury and FDIC just suffered the most devastating humiliation in recent history – just 4 days ago Powell was telling Congress he could raise 50 basis points. and here we are now using taxpayer funds to bail out banks that collapsed because they couldn’t even handle 4.75% and somehow the fed has no idea !
This analysis is just about the money.
I warned that our system could not handle higher interest rates, and higher rates were directly linked to the collapse of Silicon Valley Bank.
There will therefore be no more rate increases.
In fact, I wouldn’t be at all surprised if the Fed started cutting rates very soon.
Moreover, any new money the Fed now pumps into the financial system will be highly inflationary.
We’re told the Fed’s plan won’t cost taxpayers a penny, but the truth is inflation is a tax on all of us.
So, the financial community may be praising this “extraordinary intervention” by the Fed, but there will inevitably be a very high price to pay for sputtering money in such a reckless way.
The extraordinary intervention: pic.twitter.com/O5V1H6Kfiw
— Travoltage (@Travoltage1) March 12, 2023
But what other choice did the Fed have?
Like I have repeatedly warned my readersour fundamentally flawed system simply cannot survive without artificial support.
And as noted by Bill Ackmanif the Fed had stood idly by, we would have faced a nightmare scenario as early as next week…
The government has about 48 hours to correct a soon-to-be-irreversible error. Allowing @SVB_Financial fail without protecting all depositors, the world has come to realize what an uninsured deposit is – an unsecured illiquid claim on a failing bank. Absent @JP Morgan @citi Or… t.co/SqdkFK7Fld
— Bill Ackman (@BillAckman) March 11, 2023
Over the past few days, we have truly come to the brink.
But now the Federal Reserve has come to the rescue and so all is well, isn’t it?
I wish that were true.
Due to the Fed’s reckless rate hike strategy, US banks are now sitting on $620 billion unrealized losses.
It’s “billion” with a “b,” and it’s a ticking time bomb that’s not going away any time soon.
Meanwhile, the housing bubble is bursting, we are heading into the worst commercial real estate crisis in US history, and now confidence in the US banking system has been badly shaken.
This crisis is not even close to being over.
And whenever there is a new blowout somewhere, the Fed will try to put out the flames with generous injections of fresh cash.
Virtually everyone cheers when the Fed starts spraying money, but by now we should all realize that this story won’t have a happy ending.