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Dear Reader,
The first solution to every crisis is to figure out whom to blame.
The second is to take advantage of the crisis - politically, financially, and socially.
That is the basic job description of every self-serving politician and regulator in Washington. As we assess the current state of affairs, the global financial system is on the verge of paralysis. Yes, I'm getting those Lehman Brothers vibes as banks and other financial institutions start to push other people out of lifeboats and do their best to survive (to quote the film Margin Call).
Today, we have a front-row seat to a three-ring circus. Congress will hold hearings to discuss the recent collapse of SVB Financial and Signature Bank.
A large body of people - with very little understanding of basic economics and banking - will ask questions they don't comprehend and receive answers to which they won't listen.
Then, they'll assign blame based on their pre-existing biases against the financial system.
This time, they can't blame immigrants and poor people - as they did in 2008.
No, this time, they'll need to get creative. They'll blame the concept of Greed - as if that quality is exclusive to the capitalist system. They'll blame capitalism...
Even though the Federal Reserve system is centralized and has zero free price mechanism.
Some might blame "Woke" policies - even though that has absolutely little to do with banking (I don't even have time to discuss the unseriousness of that debate).
So - who will they blame?
I Hope You Like Theater
The hearing began as it usually does. An entrenched Member of Congress applauded regulators for their work - even though the regulators were asleep at the switch.
Democratic Senator Sherrod Brown blamed venture capitalists for the run...
That's not it...
He then blamed the previous administration.
Nope.
He blamed libertarians...
Libertarians don't even want the Federal Reserve to exist.
And then Senator Tim Scott blamed Mary Daly's focus on climate change instead of bank regulation.
What in the Hell Am I Watching?
Federal Reserve Supervisor Michael Barr started testifying as well. He blamed the bank's inability to manage its risk and assess its own liquidity. He says the bank waited too long to address its problems. He then blamed the "deregulation" efforts of the previous administration.
Is anyone home? Can we go back further? Can someone in Congress ask a very simple question?
What was the role of central banking in this crisis?
This is not that complicated. You ask the question "Why" until it takes you all the way back to your root problem. And as I noted last week, the Federal Reserve's policies over the last few years created the conditions that fueled SVB's financial decisions. In addition, the regulatory structure does not want the bank to sell these Treasury assets and Mortgage-Backed Security assets. They want these banks to hold them... or face compliance shaming.
This is the problem. We cannot - ever - go back to the root cause…
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.