The Government Admits our Economy is in Trouble

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Silicon Valley Bank saw first hand what happens when bank depositors and the financial markets panic.

Late on Sunday, the government said it would ensure no depositors in the Silicon Valley Bank would lose their money. According to the Wall Street Journal, the joint statement by the FDIC, the Federal Reserve, and the Treasury Department was “designed to shore up wavering confidence in the banking system.”

Despite the odds, that guy falling off the building in yesterday’s post made a soft landing, just like our movie star hero. That doesn’t mean it wasn’t scary as they fell, but those rich old men (and Janet Yellen) intervened and save the start-ups, the wineries, all the other SVB depositors, and possibly the entire banking system.

But don’t call it a bailout. The government is saying it isn’t a bailout because the bondholders and shareholders of SVB are still taking a loss.

Chances are, the depositors would have eventually gotten all or most of their money back. The FDIC would either find a buyer for the bank or sell off its assets, raising money to pay back the depositors. I this case, the government has opted to leap ahead a few months or years and give the money to them now, which resolves their immediate liquidity problems and makes sure companies can make payroll. More importantly, the action reassures people that their money in the bank is not at risk. The FDIC can now take their time cleaning up the mess behind the scenes.

No Tax Payers were Harmed

The FDIC hurried to assure us that our tax dollars were not being used to bail out savers. (I guess they are saving our tax dollars to bail out people who don’t pay off their student loans.) If the FDIC needs more money, they will just charge the banks higher fees. Sure, the banks will then charge us higher fees, but that’s not a tax. (Pay no attention to that man behind the curtain.)

While no tax payers were harmed, when you get right down to the nitty gritty, laws, or at least regulations, appear to have been broken. Technically, no one who had more than $250,000 in the bank should fully recover their money. But since the government makes the rules, I guess they can break them. That sounds like it should be reassuring, but when you consider many laws and rules exist to protect us and our rights, I’d have to say it isn’t.

When you look at this move, by saving the depositors, the government is tacitly admitting that our economy is on the verge of falling off a cliff. The Fed and the Treasury Department are all but acknowledging our financial systems is so tenuous it cannot withstand the loss of a single bank. Apparently, we are in such a precarious position that the entire house of cards might collapse if they don’t intervene and shore things up.

That message, the undercurrent that lies beneath their actions, it what has me worried. It means things are as bad as we feared.

More Protection Needed

The Fed and the Treasury also said they would use their emergency lending authority to ensure banks suffering bank runs or threats of a bank run would have sufficient funds to pay out depositors without reaching the point of no return, as SVB did. This just reinforces the bad news. If you have to use “emergency powers,” then we must be in an emergency.

Great. Our economy is in an emergency. When people figure this out, expect the stock market to plunge. Peter Schiff, Dr. Doom, and the other vultures who constantly say we are going to suffer a collapse or a depression might, like a stopped clock, have reached that point in the cycle where they are finally right. Preppers may fear a collapse, but very few of us look forward to it. I’m not sure we can say that about these Debbie Downers.

Is that it?

I’ll bide my time and wait to see what happens next. Things might bounce back and this will be an aberration that is rarely talked about or even remembered. But if I was China, I might instruct all the Chinese companies with money in U.S. banks to withdraw their funds. Then I would sit back in Beijing and watch what happens. Just when things got dicey, I’d tell all the Chinese companies to liquidate any stocks they hold on the U.S. markets. China could test us and our commitment to liquidity, and it would be legal. Why, it almost sounds like something we might do to them if the shoe was on the other foot.

I’ll keep watching from the sidelines. Hopefully, things will quiet down and I can go a couple days without posting about a bank run or using the words “Silicon Valley.” In the meantime, keep a few bucks in your mattress, some food in the pantry, and your powder dry. There’s no guarantee we’ve seen the end of this. There’s still plenty of you-know-what out there that could hit the fan.