Next week the Fed will announce the interest rate again, a second announcement in 2023, in what seems to be turning into a fateful decision again.
The situation is somewhat reminiscent of a forgotten decision sometime in August of 2007. The Fed then announced that inflation is the “greatest danger” to the economy and that the economy is strong and it is necessary to tighten credit conditions (sounds very familiar). The decision was to keep the interest rate at the high level of 5.25% to continue fighting inflation, and this despite the fact that the market had already begun to smell the subprime crisis and was volatile. Only ten days later, the central bank was forced to cut the interest rate in an emergency decision at a non-regular meeting, in the first step of an easing monetary policy that lasted for many years and did not prevent the 2008 crisis. Does the storm in recent days remind you of the storm at the end of 2007? It is difficult to fully compare two different periods. The conditions are not similar in many ways and very similar in many other ways. What is clear now is that the Fed did not understand the severity of the crisis in time and acted late.
Contrary to the mistake of 2007, in 1998 the Fed made the opposite mistake. Then the financial and real markets of the world faced a storm due to the collapse of the hedge fund Long Term Capital Management, which managed 126 billion dollars and threatened the “contagion” of all financial markets. This is in addition to the crisis in emerging markets from Russia to Indonesia, and a drop in the American growth rate. Then Alan Greenspan, the president of the Fed at the time, decided that the United States was also in danger, since it did not make sense that the whole world would be in crisis and only the United States would remain immune, and cut the interest rate. But contrary to Greenspan’s prediction, the American economy actually remained too strong, which led to a jump in inflation. Inflation forced the Fed to raise interest rates a year later, which ended up being part of the causes of the bursting of the dot-com bubble and the deep recession.
It is better not to make a mistake neither above nor below, but it is easy to criticize in retrospect decisions that come as a response to complex situations for which the best economists cannot give decisive answers in real time. The paper absorbs everything and journalists can write what they want, even the bits on the computer absorb everything even though they don’t wrap fish in them, but the responsibility is not on us, the columnists, but on the decision makers, who really do the best they can under conditions of such high uncertainty. In the end, despite the good intentions and high professionalism of the Fed officials, they played a part in the two biggest crises of the last decades – the subprime crisis of 2008 and the dot.com bubble crisis of the early 2000s.
At the last newspaper parties, Jerome Powell repeated the claim that it is better to err upwards than downwards. In his opinion, a mistake that will cause a recession is easier to correct than one that will cause inflation, since once it becomes sticky it is very difficult to defeat it. Thus, for example, despite the improvement in inflation conditions published on Tuesday, one worrying figure is hidden – the services sector continued to show high inflation, and this is precisely the sector that is feared to make inflation sticky.
In any case, in preparation for the interest rate decision next week nSee that the half percent increase option, which was very strong last week, is off the table. The two main reasons: the banking crisis, and the weakened inflation data. The bets in the market now range between another increase of a quarter of a percent to leaving the interest rate unchanged. The Fed’s decision, as mentioned, is not easy, and a lot of responsibility rests on its shoulders
The run to the banks
In recent days, the phrase “run to the banks” has been heard a lot following the events in the American banks. Such a run also brought down the major crypto companies last year. Just two weeks ago, there were responsible members of the public who tried to encourage a similar phenomenon in Israel for political reasons. This is a particularly dangerous phenomenon, which can lead to disastrous results, from the collapse of a single bank (which means hundreds of thousands and millions of people who lose their money) to an economic crisis that can destroy an entire country, as quite a few Argentines can tell you.
We will explain again what “running to the banks” means. The banks do not hold all the funds deposited in them in a liquid manner. The assumption is that not all customers will demand their money at once. That’s why funds that are deposited in banks are invested in different ways, either by lending to other customers, or in other investments. This is how the bank makes a profit. The banks are not non-profit associations, this is the business of the banks and this is how they make money (among other things).
At the same time, the bank is responsible for leaving a sufficient amount of cash to meet the customers’ daily requirements, plus a generous safety margin. A run to the banks occurs when at once many customers demand their money in such a way that the bank cannot satisfy this demand despite the margin of safety. This can be a temporary problem, “liquidity difficulties”. It is more serious when the bank’s investments are actually lost, and the bank is forced to realize its assets at loss prices. The collapse of a bank can lead to “contagion” for many businesses that suddenly lose their customers and go out of business, as well as general suspicions regarding all banks and running parallel to other banks. In other words, this is a very dangerous event, the end of which is not known.
Even in this case we will go back in history. In 1907 one of the most dangerous bank runs took place. One of the banks in New York ran into liquidity difficulties and the public began flocking to the banks demanding huge withdrawals. The big bankers, the Treasury Department, and the richest people in the United States also poured money into the banks from their own money to provide them with liquidity so that they would not collapse. Among other things, John Rockefeller, the richest man in the United States at the time, and Sir. John Pierpont Morgan, aka the founder of the largest bank in the United States today, JP Morgan, who also helped save the United States treasury from the Great Depression of 1893-1897 together with the English branch of the Rothschild family.
The run on the banks of 1907 was one of the factors that led to the establishment of the central bank – the Federal Reserve – in 1913, one of whose functions (besides maintaining the inflation target) is to supervise the banks, prevent capital deficits and prevent situations of runs on the banks. Now claims are starting to rise again against the Fed according to which it failed (also) in this role, and the fall of SVB Bank is not a little to blame. The collapse of Silicon Valley Bank is the second largest banking collapse in the history of the United States, so it is definitely a significant event in the banking history of the United States.
Accusations start from raising interest rates too quickly which ended up “breaking something” in the economy. But besides this general blame, there is also a more specific blame. SVB’s balance sheets were visible and known. Someone should have noticed. In the case of SVB, it is not just a temporary liquidity crisis, but a real capital deficit resulting from a mismatch in the investment ratio between the assets and the liabilities. The bank’s liabilities, i.e. depositors’ money, were supposed to be liquid in a short time. On the other hand, the assets, i.e. the bank’s investments made with their money The customers, most of them in government bonds which are considered risk-free, had longer MFA.
As long as the interest rate was zero, everything went smoothly and the profits accumulated, but the increase in the interest rate resulted in capital losses on the longer-term investments, which created a deficit in the bank’s capital. When the differences are not significant, it is not a serious problem, because there is usually no high demand for withdrawals of funds, but as soon as the run to the banks is created, and the bank is forced to realize obligations at loss prices – the loss is fixed. “It is impossible to understand how the supervisors of the Federal Reserve could not see the clear threat to the safety and soundness of banking and financial stability,” says Dennis Kelleher, CEO of Better Markets, a non-profit company that works for fairness in the markets and transparency in the capital markets and the protection of investors.
Another claim in relation to the Fed is the fact that the bank operated without a chief risk manager for most of the past year. The differences in interest rates during a period of interest rate hikes is a real and real risk (which has also materialized), but the bank operated without a person in charge to define this risk. The chief risk manager, Laura Izurieta, left the bank last October, but stopped working in practice already in April, probably due to a long period of Disagreements with the bank’s management A manager named Kim Olson replaced her temporarily last December, but he is based in New York – far from the bank’s main operating area in San Francisco, in what looks like a Band-Aid on open-heart surgery.
The Fed has already announced that it will conduct an internal investigation into the quality of its supervision in this case. “The events surrounding the Silicon Valley Bank require a comprehensive, transparent and swift examination by the Federal Reserve,” Fed Chairman Jerome Powell said last Monday. The Securities and Exchange Commission, the SEC, is also investigating the incident. The conclusions will probably be announced soon. No A few lawyers have also begun to sniff around the issue, to try to file lawsuits on behalf of the shareholders who lost their investment (Treasury only bails out the customers, not the shareholders.) The absence of a chief risk officer is a good start for the potential plaintiffs.
Micro: ETF on American banks
The banking crisis created a reverse run to the big banks. The banks from which the customers flee are the small and medium ones. And when you withdraw money from one bank, you have to put it somewhere. Since it is no longer customary to keep dollars under the embossing, people are looking for other banks to deposit in, and the big banks in the United States are benefiting from the influx of panicked customers. For example, JP Morgan has enjoyed billions of new dollar deposits in recent days. Bank of America, Citigroup and Wells Fargo also see the dollars flowing in a torrent. People don’t go to the bank every two days, so an influx of new customers and deposits is expected to generate long-term income for the banks. The 6 largest banks in the United States also enjoy safety and stability as they are considered “too big to fail”, and the government usually bails them out if necessary.
Another potential for the big banks in the United States is the parallel banking crisis created in Europe. Switzerland is considered an island of stability, but its banks are shaking. Chief among them, of course, is Credit Suisse, which recently announced substantial problems in its financial statements for the past two years. A rather alarming message when it comes to the bank. Switzerland is considered a world financial center, and if its cedars fell, the flame probably also caught fire in the mosses of the neighboring countries, there is cause for concern. It is possible that there really is a reason to think about moving the funds abroad, unlike in a certain Mediterranean country with a stable banking system as the foundation of our financial existence. The solution that may interest a lot of large customers of the banks on the old continent is to move to the large and very stable banks of the new continent that also benefit From the safety net of “too big to fall”.
We are not complaining, God forbid, that the Fed and the US Treasury are deploying a safety net for the big banks, which Gina and John from the town in Alabama will not benefit from if they take unnecessary risks and lose their money. We are completely in favor of the managers taking unnecessary risks, receiving bonuses of tens of millions, and then if the risks materialize the Fed will use the taxpayers’ money to bail them out. We are in favor, of course, on the condition that we also benefit a little from this, if not in bonuses of tens of millions, at least in investing in banks that are immune to mistakes. For this purpose, we can invest in the banks themselves directly, or simply buy the entire market, with an ETF that follows the major banks in the United States.
We did not find a certificate that invests only in the major banks, but there are certificates that invest mainly in the major banks plus other financial services such as the credit companies (Visa, American Express) or other financial services companies such as the investment company BlackRock.
For example, KBWB – Invesco KBW Bank invests 10% of its assets in JP Morgan, 9.9% in Citigroup, 8.6% in Wells Fargo, another 8% in Bank of America, and so on. The management fee in the certificate is 0.35%. iShares US Financial Services – (IYG) also holds all major banks at rates of 3% to 12% plus additional major financial companies, and does so for 0.39%.
On the other hand, The small and regional banks also enjoy some support from the policy makers. This week, as a preventive measure against a run on the banks and a liquidity crisis, the Fed and the administration announced the opening of a special fund especially for the needs of these banks. The bank shares also suffered quite a bit following the crisis, and some will see this as an opportunity. For those seeking such risk, there is an ETF that specifically follows the regional banks: SPDR S&P Regional Banking (KRE) follows the regional banks and charges a management fee of 0.35%. It owns 143 papers with an average earnings multiple of only 7.31. 100% of the fund’s holdings are in Beninese banks.
Those who want to combine the two types, will be able to invest in a diversified and diversified certificate. SPDR S&P Bank ETF (KBE) divides its investments among 93 different holdings, 24.5% of which are in large banks, 61.5% in medium and 14% in small. The management fee in this case is also 0.35%.