You know the old joke– “Predictions are hard… especially about the future.” And it’s true, nobody has a crystal ball.
But it’s astonishing to see just how horribly wrong the people in charge can be in their predictions, especially about the very near future.
You probably remember Joe Biden famously insisted in the summer of 2021 that the Taliban was “highly unlikely” to take over Afghanistan.
Boy did he turn out to be wrong.
Only a few weeks later, the Taliban was in control of the entire country… and the world watched in utter astonishment as US military helicopters evacuated embassy personnel from Kabul in one of the most shameful episodes in modern American history.
Not to be outdone, it appears that the Federal Reserve has just had its own Afghanistan moment.
It was only Tuesday of last week that the Fed Chairman testified before a committee of concerned senators who thought the Fed may be tightening monetary policy (i.e. raising interest rates) too quickly.
This was a valid concern; rapid interest rate hikes DO create a LOT of risks. And one of those risks is that asset prices– especially bond prices– plummet in value.
This risk is particularly problematic for banks because they tend to invest their customer deposits in bonds.
In fact, now that the Fed has tightened its monetary policy so quickly, banks across the US have more than $600 billion in unrealized losses on their bond portfolios. This is a pretty major problem… because that $600 billion is ultimately YOUR money.
And it’s not like the Fed doesn’t have access to this information; after all, the Fed supervises nearly EVERY bank in the US financial system.
And yet last week the Fed Chairman completely rejected this risk, telling worried senators flat out that “nothing about the data suggests to me that we’ve tightened too much. . .”
In other words, he believed the Fed’s rapid interest rate hikes posed ZERO risk.
Talk about a terrible prediction; just THREE DAYS LATER, one of the largest banks in the US imploded, multiple bank runs unfolded across the country, the bond market fell into turmoil, and the Fed had to essentially guarantee the entire US banking system in order to restore confidence. (More on that in a moment.)
The mental image of bank runs in America, just days after the Chairman dismissed any risk, is the Fed’s equivalent of the Afghanistan debacle. It’s shameful.
But what’s REALLY concerning is the Fed’s response to this panic– their de facto guarantee of the entire US banking system. Because ultimately they just put YOU on the hook for the potential bond losses of every bank in America. I’ll explain–
After Silicon Valley Bank went bust, the FDIC announced that they will guarantee ALL deposits at the bank.
This is a departure from the FDIC’s normal pledge to guarantee deposits of up to $250,000, and their decision drew a lot of ire from pundits and politicians across the ideological spectrum. Many people concluded that the FDIC’s pledge was tantamount to a “taxpayer-funded bailout.”
But that assessment is wrong. Anyone who is intellectually honest and well-informed will easily understand that the FDIC is not funded by taxpayers. The FDIC is funded by charging fees to its member banks.
So when the FDIC decided to guarantee every depositor at Silicon Valley Bank, including those with balances exceeding $250,000, it means they’re bailing out SVB’s wealthy customers at the expense of big Wall Street banks.
But most people seem to have missed the real story… because the ACTUAL bailout is coming from the Fed, not the FDIC.
Despite the Chairman’s terrible prediction in front of the Senate Banking Committee last week, the Fed now seems keenly aware of the risks in the US banking system. They realize that there are LOTS of other banks that are sitting on massive unrealized losses, just like SVB.
So in order to prevent these banks from going under, the Fed invented a new facility they’re calling the “Bank Term Funding Program”, or BTFP.
But the BTFP is really just an extraordinary lie designed to make you think that the banking system is safe. They might as well have called it, “Believe This Fiction, People”, and I’ll show you why.
Whenever people borrow money from banks, we normally have to provide some sort of collateral. Banks make home equity loans using real estate as collateral. They make car loans where the car is collateral. Manufacturing businesses borrow money using factory equipment as collateral.
Well, banks do the same thing when they borrow money. And sometimes banks will even borrow money from the Federal Reserve. This is actually one of the reasons why the central bank exists– to act as a “lender of last resort” if banks need an emergency loan.
And when banks borrow money from the Fed, they have to post collateral too.
Instead of automobiles and houses, though, banks use their financial assets as collateral– specifically their bonds.
This is actually codified by law (12 CFR 201.108) whereby Congress lists specific assets that the Fed can accept as collateral when making loans to banks. The list is basically different types of bonds.
But this is the root of the problem. Banks are in financial trouble because their bond portfolios have lost so much value. Some banks (like SVB) are even insolvent because of this.
So now, through the BTFP, the Fed will now accept banks’ sagging bond portfolios as collateral, but loan the bank MORE money than the bond portfolios are worth.
Let’s say you’re an insolvent bank that invested, say, $100 billion in bonds. Those bonds are now worth $85 billion, and your bank is about to go under. “NO PROBLEMO!” says the Fed.
The bank simply posts their bond portfolio (which is only worth $85 billion) as collateral, and the Fed will loan the bank the full $100 billion… as if those losses never occurred.
It’s a complete lie. Everyone is pretending that the banks haven’t lost any money to give you a false sense of confidence in the financial system. “Believe the Fiction, People.”
Remember that banks in the US have more than $600 billion in unrealized bond losses right now. And that number will keep increasing if interest rates continue to rise.
So this means that the Fed has essentially guaranteed that entire $600+ billion. Commercial banks won’t lose a penny— they can now pass their financial risks down to the Federal Reserve.
This isn’t a bailout… it’s a time bomb.
We can keep our fingers crossed and hope that this time bomb never explodes. But if it does, the Federal Reserve is going to be looking at hundreds of billions in losses… which would trigger devastating consequences for the US dollar.
This means that everyone who uses US dollars… including every man, woman, and child in America, is ultimately on the hook for the potential consequences of the BTFP.
And that’s what is so remarkable about this: the Fed just made this decision all on its own.
Congress didn’t pass a law. There were no hearings, no judicial oversight, no votes.
Instead, several unelected bureaucrats who have been consistently wrong got together in a room and decided to guarantee $600+ billion in bank losses… and stick the American people with the consequences.
This is the same organization that said in February 2021 that there was no inflation.
The same organization that said in July 2021 that inflation was transitory and would pass in a few months.
The same organization that said in June 2022 that they finally understand “how little we understand about inflation.”
The same organization that said THREE DAYS before SVB’s collapse that “nothing about the data” suggested any risks with their policy actions.
The Fed has been wrong at every critical point over the past few years. And they’ve now unilaterally signed up every single person in America to a $600+ billion bank bailout without so much as a courtesy phone call to Congress.
This is apparently what Democracy means in America today.
We’ve all been subjected to endless vitriol over the past few years with people on all sides howling that “Democracy is under attack.”
Well, we just watched an unelected committee of central bankers hijack democracy and stick the American people with a potential $600+ billion bank bailout.
This article was first published in Sovereign Research and Advisory Group