I don’t agree with Senator Kennedy much. Almost everything that he has said publicly since Trump emerged has been absurdly and blindly naive. His positions on the major social issues of our time indicate he wants to wage war on the young and on women. And, he seems to get his jollies by trying to stump Biden’s judicial nominees with simple first-year law school civil procedure questions about federal diversity jurisdiction.
While mostly bluster, he did show some signs of being a real Senator yesterday. He first interrogated Greg Becker, the Silicon Valley Bank CEO, appearing to know more about his bank’s exposures than he had himself, before telling him: "Mr. Becker, you made a really stupid bet that went bad."
After Becker claimed that SVB’s demise was wholly the result of an “unprecedented” bank run driven by social media (something I suggested wasn’t the case here), Kennedy replied: "This wasn't unprecedented. …. You put all of your eggs in one basket. Unless you were living on the International Space Station, you could see interest rates were rising and you weren't hedged."
Kennedy also suggested that Becker failed to make any effort to save the bank because he had already cashed out and would have had very little himself to financial gain through a financial transaction or acquisition.
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Quite extraordinarily, Becker didn’t apologize to other banks or the government during the course of the Senate hearing. Instead, he apologized to his customers who were wholly indemnified to the detriment of the other banks and the government.
I also do not agree with Massachusetts Senator Elizabeth Warren about everything. However, I agree with her position that Becker needs to be investigated and that the government should enact laws providing for the claw back of executive compensation where there is a bank failure.
Jamie Dimon, JP Morgan Chase’s CEO and Tufts alumnus, appearing this morning on Bloomberg from Paris said that the largest regional banks with which he speaks are all in good financial shape. They, however, are exposed to the sudden and instant messaging through Twitter or other forums from hedge fund gurus who - by casting aspersions and having front run a large short position - can easily create a bank run and put them out of business. In order to prevent this, Dimon said that the US government and SEC need to act immediately to ban short-selling of banks and to impose strict penalties for violations.
The Bloomberg interview, which is quite good, is here.
While I am ordinarily not a fan of interfering with the free market and limiting short selling, temporary impositions on short-selling have been used around the world at times of extreme volatility to calm the markets.
It is also clear that short-sellers played a significant role – with some benefitting tremendously and the government’s (taxpayer’s) expense – in the quick demise of Silicon Valley Bank.
Against the backdrop of the debt ceiling, banks are still considered at risk due to their interest rate exposure, even after the US Treasury and Janet Yellen have created extraordinary backstop measures. Hedge funds, in many cases, are now so large and powerful and could continue to use social media to instantly take down midsize and large banks. Extaordinary times call for extraordinary measures. Dimon therefore is correct that – albeit an extreme measure – banning short selling of banks has become a proper way to protect banks.
Additionally, I want to address some of the theories being circulated on social media that the US banking system can do fine with far fewer banks and credit unions than it has. Europe and Japan with far fewer banks are often cited as examples here.
The reality is that the US financial system is far more vigorous and robust than any other due to its many different players each vying to fill a niche is certain markets. Especially now, small and medium sized banks are necessary to fill the void that has caused the US to fall behind much of Europe in solar and wind energy. Chase, Citibank, Wells Fargo and others all have extraordinary exposure to the carbon industry and cannot reasonably be expected to lead the necessary (and now cost-effective) transformation of our economy to a carbon-free one.
The Federal Reserve has raised its benchmark Fed Funds target to a 5.00% to 5.25% target at its May meeting that concluded today. Today’s move marks the Fed’s 10th hike since the beginning of 2022 at a 0 to 0.25% target, as the Fed fights the inflation that it created itself by leaving rates too low for too long in order to inject liquidity into the market through out the pandemic.
The Fed said that inflation remains elevated and it remains highly sensitive to inflationary risk. The Fed’s statement said that it is still determining whether additional policy firming will be appropriate.
Those analysts who have been hoping for a pivot in the Fed’s policy are again disappointed. Chair Jay Powell indicates that he remains prepared to raise rates as high as necessary and to keep them there as long as necessary in order to fight inflation.
The idea that inflation is some sort of a passing post-pandemic feature of the economy is increasingly looking less likely. Many economists believe that shortages in supply, especially the supply of labor, in the post-pandemic world will continue to be manifest in the form of upwards pricing pressure for an indefinite period.
Most recently, the end-of-April extreme heat wave in Portugal and Spain, where temperatures reached over 40 Celsius (over 100 degrees Fahrenheit) and resulted in price increases all across Europe of key economic staples (wheat, corn, etc.) has finally lead many economists to predict that the climate catastrophe that we are now entering globally will cause such a disruption in agricultural powerhouse regions like Spain that we could see inflation for generations.
Under any case, it seems early to assume that we have inflation under control and naïve to assume that it will remain under control for long.
