Here is one for the Armchair Economists: SVB & Implications?

[LWJ]

The headline really says it all: what are the implications following the implosion of SVB?

How will this impact Joe Average consumer?

Are there "vulture" opportunities to be had?

Are there risks that will rise up and bite?

What does this mean for the FED and interest rates?

What does this mean for US startups and Venture firms?

What does this mean for Crypto? Gold? Other alternatives?

Does this tip the boat towards (the ever predicted) recession?

Other implications that I have completely missed?

[Crowbob]

Had I or anyone else, a crystal ball we could answer your pertinent and relevant questions. But I nor anyone else has one.

Tabs frequent invocation of the ‘animal spirits’ is a nod to the unpredictability and unknowableness of human behavior.

The people as an entity, but clearly not as individuals, do have the power to collapse everything around us. We can run the banks and crash the system in mere hours. That could happen.

Maybe it will. Maybe it won’t. Economics is a social science. It isn’t mathematics. It isn’t physics. It isn’t predictable.

[Gogar]

Government will point to the failure(s) and insist that the banking would be much better run if it were nationalized and oh yeah also we need to digitize the currency while we are at it. You know for safety and fairness and equity

[Dantilla]

Another website I'm on has a thorough explanation of what makes Silicon Valley Bank different from "normal" banks, where their ratios have been out of whack, and the silly gambles they made.

Conclusion is this is an odd situation, and while there may be a small ripple effect, this does not indicate a mass failure of the banking system.

I really hope they're right.

[Esel Mann]

Yikesies!!! Folks, this too shall pass.

[jyl]

[Climb on soapbox]

You’ve heard about the inverted yield curve which is historically an excellent predictor of recessions.

Every time it inverts, people come up with reasons why “it is different this time” so yield curve inversion is no longer a “valid signal”.

The thing they don’t get is that yield curve inversion is not signal output. It is a key *input* into the economy machine. That is why it is never “different this time”.

All kinds of carry trades are fundamentally based on positively sloped yield curves, and they get stressed and blow up when the curve inverts, especially if it inverts fast and big.

Banking depends on a positively sloped curve. Banks borrow short duration (deposits) and lend long duration (5 year commercial loan, 30 year mortgage). When short rates > long rates, they lose the spread, the “net interest margin”. Not all and not right away, but eventually. So the inverted curve kills some banks and forces the others to pull back on credit, which hits the economy.

There are lots of other similar trades, and they are under stress now.

The Fed-Treasury-FDIC-etc have all the experience and tools necessary to deal with bank stress. They have very few tools to deal with carry trades in shadow banks, hedge funds, commercial real estate, etc. Legally they are increasingly limited in their powers as you move away from the formal banking system.

[descend from soapbox]

[pwd72s]

Hard to comment here without sending this to PARF. Maybe it will stay here by simply saying that by the Feds pumping more money into banks means simply printing more money with nothing behind it. So, how will it impact Joe Average consumer? More inflation for starters...

[McLovin]

Seems like the end of QT and QE is back.

So, more inflation, more blowing up of asset bubbles (real estate, crypto, etc), kicks the recession can down the road a bit, impacts Joe Consumer by continuing to make everything more expensive (I.e., inflation, I.e. the hidden tax that pays for this all).

[LWJ]

Once again JYL has an excellent answer!

Paul, thanks for not PARFing it up!

McLovin, more details?

[David]

Originally Posted by pwd72s

Hard to comment here without sending this to PARF. Maybe it will stay here by simply saying that by the Feds pumping more money into banks means simply printing more money with nothing behind it. So, how will it impact Joe Average consumer? More inflation for starters...

If the government buys all the bank's investments at a price that just covers the bank's deposits, I wouldn't call it printing money. After a while the value of the investments will likely come back and no government money will be lost.

[McLovin]

Originally Posted by jyl

[Climb on soapbox]

You’ve heard about the inverted yield curve which is historically an excellent predictor of recessions.

Every time it inverts, people come up with reasons why “it is different this time” so yield curve inversion is no longer a “valid signal”.

The thing they don’t get is that yield curve inversion is not signal output. It is a key *input* into the economy machine. That is why it is never “different this time”.

All kinds of carry trades are fundamentally based on positively sloped yield curves, and they get stressed and blow up when the curve inverts, especially if it inverts fast and big.

Banking depends on a positively sloped curve. Banks borrow short duration (deposits) and lend long duration (5 year commercial loan, 30 year mortgage). When short rates > long rates, they lose the spread, the “net interest margin”. Not all and not right away, but eventually. So the inverted curve kills some banks and forces the others to pull back on credit, which hits the economy.

There are lots of other similar trades, and they are under stress now.

The Fed-Treasury-FDIC-etc have all the experience and tools necessary to deal with bank stress. They have very few tools to deal with carry trades in shadow banks, hedge funds, commercial real estate, etc. Legally they are increasingly limited in their powers as you move away from the formal banking system.

[descend from soapbox]

How could that bank had so much in low yield long term bonds, esp knowing that interest rates were going to have to rise? (didn’t everyone know that?)

Aren’t they suppose to manage the risk with derivatives etc?

[McLovin]

Also, I know someone who has an account there, in excess of $250k, so the govt is going to make him whole.

He checked his account today, and the govt made him whole. And put an extra $100,000 in his account.

So, things are going well.

[MBAtarga]

We had two different vendors at work email us yesterday with banking information for new accounts. They lost access to their SVB accounts and provided new ones for any payments to be made to them.

(Side note - this is a perfect storm for any hackers to do the same thing nefariously. Blast out emails with fake credentials to companies and update banking information for true vendors and hope that some receiving the emails bite and update payment info. It would be several weeks if not months before this would be caught.)

[cockerpunk]

man who crashes the entire american economy in 2008 crashes another bank more than a decade later.


talk about the definition of failing up.

[wdfifteen]

Originally Posted by LWJ

The headline really says it all: what are the implications following the implosion of SVB?

How will this impact Joe Average consumer?

The most immediate impact ought to be for Joe Average to check all his bank accounts and make sure he doesn't have over $250k in any one bank.

[wdfifteen]

Originally Posted by McLovin

How could that bank had so much in low yield long term bonds, esp knowing that interest rates were going to have to rise? (didn’t everyone know that?)

I would think incompetent management would be the cause. Which raises the question, if a bank manager screws up this spectacularly, what penalties (if any) is he subject to?

[Steve Carlton]

What would have happened if the lower limit on some regulations hadn’t been increased from $50B to $250B?

[fintstone]

The bailout will cost all banks who will be forced to pass the costs on to their own customers through fees (or elsewhere). Bailing out the wealthy because of their politics is never the solution. As has been noted, as far as risk is concerned, a bailout "privatizes gains but democratizes (or socializes) losses"...and encourages poor behavior. The SVB board was not even made up of bankers and did not have a clue. Largely, just a bunch of Hollywood elites...largely managing money for a bunch of Silicon Valley wealthy/elites. A bailout just buys votes/political contributions.

[Paul T]

Originally Posted by LWJ

The headline really says it all: what are the implications following the implosion of SVB?

How will this impact Joe Average consumer?

Are there "vulture" opportunities to be had?

Are there risks that will rise up and bite?

What does this mean for the FED and interest rates?

What does this mean for US startups and Venture firms?

What does this mean for Crypto? Gold? Other alternatives?

Does this tip the boat towards (the ever predicted) recession?

Other implications that I have completely missed?

I don't think there is any systemic risk spreading throughout the banking system as a result of SVB. They owned long dated Treasuries, perhaps too many. As rates rose rapidly, those naturally took a loss on paper. People noticed (it was clearly stated in the financials) and a bunch of large customers wanted their money out NOW - no bank can handle that. They were forced to sell those UST at a loss (now a realized loss - Goldman, of course, bought them), and they found themselves in a liquidity squeeze.

Really, if a horde of customers didn't decide to withdraw all at once, we probably wouldn't even be talking about it. Should banks of this size have tougher capital regulations? Probably, but that's a PARF argument.

As for "vulture" opportunities, yes there were several as the Equity on a bunch of regional banks tanked, but those windows are closing already. I'm interested in some of the debt on these banks potentially...some trading at ~50 cents on the $$ with some very nice yields there. Need to do more work there.

I seriously doubt this will impact the Fed's path of rate increases at all. In short, I think it's way less of a deal than is being portrayed - no need to panic.

[GH85Carrera]

For me personally, it will have very little effect. My business already has a fixed rate loan for the airplane 18 months ago. We told the bank, we had well over 50% equity in the airplane, and we insist on a fixed rate since anyone could see the massive rate hikes coming with the current administration. The bank whined they would make less money if they do it, and I told them there are other banks that would be happy to take our loan.

We pay no bank fees for our account, and have good reserves.

Inflation will continue to increase until the election and a hopeful change of administration. We just raise the prices on our product to cover the increased costs. The Jimmy Carter inflation years and interest rates are coming back.