1. After Bank Runs, Bank Failures and Bank Bail Outs, which are a direct result of the uber loose policies post 2008, the Fed has a chance to course correct and take a stand. They probably will not do so.
2. The fact that today the US Treasury has backstopped ALL Deposits in the Banking system, that the US President has announced to the nation that all Deposits are safe and the govt will do "whatever it takes" to keep them safe, represents a culmination of regulatory failure.
3. It’s inconceivable that Banks holding assets up to just below USD 250 billion were consigned to " regulatory lite" and allowed to do as they wished with their balance sheets. If there was a deep investigation into the root causes of the bank failures, it must highlight this.
4. It’s a huge privatisation of profits and socialisation of losses, when the govt says, banks can operate as they wish, we will keep your deposits safe, Too bad that bank shareholders and bond holders will be wiped out. That goes against financial integrity and stability.
5. The Fed has a very difficult task to bring down inflation without causing a recession. That should be consigned to the background, at least for a month, to study the depth of the brewing banking crisis.
6. How bad is the hit to bank depositors’ confidence? How much of the small and regional banks deposits will flow out to larger banks and to money market funds?
7. That data is paramount now for financial stability and integrity. Last year when the UK Pension funds threatened to blow up, the Bank of England actually suspended their tightening and came to the rescue of the market to ensure market integrity and stability. It took six weeks but they paused and then continued.
8. In brushing SVB, Signature and Silvergate root causes under the carpet, and in allowing banks to be bailed out by offering them "at par" loans against bonds that are USD 620 bn lower than their "at par" levels, a huge dysfunction has been brought into market integrity.
9. That should be observed, measured and tackled and over time this "universal guarantee to all depositors by the Treasury" should be removed. Till then, why would the Fed raise rates and increase systemic stress?
10. What has happened in the US banking system will be very deflationary, will hurt confidence all around and will take time to normalise. In that raging fire, would anyone rational pour more fuel by raising rates?
11. This is the key question. Rate hikes work their way through the economy with a lag. We have not seen such rate hikes in such a short time since the 1970s and early 1980s. A deep recession set in as a result. Ultimately inflation was tackled at deep suffering to all.
12. The Fed needs to move out of its reactive, data dependence stance and have the guts to say, we are flexible, we just had a 10-sigma event, bond markets went crazy, banks failed, customers confidence plummeted, the President needed to reassure all. We will pause and study.
13. That would be my suggestion. Take a Pause, analyse what is happening and then project what will happen if you raise rates more. The safer way is to wait for a month or two and then take a call, with more on the ground feedback in hand.
14. We are at a delicate juncture and the Fed's job is unenviable and thankless. But the root is the bubble due to the uber loose policies of the last 14 years. The reckoning is here and the price has to be paid for that profligacy. Let’s see what we get on Mar 22nd.
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