Free Money Turned Brains to Mush, Now Some Banks Fail

The Fed’s rate hikes and QT didn’t break anything except consensual hallucination.

By Wolf Richter. This is the transcript of my podcast on Sunday, February 26, THE WOLF STREET REPORT.

There’s a lot of talk that the Federal Reserve broke the banks with its rate hikes and quantitative tightening, and that the Fed killed Silicon Valley Bank, etc. etc.

But the Fed didn’t break anything with its rate hikes and QT, except consensual hallucination, as I call it, in the Free Money era.

What did break Silicon Valley Bank was the Fed’s refusal to regulate it properly. The Fed is the dominant banking regulator. And it just let the bank do its thing, and it loosened its regulations for mid-size banks in 2018, and when the Fed as banking regulator started getting nervous about it, it still didn’t actually push the bank to fix its problems, and it still let it do its thing. The collapse of Silicon Valley Bank was a regulatory failure.

And it was a reckless management failure, obviously, and those folks should spend some quality time in the hoosegow.

But there’s another issue that forms the foundation for all this – and the Fed is solely responsible for it: The 14 years of free money policies by the Fed. From what we now know, free money is like a virus that turns brains to mush.

The Fed has broken all kinds of things with its interest-rate repression and money printing that have created this era of Free Money. The biggest thing it has broken – and this is a huge thing – is price stability.

After 40 years of relatively calm inflation, we now have raging inflation, and this inflation has moved from goods to services, and services is nearly two-thirds of consumer spending, and inflation is now raging in services at the worst pace in 40 years, and in services is where inflation is very difficult to eradicate.

Way too late, the Fed is now trying to actually fix this huge thing – price stability – that it has broken.

So we got this huge mess of heavy-breathing inflation that the Fed has been trying to address over the past 12 months, after having fallen at least a year behind. The Fed has been addressing this inflation with rate hikes and quantitative tightening. So that’s the end of free money.

And now, in addition to this heavy breathing inflation, we have a crisis in the banking system because the brains of some banking executives had been turned to mush by 14 years of free money.

And when I say “free money” with regards to banks, I mean it literally.  Since 2008, banks have been borrowing from depositors at 0% interest or near 0% interest. Even today, even as some banks are trying to attract more deposits by offering higher interest rates, even today when the Fed’s short-term rates are near 5%, the average interest rate on savings accounts is still only 0.4%. Even today, 0.4%.

But until March last year, it was 0.06%. For all practical purposes this is 0%. It means that on savings of $100,000, the bank would pay its customers just $60 in interest, when it should have paid them $3,000 or $4,000 in interest. For checking accounts and other transaction accounts, the banks paid 0% interest.  For banks this was the era of free money – and a lot of free money.

Banks now have about $17 trillion in deposits, and that’s $17 trillion in free money for the banks, thanks to the Fed’s 14 years of interest rate repression.

The Fed’s monetary policies have allowed and encourage banks to screw their customers – to just take their money and not pay them any interest on it.

And so now this free-money era is coming to a gradual end – the banks are mostly still not paying interest. As I said, the average savings account interest rate is 0.4% and the average checking account interest rate is 0%. But gradually banks are having to offer higher rates or else customers might yank their money out. And suddenly some banks get in trouble?

Banks got in trouble because a bunch of these genius bankers could not even imagine life without free money, and they recklessly refused to prepare for the end of free money. And they made an awful mess.

It goes like this – and many observers, including me, have hammered on it fruitlessly for years: The Fed repressed short-term interest rates to near 0%, and it bought trillions of dollars of bonds via QE, thereby handing out money that then went chasing after assets of all kinds, and a lot of it washed into banks, causing the biggest asset price bubble ever, and causing long-term yields to plunge.

The Fed’s interest rate repression and asset-price inflation started in 2008 and continued in waves, backing off timidly in 2016-2018, then going hog-wild in 2020-2021. It will go down in history as the biggest monetary-policy idiocy ever.

Enough of the decision makers at banks – but obviously not all that many of them – believed that money would always be free, and they believed that even if money is briefly less free, it would soon be free again.

And enough of them based their banking decisions on those believes. Free money is like a virus that turns human brains to mush.

The Fed gave them two years to address these issues at their banks. As inflation was surging in early 2021, the Fed refused to hike rates. But other central banks could figure out what was coming from the Fed, they started to front-run the Fed to protect their currencies for the moment when the Fed would start hiking rates. Among them are the central banks of Brazil and Mexico that, starting in the spring of 2021, implemented monster rate hikes. They saw what the Fed would do, and the front-ran the Fed to protect their currencies, and it worked, the currencies of Brazil and Mexico fared very well against the dollar.

Only a bunch of genius-bankers in the US didn’t get it because they didn’t want to get it because their brains had been turned to mush by free money. And they were thinking about bonuses and stock compensation and pumping up stock prices, just look at the stock charts of these banks.

For example, SVB Financial, which owned Silicon Valley Bank, well its stock price tripled in two years to $750 a share, before it collapsed. When you look at these charts, you instinctively understand the term “consensual hallucination.”

With all this going on for SVB and some other banks, preparing for the end of free money just wasn’t possible because it might have put a damper on the run-up in the stock price.

I’ve written a bunch of articles about SVB Financial, starting in the summer last year, when I started making parallels to the dotcom bust. Silicon Valley Bank survived the dotcom bust; it didn’t survive this bust.

Then the Fed indicated in the fall of 2021 that it would hike rates, and then it did hike rates in early 2022, and then faster in mid-2022, as inflation was blowing out. And these highly paid geniuses still didn’t prepare for higher rates.

Some of these bank managers just blew off raging inflation and the Fed. And they believed in the “Free Money Forever” mantra, and they refused to hedge their interest rate risk, and they refused to unload their long-term Treasury securities and mortgage-backed securities that would decline in market price as long-term rates would go up. Everyone knows this. It’s not a secret. It’s one of the fundamental principles you learn in finance 101 in grade school or whatever. And those bankers knew that too but refused to act because their brains had turned to mush.

Throughout the rate-hike cycle, long-term Treasury yields were below the short-term yields. They were lower because banks and other big holders thought all this was just transitory or whatever, and they kept these securities and bought these securities instead of unloading them.

They could have unloaded these long-term securities in 2021 and earlier in 2022 without losses or big losses. And when rates started rising, these geniuses believed in the Fed-pivot that was being mongered on Wall Street and in the media and they still refused to hedge their interest rate risk and unload these securities at a much smaller loss than now.

What they did was a stock pumping scheme, and they were busy paying themselves big bonuses and stock compensation packages, and they were busy selling their own stock holdings and getting richer.

Hedging against interest rate risk – meaning against the risk that interest rates will rise in the future – is a fundamental thing that banks do. So when interest rates rise, their long-term fixed-rate loans, such as mortgages or industrial loans, and their holdings of long-term securities, they all would lose value. But banks would make money on their hedges and it would balance out to some extent.

But hedging is not free. It would have reduced the income during the Free Money era. And so Silicon Valley Bank didn’t hedge at all its interest rate risk. That was management recklessness.

At the same time, banks ripped off their depositors by paying them 0% or near 0% in interest while gorging on long-term securities with yields of 2% or thereabouts, making money on this spread, and they figured they’d always have access to this free money from their depositors.

When I say that free money turns brains to mush, I mean it literally for some bankers.

And then depositors started pulling their money out for a variety of reasons, including that they got tired of getting screwed on the interest, which was still largely 0%. And they knew that the banks had huge unrealized losses on their long-term securities that they had bought years ago with a yield of 2%, and when the market moved to 4%, those securities lost value, so banks couldn’t sell them without booking a big loss, and so they didn’t sell them, and the situation just kept getting worse, and it’s all disclosed in the financial statements, and people started reading them, and it’s like wow, I’m outa here.

And they yanked their deposits out, which forced the banks to actually sell those securities at a loss in order to fund the deposit outflow that had turned into a torrent, and it all spiraled into a mess. Two of these banks collapsed, a few others are on the verge of collapse, and the Fed and the FDIC are now propping them up. These geniuses that run or ran these banks need to spend some quality time in the hoosegow.

But the Fed’s rate hikes and QT didn’t break anything except consensual hallucination, which was the standard condition during the free-money era. And that’s a good thing. Higher interest rates and QT have been observed in the wild to reverse the process of brains having turned to mush. And that’s a good thing too.

You can subscribe to the podcast of THE WOLF STREET REPORT on YouTube or download it wherever you get your podcasts.

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  177 comments for “Free Money Turned Brains to Mush, Now Some Banks Fail

  1. T says:

    I really enjoy your coverage, Wolf. It seems like history repeating itself. The federal government and its agencies, in partnership with private interests, have bailed out 74 of the 74 banking failures in the history of our country. Free market capitalism on the way up and “too big to fail” nationalism on the way down.

    • Bobber says:

      The way our bankers have structured the industry, it promotes speculation and shifts the risk of downside to the public.

      Banks perform a valuable sustainable service by collecting deposits, clearing payments, and making loans, but there is no reason for banks to leverage deposits 10-to-1. This adds unnecessary risk to the system in the form of bank runs and bailouts, and it converts banks to leverage hedge funds, in substance.

      Banks should be required to align the maturity of their loans with the maturity of their CD’s, if they are to avoid bank runs. Banks should also maintain capital requirements that are at least triple current levels, to make bank managers and shareholders accountable for risks they take.

      Under the current system plagued by low equity requirements, leverage, and excessive risk-taking, banks can conduct huge stock buybacks, then receive taxpayer bailouts later, like in 2008, under the screamed threat of financial system collapse by bankers. Average citizens wind up funding the misdeeds and risk-taking of the top .1%.

    • Longstreet says:

      These banks were essentially SHORT interest rates at all time lows…..with their unhedged portfolio.

  2. Vijay B Patel says:

    Don’t you think that the inflation will come down soon as the price of most commodities like oil, copper, lumber, etc. have come down to pre-covid levels?

    • Wolf Richter says:

      READ THE ARTICLE. It says:

      “…and this inflation has moved from goods to services, and services is nearly two-thirds of consumer spending, and inflation is now raging in services at the worst pace in 40 years, and in services is where inflation is very difficult to eradicate.

      Commodity prices are largely irrelevant for services inflation.

      You need to start paying attention. Inflation shifted to services a year ago. Prices of many manufactured goods have actually dropped for months, but prices of services are spiking:

      • Thomas Pained says:

        So…I should expect to get utterly crushed! What really astounds me is how the average person can afford to live in this type of financial environment. When will we start to see people marauding the streets for basic needs we take for granted every day?

        • Swamp Creature says:

          Thomas Pained

          ” When will we start to see people marauding the streets for basic needs we take for granted every day?”

          You must be kidding! It’s already happening here in DC. You can’t go anywhere without running into a panhandler hitting you up for some money. I carry an extra wallet with some small bills, one’s and five’s. I paid one dude a $5/bill to watch my car for 5 minutes when I had to go into a property for a second. I made him work for his money.

        • Longtime Listener says:

          In the cities dominated by tech, this is already a thing. SVB and the bullshit “tech” businesses they propped up, are a part of this.

        • Augustus Frost says:

          I’m probably as bearish as anyone who comments here, but this is probably some time off, unless the entire financial system freezes up.

          Even at the bottom of the GFC, it wasn’t hard for consumers to get a mortgage, buy a car, or get a credit card, IF they had decent credit and a job.

          Credit standards have been low to really low at least since the mid-90’s and are still at sub-basement levels now.

          The first step in the process is for funding to get cut-off from the companies who lend to consumers. Since the government guarantees most mortgages, it’s not going to happen there for the forseeable future. Banks are also important enough (the bigger ones anyway) where they won’t get cut-off either, for now.

          It’s the non-banks who are going to get hit worst first, and to my knowledge, they are the ones that lend to the lower and lowest rated borrowers.

          But yes, I absolutely expect literal rioting when enough people realize the fantasy of inflated unsustainable living standards is over.

        • Petunia says:


          I lost everything in the GFC and it was still easy to rent and get credit because “everybody” was in the same boat. I disagree about the shadow lenders, they made out like bandits if they survived the initial shock. They funded the used car dealers, the distressed home buyers, etc., at exorbitant interest rates.

        • Brant Lee says:

          No, people are losing any type of morals. Walmart just announced about 15 store closings and the reason is theft and shop-lifting. It’s rampant all over the country. Social media is promoting it. It’s all a game, dog eat dog.

          Does everyone want the freedom to do whatever? Do you want Godless? You’ve won it. Enjoy.

        • Wolf Richter says:


          Hilariously, Walgreen came out a year later and admitted exactly that. The corporate world of manipulation is a funny place 🤣

          Retailers have been closing stores for years, everywhere! Brick-and-mortar retail meltdown, as I have called it since 2017, because people discovered buying their prescriptions drugs along with everything else ONLINE.

          Walmart’s ecommerce business is now huge and it’s growing at something like 18% a year. Sales at its brick-and-mortar stores falling.

          Walmart doesn’t even disclose brick-and-mortar sales. It only discloses “comparable store” sales – and those include ecommerce, LOL


        • sufferinsucatash says:

          The poor feel it first, then the lower plebs, middle plebs and the high plebs last. The high plebs try to ignore it the longest because they do not consider themselves plebs. But they are very much plebs in comparison to their relation to the top .01% and the GIANT chasm that seperates pleb and non pleb. ;)

        • Shiloh1 says:

          Store closings because much brick and mortar? Simply shoplift off the front porches. Problem solved!

        • MM says:


          VERY good point.

          Some of my observations working in e-comm order fulfillment:

          Some brands now refuse to sell on Amazon due to fraud & theft. Amazon has problem with internal theft as well – sellers would send product to be sold FBA, only for Amazon to lose some of it and refuse to reimburse the retailer. If the retailer tries to fight it too aggressively, Amazon will shut down their FBA account.

          Very easy for Amazon Logistics drivers to plop the package on your porch, take the pic, and then put it back in their van. We now ship our FBA orders only with UPS because too many shipments delivered by Amazon had gone missing.

          Scammers have realized they can use credit card / Paypal chargebacks to rip off sellers and get free stuff. Local neighnorhood thieves can easily steal packages. Store pickup is a popular option partly due to package theft.

          Many customers specifically choose store pickup due to local package theft. I often contact customers to offer free shipping when their chosen store doesn’t have the product in stock – but very often the response is “please ship to the store, we have porch pirates in my area”

          IMO, its a lot easier to steal from an online retailer than brick & mortar.

        • Joe says:

          They may not be closing down because of theft. However, when I walk into a Walgreens half the shelves are locked up.

      • cas127 says:


        If possible, you might want to break out “services” inflation into housing, med, etc. (although housing is weighted so hugely, it may be enough by itself).

        1) Most people don’t think “housing” when they think “services” so anger/adjustments get misdirected/lose focus. My guess is that housing is the major villain and should be repeatedly outed as such.

        2) My semi-precise sense is that housing accounts for a huge-ish pct of the services inflation…other components contribute but their weighting pales in comparison.

        3) It would be interesting to see the other components of “services” inflation…but it might create a lot more work for you for comparatively little return (but I could easily be wrong…just hard for me to ID the “services” sector that weighs enough and inflated enough to outrank housing.

        • Wolf Richter says:

          Click on the frigging link I gave you, for crying out loud!!!!!!!!!!

          It’s all there. I’m NOT going to re-explain it too you in the comments because you were too lazy to read the article.

      • BENW says:

        “The 14 years of free money policies by the Fed. From what we now know, free money is like a virus that turns brains to mush.”

        Great article. My only suggestion is to point out that this isn’t just a Fed phenomenon. It’s the whole financial system which has doubled down on Modern Monetary Theory-basis means of managing the economy.

        This has profound implications. It means the market no-longer picks winners & losers when we get to these black swan events.

        Large swaths of the financial / employment system are now too big to fail, which is a radical departure to pre-2008.

      • kleen says:

        Besides service inflation, everybody is now asking for tips by handing you the CC machine at the register that takes you to a screen asking if you would like tip. 10% 15% 20%

        It’s ridiculous.

        • sufferinsucatash says:

          Instead of increasing wages employers are asking customers to pay their employees for them. Vote with your wallet! Cook dinner at home.

        • Longstreet says:

          some start at 22% and work up….so you are also tipping on the tax

    • American Dream says:

      Two input costs that you aren’t mentioning are cost of human capital and profit margins.

      That’s what’s now driving inflation IMO

      • phleep says:

        > cost of human capital
        i.e. services of employees? So, services inflation, as copiously mentioned? Wages would be quite analogous to fees for services. I’m not sure of the formal classifications.

    • Old school says:

      My guess is the economy is going to crash in 2023 and inflation is going to nose dive. Just like people can pull money from a bank when scared, they can stop spending on everything not needed when scared too.

      What happens after that is a big scary unknown. With congress divided it might not be fiscal support of 7% of GDP any more. Might fall on the Fed again.

      • phleep says:

        That would mean a rollback in available credit too, I assume, just when people might be grabbing for it to “bridge” to some hoped-for recovery.

  3. old school says:

    Looking back from 2009 to 2022 the smart game to be played if maximizing returns was the goal was to use leverage. Borrow as much as a bank would loan you and purchase nearly any house, bond or stock. If you did that your net worth increased by 10X or much more. Maybe 25X.

    The smart money crowd played it at least two ways. The Buffet types who didn’t leverage up and just kept playing the same long game. The second are those that understood when the gig is up and sold to an unsophisticated bag holder.

    I guess there is a third type of smart money that faired poorly. Those are Hussman, Stockman, Faber and Grant whose imagination could not conceive that central banks would go as far as $17 trillion in negative interest money to can kick the debt burden. They probably will be able to say they were correct in the long run, but that didn’t help their followers very much.

    • Augustus Frost says:

      It’s one thing for Buffet to play the “long game” and another entirely for the average person.

      When the mania is confirmed to be over, many from among those who are viewed as affluent are going to be set back decades financially if they aren’t ruined completely.

      • Zero Sum Game says:

        Augustus Frost: I frequently derive a wry kick out of your saying how most Americans’ living standards will decline in the reasonably near future. I know you speak in broad terms, but your comments often remind me of my individual case.
        I was a child of the 70’s, and my mother was one of the few women working deep in financial research for a major investment bank during her twenties. She was killed one night coming home from work in an auto crash. I was her only child and a two-year old at the time. The news media ascribed such little meaning or value to this old incident that I had no conscious inkling I had suffered an indescribable $30 million economic loss early in my childhood (forget the emotional suffering component, just the sheer economic loss of household income was massive enough), that I didn’t even develop the instinct to check into my mother’s work resume (a doozy!) for the very first time in my own life until I was around 25 years old.
        So when you say how American’s lifestyles will decline soon, I often just chuckle “Heh!” and go back to cooking my cheap dried bulk garbanzo beans in a slow cooker, trying to get by.

    • Petunia says:

      During the GFC, if you had a job you basically were untouched by the crisis. This one will be the same. If you lose that cushy tech job, you are screwed.

      • old school says:

        That is true. I kept a paycheck coming every week but 1 or 2 for 25 years and saved / invested some of each check. For the average peon that is how you do it.

        I had retired just before GFC and had already sold my house. Like a lot of people my portfolio was chopped in half, but I just went all in on stocks and lived off of 3.5% of my portfolio which at the bottom was about $1000 per month. I still enjoyed life cause I was out of corporate grind and had time to do things I enjoy which are nearly free.

        • andy says:

          Old school, how can one live on 1K/month. Especially if you sold your house. Did you move to Thailand or something?

        • Old school says:

          There were people around that needed money. My best housing situation was renting a single wide trailer for $400 per month that included water and electricity. I could eat for $150 per month.

          I had a high deductible health policy for about $100. My car insurance was dirt cheap then under $400 per year. I biked a lot then which is a cheap hobby unless you want to spend to have the best.

          But I was older and had had the nice home and nice car before and had gotten that out of my system.

        • patrick says:

          I don’t know you but i respect you –

        • Propheticus says:

          Old School,

          Were you still able to get laid after cutting back on your living expenses?

    • Bobber says:

      The real bagholders will be people who retire early and watch their net worth get cut in half via asset price declines and inflation.

      I knew a sales guy that retired with $6M in 2004 at the top of the 2000 bubble. He followed the advice of the latest “hot” advisor. He lost 60% of that wad before his wife took away his investment responsibilities. He used to be a happy guy, but I never saw him smile after that. His wife never really forgave him.

      • old school says:

        I had a friend that was working and in her 30s, but she doesn’t understand markets very well. She came close to bottom ticking the market by selling out in her 401k at the bottom. She is going to have to work a lot longer because of it.

        I help her now with managing her money and every year ask her the question, what is the maximum drawdown you can handle without freaking out. Usually that means she has to have only about 13% of her money in risk assets and the rest in m/m and short term treasuries. I try to never have her account show an annual loss, but couldn’t quite do it last year because short term treasuries and stocks both declined. At least this year is looking better with m/m paying interest and short term treasuries in a pretty good spot.

        I have found its a lot harder to manage someone elses money than managing my own because they don’t really understand what you are doing and I am more risk adverse with someone elses money.

  4. Chase D says:

    Another informative article! It’s a sad fact that when anyone is given the opportunity to steal, eventually temptation overtakes integrity. It even happens to little old ladies who sing in the church choir. No surprise it happens to bankers. But I did learn what “hoosegow” means! :-)

  5. cas127 says:


    1) a) “to just take their money and not pay them any interest on it” – All true with regards to banks…but it was *exactly* the same thing the Fed/DC was doing upstream of banks (Treasuries form the baseline off of which both loans and deposits are priced) and bank trading in Treasuries is the core function of bank asset-liability management. So don’t let DC use the banks at cutouts…the banks were all complicit in the recklessness/stupidity…but DC was the mother of ruin. I don’t know if you emphasize this enough.

    b) It is no accident that DC can i) print unbacked money at will and ii) is a massive, massive debtor. Unbacked printing *creates* “free money” for the G (by expropriating USD savers and imposing real goods inflation on citizen consumers). The G “solves” its debt problem caused by decades of grotesque financial mismanagement by imposing the costs on innocent savers/consumers. The G’s ability to print unbacked money is the fulcrum upon which the whole system of “shifted accountability” pivots.

    Until enough people know this in their bones, DC will never stop (and cut vote buying expenditures, raise taxes on HNW, and stop using printing/savings dilution as a primary means of government “finance”)

    • Flea says:

      My local KENO parlor ,attendant told me getting a lot of counterfeit money.

      • Longstreet says:


        another reason we are headed for a digital currency and a nationalized banking system

    • Tyson Bryan says:

      I would add that the greater hallucinogenic absurdity is that an inflation target of 2% is somehow achievable, when inflation is running several times that rate – up into the teens and no end in sight.

  6. Juliab says:

    Wolf, what can you say about the problem that appeared in Deutsche Bank?

    • Swamp Creature says:

      Wasn’t Deutsche Bank featured in the movie “The Big Short” which I saw. They had some crooked banker selling CDO’s to some moron investor. They were almost bankrupt then as I recall, and probably completely bankrupt now. Who in their right mind would have their money in this bank?? The question is not whether they will go under, but when.

    • Wolf Richter says:


      The “problem that appeared” at Deutsche Bank is that the market suddenly got the jitters again, as it does periodically.

      Deutsche Bank of today is not the Deutsche Bank of 2008. It has bee profitable for the last few years. It raised quite a bit of capital. The German government cracked down and made it clean up its act.

      In general, Germany will never let DB implode. They may bail in shareholders and some bondholders. The state may take a big stake in the bank after bailing in investors, effectively or partially nationalizing it. But they will keep the bank up and running. DB is a hugely important industrial bank in Germany, it’s a hugely important cog in the export and import machinery of Germany Inc. And the government will make sure it continues to function as such.

      At the moment, I’m not too worried about it (I wouldn’t want to own the shares though).

      These are market tremors you’re seeing. Shares have been in the same range of €5 to €13 for many years. Friday’s price of €8.60 is up about 50% from the low in 2019 and about 75% from the low in 2020.

      • Juliab says:

        Thanks Wolf

      • I followed Yellens (then Fed chief) backdoor bailout of DB, transferring their derivatives to major US banks, who promptly failed “their” stress tests. Eventually the paper was cleaned up, [or they gundecked the stress tests]. The Euro financial press is chirping at the Fed, so this “psychological” thing may need couples counseling. Eurodollar levels are showing stress, and whenever you open the dollar swap line, you know something is wrong. The US was ground zero in GFC [and they’re doing it again]. First the US deregulated, then unregulated the banks, stricter measures are needed. Have to agree.

  7. The FED told them inflation was transitory. One thing the era of free money did create was a period with the most stable inflation in history. The 2% benchmark became more reliable than Fed Funds Rate. Yield curve inversion is the Feds most egregious sin in the cycle of free money but then years ago one analyst predicted that investors would be borrowing money at the long end in order to put it in a savings account.

    • Longtime Listner says:

      I think we are learning something about tech, as it ages and matures, it’s leaders and investors, I’m not sure what the full lesson is yet, but exactly, they were told rates were going up, and started a run on their own bank rather than adjust.

    • Auto-outsider says:

      Not even close. Please tell us which prices were stable.? Houses? Financials? Autos? Three giant bubbles? One of the craziest periods in history.

    • Longstreet says:

      The yield curve is just the way the Fed wants it…..
      and that is why they absorbed circa $5 Trillion in debt > 10yr…treasuries and MBSs.
      Those who continue to analyzed the yield curve as if the Fed had a $800 billion balance sheet do so in vain…IMO
      The yield curve should be positive….for the uncertainty of the future demands higher returns IMO
      “moderate long term rates” suggests not too high OR TOO LOW. The Fed ignores this, and no one calls them on that.

  8. Desert Dweller says:

    Broker/dealers file monthly Focus Reports to the SEC and FINRA that mark all securities held by the firm for its trading and investment accounts to market. The question becomes why aren’t banks forced to do the same thing, why do they get different treatment and are allowed to declare certain bonds as held to maturity and not mark them to market?

  9. Deepwater says:

    Any articles on the unbooked losses? Is there just a ticking time bomb in our banking system right now?

    • Wolf Richter says:

      Unrealized losses peaked in Q3, fell in Q4, and will likely further fall in Q1. I will cover it when the data come out (FDIC) in a couple of months.

      Overall, banks have been shedding these securities for a year. Only a few banks were completely stupid about it.

      • Deepwater says:

        Thank you!

      • Arya Stark says:

        Which means this is not a crisis as the media likes to proclaim. It also means the Fed should not “pivot” and give in to the Wall St. Whiners ™.

        • Wolf Richter says:

          There is a crisis for the few banks that have been completely stupid about it because free money had turned their CEOs’ brains to mush.

          But stocks going down is NOT a crisis, LOL. It’s part of normal.

  10. gametv says:

    I read an article from 2018 that was saying that all of the monetary stimulus was going into asset price inflation instead of inflation in the real economy. That was before the massive stimulus related to COVID.

    Is anyone at the Fed or in the news media even looking at this? If this is true, then shouldnt the Fed be looking at both inflation in the economy AND asset prices to determine monetary policy?

    Because asset price inflation means simply that some people get rich and others get left behind. It increases the divide between capitalists and workers, and increases the wealth gap. It means that people cant afford to buy things like a decent home for a decent price.

    Or is that the point? Increase the wealth gap as much as possible because the bankers are on the right side of that gap?

    • old school says:

      There seems to be endless options of dealing with debt. I think the modern economist thinks the best way is to not let bad debt default, but stick it on the governments balance sheet where service cost is lower. An example is student loan debt and maybe housing debt in next crisis.

      Once the government can’t pay the service cost, they can do financial repression of interest rates to manage debt service cost. A rich country has a lot of options with debt before people get violent. For the average citizen living standards can slip backwards as the real economy becomes less innovative. We have pretty much topped out with living standards I think.

      I always say housing is the indicator of the health of an economy. Housing was one of mankind’s earliest needs and a truly rich society can generate decent housing at reasonable price to income.

      • Augustus Frost says:

        The “options” will last as long as confidence lasts and not a second longer.

        There is nothing magical about the US or another “rich” country.

        Eventually if the government persists, there will be a run on the entire financial system or the currency.

        What gimmick are they going to use then?

      • longstreet says:

        “Once the government can’t pay the service cost”

        weekend WSJ big article on the essential open ended
        Inflation Prevention Act…..
        Lord help us.

    • GW says:

      It is almost as if there were two decoupled economies – one for assets and one for the rest. This allowed free money being created as this free money did not cause traditional inflation. One may even argue that money burning investments like Uber had a deflationary impact on transportation costs.

      Now there are inflationary mega trends like energy cost and China. Both made worse by Covid, Ukraine and global warming compensation. As the real economy was bled of capital and Covid threatened to break things (looking at the supply chains a valid concern) money was injected in the real economy and that imho. broke the dam separating the two worlds. Some things may get better but now capital has a cost which will have to be earned so it is unlikely inflation will go down soon.

    • sufferinsucatash says:

      Dunno about asset price inflation on purpose, sounds kind of conspiratorial to me.

      But the effect QE has is to inflate asset prices because there is just sooo much more cash around.

      I do have a loose thought that the 2017 tax cuts were aimed at creating this instability. Perhaps The whole jobs act was a big nudge in this direction. and the people crying now to “loosen money” are the same as then. Curiously, that’s when bank regulation was made less important.

  11. Nathan says:


    “What did break Silicon Valley Bank was the Fed’s refusal to regulate it properly…And it was a reckless management failure, obviously, and those folks should spend some quality time in the hoosegow.”

    Amen. Be sure to support legislation which calls out the Fed’s “reckless management failure”, lackadaisical regulation and ineffective oversight..If all else fails, in Serta we trust!

  12. Michael Engel says:

    1) KRE Mar 13/14 is the regional banks Anti backbone. Backbones tend to build congestion, send prices above and below.
    2) There is a Lazer tilting down aiming at an area below the Anti. One day KRB might be there.
    3) Yesterday low was a spring. For 9TD there is no close yesterday high KRE might popup. We don’t know how far it might go.
    4) If KRE have a close > Mar 13 high, good news.
    5) If KRE close < Mar 13 low, cut your losses, u are swimming with the

  13. Augustus Frost says:

    “And it was a reckless management failure, obviously, and those folks should spend some quality time in the hoosegow.”

    I must have missed it, as I haven’t read anything about any potential criminal activity. I have read insiders borrowed a lot of money recently which may be a conflict of interest but not in specifics where it violated Reg-O.

    Improper risk management isn’t actually criminal. There is no need to invent more crimes.

    • Sams says:

      Cynical, was it really improper risk management?
      Or did someone look at it and decide to get the money as fast as possible?

      A bit like offshore saturation diving, at least it used to be well paid when operating in the North Sea. Still there was a catch. In the ROV control room there was a sign with the text “Divers are not paid more, just faster.”

    • Anthony A. says:

      While their brains turned into mush, these were pretty intelligent fellows and, more than likely, knew what they were doing. They managed to not forget to give themselves going away bonuses too!

    • old school says:

      Heard a guy that assists banks with managing risk say Fed policy last 3 years has got duration risk all messed ip making nearly any bank vulnerable if deposits leave. He said there is probably a different story at Silicon Valley Bank because their duration risk was where most banks are. Its the deposit flight that is the problem. If half of your deposits leave quick any bank is a goner. Demand deposits are tough for a bank to manage.

      • Phil says:

        this makes sense. and what i’ve been thinking. apples/oranges for SVB. Any bank can get a run, but SVB was structured to not be able to deal with one, based on their situations, and, worse, how they didn’t prepare. And for that, we get the rest of what’s happening.

    • Appletrader says:

      At some point it becomes a pyramid scheme! Lock em up next to Madoff

  14. gametv says:

    I somewhat disagree that it turned the bankers brains to mush. I think they did exactly what the incentives told them to do – maximize short term profits so that they could pay themselves outrageously large bonuses.

    Why manage for the long term when you can make so much money short term that you can live off it forever in happy retirement in Aspen?

    • old school says:

      If I have my story correct, the bank president at BB&T ran a conservative bank before the GFC. Paulson tried to strong arm him into taking the government handout like the other banks so that people couldn’t figure out Citi and a few other banks were bankrupt. He wouldn’t do it and resigned out of principle. Heard him tell the story. He was your typical old style prudent banker and didn’t believe in using the bank as a casino.

  15. pigeon says:

    Dear Wolf,
    I think the problem is more severe. Of course some bankers were especially reckless and so they are the first in the line to fail. But the problem of this huge interest rate reset from zero to five percent must in my view wreck broader damage in the banking system. I think hedging the interest rate risk is of course a way to mitigate that risk for the individual bank. But who is the counterparty? In the end trillions of longterm loans and bonds are outstanding that now need to be refinanced at much higher rates. This guarantees huge losses in the entire system either by a bank or by a hedging counterparty that probably also is a bank. When we look at the enormous refinancing activity in mortgages during the time of the lowest interest rates 2020 and 2021 we can assume that banks hold a very large amount of 30 year mortgages that were issued at 3-4% interest rate. Just to give an example. It is even worse with treasuries or other loans the IG corporate sector. So I think we currently face the first part of the crisis, that is the liquidity issue. But I would suspect that in a few months we will see a widespread solvency crisis that could only be remedied via a sharp drop in interest rates.

    • A A Ron says:

      That’s the whole point, assets were completely overinflated due to free money for decades. Time to come back to reality and pay the Piper. Long term loans and bonds don’t “need” to be refinanced, they can be held. If they “need” to be refinanced then that was a poor financial decision and they need to let markets work and pay for their bad decisions. There cannot only ever be winners in a well functioning market, or else we get more “consensual hallucination”

      • old school says:

        If things weren’t scary, Fed would not have went from 0 to 5% so quickly as they know they are going to crater assets. None of the bond, housing or stock markets think that Powell can stay at 5% for very long or all assets would be priced lower. The current asset pricing does work at a decade of 5% funds rate.

    • Augustus Frost says:

      The banks securitized the mortgages (mostly) to offload the credit risk to the GSE’s, but many have taken on interest rate risk buying MBS.

      • old school says:

        I think they have to keep some percentage on their books or are responsible for some of the losses since GFC additional regulation.

    • Lune says:

      Agreed. It’s great if most of the banks hedged their interest rate risk. At least it’s out of the core banking system. But someone, somewhere, is a counterparty to that risk. And if indeed most banks hedged this risk properly, then that means trillions of dollars of bonds that are now facing significant losses for whomever is on the other end of that swap.

      Most likely, it’s investment banks who make custom interest rate swaps for their clients, and the people they sell the swaps onto. I don’t know enough about this market to know how these swaps get packaged and sold, and who buys them. But the bottomline is that hedges don’t eliminate risk. They merely transfer a specific risk to another party (for a fee).

      Now, as long as the counterparty isn’t other banks, maybe we shouldn’t care. It tends to be banks that get bailed out when they get in trouble. If it’s a bunch of hedge funds then hopefully the government will feel less pressure to cover their losses. Most likely though, it will be pension funds, widows, orphans and other traditional bagholders, who will be getting the shaft (as it was in the UK’s gilt market a few months ago).

    • MM says:

      I too am curious who underwrites the rate swaps these banks use as hedges.

  16. Raging Texan says:

    “customers might yank their money out.”

    I yanked my money out of banks in 2008. I have have minimized any bank or money market deposits ever since then.

    Why didn’t everyone else?

    • Flea says:

      Where’s your money under a mattress

    • MM says:

      Might be time to consider going back – you can earn >5% on <1 year CDs now.

      • Ragin Texan says:

        Flea, since you asked, how about you tell us where your money is first?

        MM Thanks or advice but 5% yields are not attractive, lower than inflation. FYI lending below the rate of inflation is self caused wealth destruction. Not interested.

  17. A A Ron says:

    Modern monetary policy seems to be all based on psychology and 3 card Monty. The global ability to produce food, goods and services is relatively unchanged it’s just all wagged in one direction to the other by the elite power brokers who are enriched by this.

  18. Swamp Creature says:

    Very good article. I’m printing it out and saving it in my archives. Something that was free, like free money, was not actually free, and it corrupted the many people who got it, and hurt a lot of people who didn’t get it.

  19. Austrian School says:

    Wolf: You said: “What did break Silicon Valley Bank was the Fed’s refusal to regulate it properly”. It could be due to the SVB CEO sitting on the board of the Federal Reserve Bank of San Francisco. This is an inherent conflict of interest and perhaps the Fed Board ignored SVB loading up with long term treasuries with historically low rates.

    In defense of banks paying almost no interest to their depositors, most banks survive by their “net interest margin” (difference between average cost of funds and their average interest rate charged on loans) The net interest margin has been at historical lows for about 14 years due to the Fed choosing to sacrifice savers, (financially responsible people who do not depend on others) in favor of borrowers. I would contend that the banks had little choice other than to pay little or no interest on deposits due to their net interest margin historically being so small. The rebuttal will be that banks made a lot of money during this time but keep in mind the profits need to be inflation adjusted.

    The blame for no interest being paid to savers almost relies exclusively with the Federal Reserve Bank which is the third US central bank in US history. Some of the most prosperous times in US history were when there was no central bank. BAN THE FED

  20. 91B20 1stCav (AUS) says:

    Wolf – in addition to your sterling print output, I have always, and greatly, appreciate your commitment and the huge amount of PITA effort you devote to producing a print version of your podcast (…my poor ol’ brain processes/reviews the information better through the printed word…). If you ever stop, given the seemingly-declining demographic of folks like me, i’ll certainly understand – (…but imagine the ‘comments’ section in a video-conference format – yikes!).

    Again, many thanks for all you do maintaining this fine establishment…

    may we all find a better day.

  21. Ralph Hiesey says:

    I wouldn’t say the BANKERS’ brains turned to mush.

    I would say the REGULATOR’S brains slowly turned to mush beginning gradually in 1933–and going into high speed mush mode more especially after 2010 when Bernanke discovered it was much easier and cheaper than regulating just to eliminate risk by printing free money and purchasing the bad stuff. And he was just kinda following Greenspan who successfully removed risk from the stock market using a similar technique. Keeps everybody very happy.

    NO MORE NEED FOR WORRYING ABOUT RISK!! And the banks gradually caught on. And of course, the chorus of capitalists screaming that regulation was always very BAD BAD BAD.

    In 1933 depositors no longer had to worry about their deposits to the bank–IF their total deposit was less than $2500. Which could be ok if it ONLY applies to relatively small deposits for people who simply don’t have the resources to check whether the bankers are running their business right.

    However, the INSTANT that happened the regulators should have realized that THEY suddenly had to take over responsibility for how the banks were running their business.

    So now the mush mentality has spread to the whole financial sector–people now saying hardly anyone should need to worry about who they loan their money to– the Fed will back them up–but especially if they have a LOTS and LOTS of money– who are “too big to fail” And also too big to regulate properly.

    I hope I’m wrong, but I’m predicting the Fed will be unable to resist the rich pivot people who want to turn up the free money tap –as much as it takes.

    • Augustus Frost says:

      According to a book I have, purportedly during the Congressional hearings on the FDIC bill, some bankers testified against it predicting it would lead to unsafe and unsound banking.

      They were right, even though those who believe moral hazard can be effectively regulated forever believe otherwise.

      I am very confident not a single bank’s management thinks the same now.

    • Antonym says:

      Self regulating Bankers brains turned to whipped cream, they wanted more, and more and……. Pay off the Nation’s oversight in DC to sleep and you win in the casinos all the time. Uncontrolled greed is one of the problems of Homo sapiens, apart from hive mind.

      Thanks Wolf, I only started reading you since about a year or so. Now I find out you’re actually a Wolf that ripped into The holy mammon Mammoth (FED) too in the past.

  22. Spencer says:

    More monetary policy blunders. Powell:
    #1 “there was a time when monetary policy aggregates were important determinants of inflation and that has not been the case for a long time.”
    #2 “Inflation is not a problem for this time as near as I can figure. Right now, M2 [money supply] does not really have important implications. It is something we have to unlearn.”
    #3 “the correlation between different aggregates [like] M2 and inflation is just very, very low”.

    • Ralph Hiesey says:

      Spencer– here’s my my guess about why Powell made that bad mistake.

      Just after 2010, to keep panic asset selling from causing a run, the Bernanke Fed was printing money like crazy to buy questionable assets that were held by the highly affluent. That converted bad assets into safe assets as cash, then stayed unspent to substitute for the bad assets–which is why inflation did not happen. The new money wasn’t being spent.

      After Covid, similar quantities of newly printed cash went to normal, not rich people who would fairly quickly spend it. So naturally increased aggregate demand, with corresponding weaker supply because of Covid–so that DID cause inflation.

      Powell didn’t seem to get the difference.

      • MM says:

        Fantastic hypothesis – makes a lot of sense, I hadn’t thought to make that comparison.

  23. Michael Engel says:

    1) Banks Reserves at the Fed are down from $4.3T to $3.4T, below
    2020 high.
    2) RRP is $2.2T
    3) The total is $5.6T ==> 5.6T x0.05 = $280B/Y for the do nothing banks.
    4) The large banks lend 60% of their deposits. The small ones lend 80%.
    The banks pay zero rates on deposits and charge 20%/30%
    c/c rates. The banks are safe, safer than ever before.
    5) Total mortgage assets : $19T. Mortgages between 3%/4.5% are half
    prices. Mortgage delinquencies is 1.15%. Delinquencies don’t matter.
    They indicate a healthy economy with low unemployment. The filth and bacteria under their mattress make them sick day and night. They held it to maturity instead of cutting their losses.

  24. I’ve read many takes on what’s going on with the banks. Your article actually explains it step by step.

  25. gametv says:

    I am seeing many articles pointing to the rebound in home sales in the spring selling season. Seems like the dumb people in the crowd are back at it again, buying overpriced homes because there is little on the market.

    Do these people have no self-control? It is like they just cant stop themselves from making dumb decisions. I keep an eye on a local Southern California market that is very middle class, a good indicator of overall market conditions and the inventory is dropping as homes sell amid very low inventory.

    I cant help but think that another 6-12-18 months from now those people are going to be in a world of pain.

    I see long term rates going much higher and demand collapsing again at the end of the summer and into next fall. The real carnage in housing probably wont show up until 2024 or even 2025, when there is alot of underwater borrowers and massive lost equity.

    The rate of QT by the Fed and other central bankers is pathetically slow. The ECB is going to increase the pace of QT in mid-summer, BOJ is getting a new chairman who will stop the crazy policies of suppressing rates about that same time and the Treasury will finally be able to issue debt after the debt ceiling is raised in July. Going to be carnage at that time. That is when the real estate market really goes into free-fall as long term rates finally take off.

    • gametv says:

      But i must admit the price of food at Costco has dropped quite a bit recently. Egg and certain meat prices seem to be down quite a bit.

    • Fed up says:

      “Hurry up, homebuyers! This may be the calm before the mortgage-rate storm. ”

      Email headline I received from Seems like the real estate industry is trying to incite FOMO again. I see crap like this quite a bit plus the local YouTube realtors jumping on the FOMO bandwagon. While there may be a few more sales happening now during the spring selling season, both supply and demand are pretty much in the toilet. I’m talking the Phx market. I would assume it is similar in many other markets as well.

      • Zest says:

        I closely watch a Florida market where I plan to buy at some point. Spring selling season has finally picked up there, and I’m seeing exactly what you and gametv describe: nicer mid-sized SFHs starting to get snatched up again, albeit with 3% reductions from asking price. It *almost* makes sense. Prices there have retreated maybe 5+% from their euphoric high last year, mortgage rates have taken a breather in the past few weeks…

        I might jump in, too. And I could absolutely afford to. Except that I refuse to believe that a 1900 sq ft block home with a superficial flip job can sustain a $620k valuation when the same house was valued under $300k just 5 years ago.

        So I ask the same rhetorical question I’ve been asking for a couple years now: how are so many people able to spend $3-4k per month on a mortgage for a mid-tier SFH in a mid-tier zip code? And more importantly, WHY are they willing to do that?

        Is everyone just counting on inflation and wage growth to make that $3500 payment shrink down to something proportionally more manageable?

    • Augustus Frost says:

      “Do these people have no self-control? It is like they just cant stop themselves from making dumb decisions.”

      A noticeable percentage of the population believe they have a birthright to minimum living standards and more, including at someone else’s expense.

      Some of these believers post here.

      Watch for it to happen “in spades” in the near future and when it happens, they will still claim “nobody could have seen it coming.”

      Demand for more handouts will follow and, previously well off or not, virtually no one will ask or want answered what these people did with the money that had before the “unexpected” happened.

    • sufferinsucatash says:

      Yep, the bidding wars are back in the Raleigh market. Prices did seem to be falling a month ago.

      • Fed up says:

        In Phx, supposedly you have low inventory and low demand but demand is slightly higher than inventory, thus, a few bidding wars. I don’t expect this scenario will last long. Buyers will get frustrated. I know I would. Still not a healthy market.

  26. Swamp Creature says:

    Yep, The “Listing from Hell” one block from me just went under contract. I believed they dropped the price substantially. The builder may have lost his shirt on this one. The Swamp RE and neighboring suburbs hasn’t collapsed yet. There are so few listings that even the dog properties sell if priced right. We did one the other day that had freight trains running on a track in both directions 5 feet past the end of their back yard all day and night.

  27. old school says:

    I have owned stock off ond on in a no debt company that sold pet prescriptions. A good safe dividend payer. Chewy came into the space thanks to a private equity firm. Chewy was a hot stock at listing but after five years or so is back to its first day price.

    I bring this up because it looks like the Chewy is virtually all debt and just a sliver of equity and is cash flow negative at current rates. If rates stay high for a few years I don’t see how they survive and someone perhaps a bank will have to eat the debt. I suspect this is one of the zombie companies people talk about.

    Chewy has hurt the sales of the no debt company because they run a conservative balance sheet and pay dividends. What good did Zirp do if it creates a company that can only survive in zirp environment?

    • 91B20 1stCav (AUS) says:

      … Pays Chewy’s execs quite well, i imagine…

      may we all find a better day.

    • MM says:


      My girlfriend & I regularly order our cat food from Chewy. I’ve been telling her there’s no way they’ll still be in business after a coiple years of higher rates, but she doesn’t believe me.

  28. Mike says:

    Money just wants to be free.

  29. Seba says:

    “And enough of them based their banking decisions on those believes. Free money is like a virus that turns human brains to mush.”

    I believe it’s “beliefs” there

    Great article again!

  30. Dave says:

    Sure wish I got some of the free money, we are gonna need it with inflation the way it is. At the rate we are going half the country will be on Medicade and food stamps. It’s either that or we will have people protesting in the streets.

    • Flea says:

      Socialism and a dictator,problem solved

    • BuySome says:

      Medicade…the drink that makes you feel better even when you’re not. I think we’ve just found a product to let us all cash in on some free money. Now all we need is a football team to drink up.

      • 91B20 1stCav (AUS) says:

        …the makers of Damitol should be concerned…

        may we all find a better day.

  31. Depth Charge says:

    “Free Money Turned Brains to Mush, Now Some Banks Fail”

    We need LOTS of banks to fail, and lots of debt-junkies to go bankrupt and lose all of their stuff, because brains indeed turned to mush based upon rapacious greed, FOMO and entitlement.

    I was reading an article last night about RV sales, and how new and used RV prices have been falling and sales of new RVs slowing. What transpired in that space over the course of the past 3 years should be illegal.

    Dealers were jacking prices up 50% and more on new units in certain instances, and people were borrowing any amount to buy them. And the loans were there. The underlying collateral didn’t have to support the purchase price. In many instances the loans are 20 years in duration. And the rates are ludicrous. 20% is not uncommon for somebody with a credit score under 700. Subprime goes over 30%.

    Somebody with a 720 credit score could expect to be paying 15%, and if you plug in a total loan amount of $50,000 (many RVs are way beyond that), they are paying $108,000 in interest alone on a paper mache box on wheels. It is one of the most pathetic things imaginable when you consider the product.

    This is the kind of thing that happens in a credit bubble. The banks spread credit far and wide. Anybody with a pulse can sign up to buy anything. And as we learned with auto sales, stimmy checks were “proof of income.” How despicable.

    We know that people will financially hang themselves every single time if you give them the rope. This has been proven over and over again. That’s why there are supposed to be lending standards, to protect both people and the system. When you don’t have them, everything becomes unstable, including prices. Inflation blew out due to the loose lending as much as anything.

    • old school says:

      David Stockman has a new piece out on banksters and even if you don’t agree with him he is a master of written language.

      I had looked at a high end camper van about 7 years ago with only 25,000 miles for $50,000. New listed for about $100,000 but you could buy for $80,000.

      Last month I looked and the higher end was listed for $180,000. Think I will pass. Nearly everything is 30 – 50% too high.

      • Depth Charge says:

        Price and value are two entirely different things. I see almost no value in most depreciating assets at today’s prices. RVs suffer some of the worst depreciation of anything you can buy, save for maybe boats. Worse, if you don’t have an indoor shop to store them, they will quickly be totaled by the weather.

        • Tony says:

          When I bought a Steinway Grand Piano for $60K many years ago, most of my friends thought I was crazy and throwing away money. But they saw nothing unusual in their buying $50-$60K cars.
          Fast forward a decade. My piano used is now worth $50-60K (new ones are crazy expensive) and their cars are essentially zero.
          In fact, my piano will last 100 years. There are still some selling on EBay from 1900-1920.

        • Prairie Rider says:

          During a recent Minnesota Orchestra TV live-streaming, there was a fascinating piece during intermission about the four Steinways that are at Orchestra Hall. Keeping these machines working perfectly takes a very skilled technician, and when guest pianists arrive for a weekend’s performances, they test each piano, choose their favorite, and have it set up by the technician to their exact preference.

          You made a great investment in the piano!

        • MM says:

          I guess it depends on whether you bought it as an investment or for its utility.

          My car is certainly worth a lot less than when I bought it, but it gets me to work everyday. Its a great car & I have no plans to replace it.

        • MM says:

          NB: I didn’t pay 50k for it; bought it used for 10k in 2018.

          I do agree 50k for a personal vehicle is ridiculous.

  32. Don says:

    As I recall, hallucination is when someone with the DTs (delirium tremens usually caused by chemical withdrawals, CWs) sees giant spiders that don’t exist at the same time and place for other observers not having the DTs. A delusion, however, LSD induced or not, is when Joe Blow thinks he’s a bird, a chick with a dick, and jumps off the Golden Gate Bridge with no thought of ending up as food for the sharks ’cause he she can fly like a bird without wings and good god Girdy’s gash while playing the hurdy-gurdy. Apparently Powell and Yellen, etc., have similar issues with QT and QE, similar to CW and CE, chemical enhancement.

    • Gomp says:

      Officer: Why didn’t you save your buddy?
      Hippie: I didn’t know he couldn’t fly!

  33. Doolittle says:

    People don’t realize the banks are not their friend. They’ve bought into the brand. The brand of it’s big and safe. If you have money at a bank today it’s costing you tremendously.

  34. Concerned Citizen says:

    “After 40 years of relatively calm inflation, we now have raging inflation, and this inflation has moved from goods to services, and services is nearly two-thirds of consumer spending, and inflation is now raging in services at the worst pace in 40 years, and in services is where inflation is very difficult to eradicate”.


    I hate to be the person who spoils the party but services inflation is not going away. The federal government spent $6.5 trillion in FY 2022 — or $19,434 per person and we all know that is multiplied several times over our services dominated economy. We’ll see what they spent in 2023.

    There still is unspent COVID money slushing around and many new programs coming on board each pumping billions into a services-driven economy.

    Even the interest rate hikes will be passed on to customers until they cannot. Until then, they will be inflationary! State and local governments will raise taxes to cover their increased costs. More inflation.

    This is all very depressing!

    • Depth Charge says:

      Which is why pausing rate hikes is the dumbest possible thing the FED can do. They need to keep raising until the fed funds rate is way above CPI. Instead, they are opting for entrenched inflation, because they want their wealthy buddies to keep all their gains.

      • Concerned Citizen says:


        Yes, indeed. Let me give you a little story of how this must play out.

        Today, Billy the plumber is so busy and he keeps raising his hourly rate but the customers still come to him even at the higher rates. This continues month after month with no end in sight. Billy is pretty happy but his apprentice Timmy is threatening to quit unless Billy pays him more. Billy relents and ups Timmy’s pay by a lot. Timmy is now flush with cash and he wants his F250 detailed.
        Pauli, is so busy he cannot handle all of the detail work so he quotes Timmy an outrageous price to make him go away but Timmy just got a big raise so he says, why not and gets his F250 detailed.

        How does it stop?

        1) J-Powell must go ‘Volker like’ and raise all the interest rates he controls well beyond the CPI.
        2) He is really determined so he pushes up the rate of QT significantly.
        3) In parallel, Biden and Congress agree to curb spending during the Debt Ceiling negotiations.

        • Tony says:

          A subplot to your little story is the shortage of plumbers and trade workers in general. This is another factor that will allow them to raise prices a lot higher. We have a huge mismatched, skewed labor force consisting of a generation of college grads who are all white collar workers pushing paper. So anyone in a skilled trade can raise prices to the moon.

        • Bobber says:

          That’s half of inflation. The other half is that corporations are raising prices opportunistically. Corporate profits margins just hit a new all-time high.

        • The Real Tony says:

          The Bank of Canada did all the wrong things.

      • 91B20 1stCav (AUS) says:

        …supply and demand (always inimical to stability) who woulda thunk…

        may we all find a better day.

  35. Doctor_ECE_Prof_Old_Fa_t says:

    It is not just bankers.
    Bernanke said, we can keep printing as we are the reserve currency country. FED has been doing this almost from 1987 crash (Greenspan) interfering in the markets and hence giving the bankers, investors assurance that FED will prop up the market all the time. And they did until they could not or close there.
    No investor asked the question how banking / financial stocks such as SVB or Charles Swab stocks can triple in 2 or 3 years like a highly innovative tech company or reminded themselves that what goes up parabolically has to come down parabolically, at a much higher speed.
    Every Joe and Jane got drunk in this drug. Changing houses, remodeling, and some going for rental properties, vacation properties, BnB and what not.
    I have 50 years of experience in high tech research, program management and taken all MBA courses in finance and accounting. I have worked with a number of international scholars and travel abroad for conferences. That experience tells me we have been in a decay for the last 50 years (from we can give away our cotton cloths manufacturing, we can give away small car manufacturing to Japanese… and we are left with exporting grains, start wars to push our weapons, entertainment, the social media apps and financial engineering — even there, we need government help on TikTok. It is mind boggling to see Apple pinning their growth on movie production and or being a tech bank).
    Right now, we have only service inflation. Think when the foreigners who supply us the goods and materials hike their prices. Already, SA royals know what happens to their personal kitty when stored in western countries.

    • 91B20 1stCav (AUS) says:

      …history’s wheel garbed in the raiment of national ‘exceptionalism’…

      may we all find a better day.

  36. Ulysses Rex says:

    Re: “They could have unloaded these long-term securities in 2021 and earlier in 2022 without losses or big losses.”

    Disagree. “Unloading” does not make them magically disappear. It merely allows the schlemiels to dump their bowls of soup on the schlimazels . . .

    • Another Craig says:

      True, except that the buyers might be in a position to hold them until maturity while banks have to deal with customer whims

  37. Einhal says:

    As much as I hate bailouts, it’s because of the Fed and other regulators’ refusal to properly regulate these banks that I support raising or even eliminating the FDIC cap. Depositors should be able to rely on the regulators.

    • phleep says:

      Over-insured financial institutions like savings and loans became a roach motel for financial criminals and just plain reckless managers, and the bottom fell out even worse. Ultimately “depositors” (I mean taxpayers) had to absorb these losses anyway. Financial hotshots could then cherry-pick in the asset sales and get even richer. Unlimited insurance is another form of moral hazard, another wave of free money that turns brains and backbones (including, of gatekeeper regulators) to mush. the buck must actually stop somewhere, meaning failure is possible.

      • phleep says:

        If you don’t allow smaller distributed failures to happen, the risk just gets shoved around, it piles up like kindling, and finally you get a mother-of-all failures that sweeps across the whole system and wipes everything out. That’s how Switzerland became one big involuntary insurance company last week, and then we were backstopping them with swap lines. Who will backstop the global backstopper of last resort? We don’t want to get there in a test case to find out. The last test cases were called Great Depression and WW2.

    • phleep says:

      There is technology, there are ways to spread deposits above insured limits across multiple banks. That should be done, instead of large depositors being lazy while having risky deposits and endangering the insurance system.

    • Augustus Frost says:

      You still do not understand that moral hazard cannot be effectively regulated.

      Additionally, there is no possibility that regulation can preserve the purchasing power of savings. Your preference will ultimately lead to runaway “printing”.

      What good does it do to “insure” loans to banks (no, not deposits), when the end result makes it (virtually) worthless?

      • 91B20 1stCav (AUS) says:

        AF – since ‘morals’ (that’s a bit of a slippery term, maybe ‘sense of general responsibility’ is more apt) don’t (doesn’t) spring naturally from the human creature, but instead, from (best case) adequately life-experienced parenting (one that considers ‘general responsibility’ an indispensable ‘virtue’) and confirming subsequent life experience, one must wonder if we’re approaching, if not at, the PNR of what our civilization has considered in the past as a dim, if not a ‘dark’, age…

        (“…but, but, ‘who knew?’…).

        may we all find a better day.

      • Einhal says:

        I understand it well. But to me, it’ll be very simple. Regulators will assess the risk of a bank, and raise FDIC premiums accordingly. The FDIC should be well funded, such that printing to make up for a shortfall is never needed.

        If a bank is the equivalent of a drunk reckless driver, they’ll pay more.

        Unless you think insurance creates moral hazard in all forms, I don’t see why this, in theory, has to be different.

        I do agree that the way it’s been implemented is bad.

  38. Michael Engel says:

    1) In 2019/2020 those little candles uphill led to Feb/Mar 2020 plunge.
    2) In 2023 those low tranquility candles were sloping on the bunny slope until they plunged they all plunged unison.
    3) SLV had the similar characteristic to the regional banks, but the regional banks average account is $4K. Smallness saved them. They didn’t go bk.
    4) Those who were connected withdraw their money from SVB bank. The outsiders paid the price.
    5) Most people don’t care about SLV bank bk, because it was BLM bank. It might signal an end of an era that peaked 3Y ago, after a prolong decline.

    • Zest says:

      Is this what happens when you pour a shot of vodka into your computer before asking ChatGPT to explain the current banking crisis?

  39. Sarah says:

    So what you’re saying is that Powell is a hero? 😅

    In other news, Wolf, YOU’RE A TREASURE!

  40. Longstreet says:

    I find it remarkable that those who are going belly up now are hurt by their long end maturities….
    The ten year is around 3.5%, give or take…..THAT IS NOTHING, especially with inflation where it is ….
    Imagine if the yield curve was NOT inverted……if the Fed had not absorbed …what…$5 trillion in MBSs and long maturity treasuries…
    1981…..16% 30yr Treasuries!!
    And it was only 12 months ago … or so….that the Fed was pumping $120 billion a month into the markets.

    • old school says:

      Its probably more the rate of change and the low initial interest rate. Banks are in the loan business using leverage and duration management to make it all work out. Fast rate of change up or down is tough for them. This era of Fed policy will probably go down in the history books as what not to do.

  41. bruce says:

    So banks have $17TT in deposits (almost the total m3 money supply) and they are still not paying much interest.

    The question is can they AFFORD to pay interest??

    If their assets (loans) and at such low interest rates how can they now turn around and pay a fair rate??

    • Johnny5 says:

      “The question is can they AFFORD to pay interest??”

      Yep, they can. If they just take those deposits and deposit them at the FED instead of lending them out, they can get 4.90%. They can take a 20bps spread, leaving them 470bps to credit on their customers deposits.

      Everybody wins. The customer gets a competitive interest rate on their deposits, the bank makes an easy, risk free spread to cover expenses and a little profit, and the FED gets tighter lending conditions. Win, Win, Win.

      • Spencer says:

        “Eventually, as bank capital becomes scarce, the cost of holding additional reserves becomes higher than the interest paid on reserves and banks again become sensitive to the quantity of reserves outstanding. ” – Richmond Fed

  42. Finster says:

    Alas far too much media commentary is from analysts whose memories are apparently no longer than the current news cycle. They blame the Fed tightening that’s been making headlines but forget the Fed’s money-palooza of 2020-2021, and the even longer era of rate repression going back to 2008 … the emergency accommodation that outlasted the emergency by years.

    They may not have even noticed that among the Fed’s next round of emergency measures was the March 26, 2020 lowering of reserve requirements to zero, where they were left even as the Fed was mounting its 2022 tightening campaign.

    No analysis of the current state of the financial system could be complete without considering the explosive monetary ease that led to it.

  43. grimp says:

    There is no free lunch, period. But that won’t stop anyone from pretending that it exists. Consensual hallucination.

  44. Xavier Caveat says:

    If you loan someone, set them free from obligations. If they pay you back its yours; if they don’t they never were going to, were they?

  45. Michael Engel says:

    1) Yelen will rescue $17T depositors, but if Chinese banks will be on the
    brink of default, because they finance too many dots on the silk road, the Fed will not kick the can down to rescue them, provide them with dollars, claiming moral hazard, unless, of course unless…
    2) No CBDC creepto to shake confidence. There are three ways to clean the filth under the mattress :
    3) Robot cleaners, but the dogs and cats hate them.
    4) Crawl on the floor, bang your head on the frame : recession.
    5) Lift the mattress and the box sideways, clean the long duration in Apr and May until fear abate in June/July. US 2Y and 10Y will be down for about 3 months.
    6) When the selling will be over the 10Y will rise above the 2Y, above
    the 5% and with momentum reach 8%/9%, before investors move in
    and take it down.
    7) When the next recession start there will be no warning signs, no inversion, it will be sudden and deep.

  46. longstreet says:

    Here is the bet
    What will be the next first digit of the balance sheet after “8”?
    “7” or “9”?

  47. WB says:

    Two comments. The Fed encouraged the belief that it would never end QE and interest rate repression. It stopped trying to shrink its balance sheet whenever the markets threw a tantrum. Powell did a U-turn when Trump threatened to fire him. Bernanke said publicly that interest rates would not go up “in your lifetimes.” On several occasions Yellen brushed off the harm that low interest rates inflicted on savers because the Fed’s policies “helped workers.” My other comment is that stock grants and stock options and stock buy-backs have turned every publicly traded corporation into a stock-pumping scheme.

    • Longstreet says:

      The game seems to be the imagery of risk….but the ‘right people’ never seem to lose, by emergency edicts
      Big chunks of money sitting there….uninsured….with a great deal of certainty they will be saved, just like be bank officers and their families who took big salaries (First Republic) and dividends as the ship sank.
      Clawbacks should be a part of any rescue. That is a giant step towards accountability and prevention in the future

  48. Bubbajohnson says:

    The FED, politicians, Banksters, and Govern ment is to blame for what is coming. THEY will all blame each other and scapegoats will change. THEY will continue to rape and pillage. Rich get richer, poor get poorer. THE END

    • Bubbajohnson says:

      Thought this stolen quote was worth a post here.

      “The trouble with this bubble is it’s an everything bubble. We have bubbled the important and dangerous housing market to record prices. We bubbled the bond market to levels that had never been seen in the history of man with the lowest rates ever recorded. Fine arts and every other asset through the roof, and equities, particularly in the US, at or close to the highest points ever reached.”

  49. WaterDog says:

    Wolf says:
    “Enough of the decision makers at banks – but obviously not all that many of them – believed that money would always be free, and they believed that even if money is briefly less free, it would soon be free again.”

    Que the irony because Gunlach, Bill Gross, pundits, market are all predicting a 100 bps cut by year end!

    People refuse to believe the party is over!


    Bond Traders See Fed Rate Hikes Ending Soon as Bank Stress Grows”

    “Fed rate cuts by summer? Markets price in cuts in June or July”

    Wall Street Expects the Fed to Cut Rates. That Isn’t a Good Sign”

    …and a million more.

    I mean bond yields still suck if inflation persists any length of time.

    • Wolf Richter says:

      Gundlach has been wrong about bonds and Fed rates since mid-2020, LOL. Bond managers are getting their clocks cleaned by higher yields. The MUST have falling yields. So they ALWAYS clamor for that. They’re trying to manipulate everything their way, and the media plays along. I don’t even know why anyone still pays attention to them.

      I mean, look at Goldman Sachs too. It has been wrong about the Fed rate hikes for over a year, and then when in early March it predicted that the Fed would pause in March, the media took this as the word of god, and spread it all over the place. And when the Fed raised by 25 basis points, the media didn’t say that Goldman is full of BS. No, they just ignored Goldman’s idiocy and moved on to Gundlach and Gross. This stuff is really funny after a few years. These people NEVER stop manipulating, and the media loves them for it.

      • WaterDog says:

        I mean, I totally agree w/ you Wolf, buuuut…

        Bond investors are still buying bonds at bad prices. Still TINA unless you hold cash, short terms, or I bonds.

        Stocks face inflation & recession.

        Bonds face inflation & rising rates.

        Real estate is a dumpster full of gasoline.

        Bonds are still priced in a rate cut delusion. Junk bond spreads are below historical average.

        I-Bonds are my only true love

  50. WaterDog says:

    Separately, did you guys see this puff piece treasure?

    “I’m an SVB employee who lost more than $1 million. Here’s the inside story of our struggle to survive.”

    I feel so bad for them /sarcasm

    Gems like:
    “I’d been eating nothing but bagels for days.”
    —–> Oh the horror! Bagels!!!

    “My equity in the few years I’ve been here used to be worth more than $1 million.”
    —–> In the *few years* they got 1 mil equity. Yes, everybody gets a cool million in 3-5 years on top of salary…

    “First Republic got a capital injection, Signature sold, Credit Suisse sold. And here we are, the people who started it. We still don’t have someone. We’re still in this state of uncertainty.”
    —–> Translation – Bail us out!!!

  51. Gilbert says:

    We have four bank branches within the immediate area, and they all pay ridiculously low interest on deposits. We yanked the bulk of our savings out on one of these banks last October and opened accounts at a bank that at present has an interest rate of 3.85%. Many local people say we should support these local banks because they do a lot of good in the community, but we have to think of our own well being before theirs. I know for a fact that the bank officer’s compensation at most is many tax brackets above ours, so we don’t feel guilty in the slightest.

    • Longstreet says:

      Big money would “spread out” if the $250K limit on insurance was truly honored. Small banks would have more money, exposure for the FDIC would be reduced.
      BUT INSTEAD, we get huge money parked in reckless institutions…..and then they get the rules waived. FDIC exposure increases.
      Thus going forward, we will get MORE concentrations and less money in the local banks, IMO it seems.

  52. Donato Giovine says:

    So, I just have one question at this point (I’m 56 so I’ve seen a lot).
    Is the FED incompetent or colluded in your opinion ?
    There’s no third option unless being a mix of the first two.

  53. sunny129 says:

    Amidst of all these events, there is no public or demand for accountability or culpability. There is of course a pending bill to a separate AG to audit, monitor and manage as overseer of Fed. I doubt that this will be passed into law. Many don’t know how the or the banking system. Banks’ reserve at the Fed are/will start getting 4.95% free money

    Mr. Powell made fractional reserve banking into O% reserve banking in the March 15th of 2022. Wall st is expecting a 100 basis at the end of this year and some wishing and hoping rate cuts will begin this June.

    Consensual hallucination will continue.

  54. Longstreet says:

    Fed is incompetent for some (average Joe) , and colluded with others (you know who they are).
    Why wouldnt Fed funds be tied to a legitimate inflation metric, thus removing the delay from a misidentification (transitory)?
    If inflation was transitory, so could the rate increases.
    If inflation was NOT transitory, then it could be an immediate response to the problem.
    Fed Funds = a 3 month moving average of a legitimate inflation metric.
    But instead we get testimony, on the edge of our seat rate decisions, etc. BS.

  55. CreditGB says:

    The guy that hired me back in 1978 and gave me my first break in business warned that “Bad times breed good businessmen, and good times breed bad businessmen.”

    No truer words were ever spoken. Just didn’t know how profoundly “good times” would impact an entire generation of businesses.

    Your consensual halucination diagnosis fits perfectly.

Comments are closed.