‘We could be on Tenterhooks all week’ to see if other banks crash
“We could be on edge all week waiting to see who else gets knocked out,” Breitbart Economics editor John Carney said in a Monday interview with Fox Business host Larry Kudlow.
Carney highlighted fears of contagion following the collapse of Silicon Valley Bank (SVB) on Friday and Sunday’s joint statement from the US Treasury Department, Federal Reserve and Federal Deposit Insurance Corporation (FDIC) that they were closing Signature Bank.
“People are waiting right now to find out if they’re going to announce any more bank foreclosures,” Carney told Kudlow. “The FDIC doesn’t like to do that mid-week, especially Monday. They prefer to wait until Friday. So we could be on hot coals all week waiting to see who else gets eliminated.
He argued that the FDIC might need to expand its deposit coverage to quell the panic.
“I think they’re going to realize they need to expand coverage,” he said. “Right now, they just guaranteed deposits in two banks. I think they will quickly understand that it does not go far enough.
Kudlow asked if the US government’s announcement that it guarantees all depositors at SVB and Signature Bank is a de facto guarantee to cover all bank deposits throughout the financial system.
“It appears to be,” Carney said. “Because if another bank fails, are they just going to say to these guys, ‘Now your deposits are no good. You’re going to lose, but the Silicon Valley guys got bailed out with their big They can’t do that, so basically they’ve already guaranteed all the deposits.
“But I think one of the things we saw in 2008 was that it wasn’t enough to just artificially do things. The markets actually demanded that you invest the money, that you actually speak the words. So people aren’t going to assume all deposits are safe until they see the FDIC and the Fed and Janet Yellen come out and say we back it up,” Carney added.
Kudlow then asked why SVB hadn’t found a buyer yet. Carney identified two possible reasons.
“There could be a problem with the (SVB) loan book,” he explained. “We don’t know what they had (in their loan book). On this network, Charlie Gasparino said he heard they had a bunch of super risky loans to venture capitalists.
“We also don’t know who they will allow to buy this bank,” he continued. “It is the sixteenth largest bank. They don’t want JP Morgan, Wells Fargo and Citigroup to grow. So who can buy it?
“The whole regulatory apparatus prevents the banks – the giant, the four largest banks in the United States – from buying this. So who else can buy it? Well, it’s a big bank. He had hundreds of billions of dollars in assets,” Carney explained.
Any buyer of SVB, whether a small bank or one of the big banks, will inevitably become a big bank as a result of the SVB acquisition, Carney noted.
Kudlow asked what impact all of this would have on the Federal Reserve’s fight against inflation.
“What is the Federal Reserve going to do now? Will they take a break? Will they raise a quarter, raise a half, fight inflation? What do you think?” asked Kudlow.
Carney said a 50 basis point hike is now likely “off the table.”
“They don’t do halftime. They were Thursday afternoon; they were still half thinking. Today they think maybe a quarter,” he said. “If this continues all week what we see happening to the banks, (then) I think they will announce that they are taking a break. One thing that I think they will not do is announce a cut urgently because I think that would actually trigger even greater panic.
In Monday’s Breitbart Business Digest, Carney noted:
It looks increasingly likely that the bank run will force the Fed to pause or at least slow its interest rate hikes at the next meeting. The implied probability of a 50 basis point hike fell to zero on Monday, according to CME Group’s Fedwatch tool. The odds of not increasing at all have gone from zero last week to over 20%. Some market observers are call on the Fed to lower rates in the name of restoring financial stability.
Kudlow recalled former Federal Reserve Chairman Alan Greenspan’s decision in 1998 to cut the federal funds rate three times. “Don’t you think that’s going to happen now?” he asked Carney.
“I don’t think so,” he said. “It was also a mistake. It helped inflate the tech bubble and made the consequences worse. (Greenspan) also had the advantage of not having 9% inflation at the time. We have such bad inflation that pulling back the Fed now, I think, would only make inflation worse.
“I think the Fed should take a break,” Kudlow said. “Relax. Let their powder dry. It’s good. They can resume clamping. Let’s see what happens with the contagion.