In many ways, We owe the current banking chaos to the changes in monetary policy. That, however, does not mean that the Federal Reserve, the central bank of the United States, is to blame for what is happening. What we actually have is a crisis of confidence. And that relates to mismanagement of risk by individual banks. On the other hand, we can also talk about the lack of supervision by regulators. That means many mid-size and regional banks are, at this point, in the same boat as the failed banks. Should the Fed take a pause to avoid a bigger crisis?
What happened could be summed up as the classic mismatch between liabilities, assets and liquidity. Banks began to lose customers due to high credit costs. And, in order to respond to those withdrawals, they began to sell assets (assuming losses). That is what happened in the case of Silicon Valley Bank. This bank had many clients from the technology sector. Because its customers were not taking out many loans, the bank decided to buy long-duration T-bonds. Then, with the increase in withdrawals, the bank was forced to sell bonds (assuming losses). This situation produced a crisis of confidence. And a bank run was formed. Then: Bankruptcy. Then the intervention.
The rise in interest rates is responsible for discouraging credit and increasing the attractiveness of the bond market. But that is being done to reduce inflation. We well know that a policy of monetary tightening is necessary to lower demand. Obviously there will be pain. That is known. But the alternative is much more painful. What is the alternative? The alternative is to do nothing. The alternative is indulgence, recklessness, and indiscipline. The alternative is to have runaway inflation for a long time.
Credit moves the world. And banks are the meeting point between lenders and borrowers. The proper functioning of banks is vital to the economy. Without credit, the economy collapses. It’s death by suffocation. Because the shortage of money paralyzes everything. Credit is demand. Demand is expense. Expense is income. Income is employment. And employment is well-being.
Now something about trust. Banking is primarily a matter of trust. Trust is earned very slowly. However, it can be lost very quickly. Fear and pessimism can destroy everything. Of course we have learned a lot from history. Today we know how to avoid banking crises. We are no longer in the 19th century. Although many conservatives (by lip service) want to return to the 19th century, we are no longer in the 19th century. At present, we have protection tools and mechanisms. “Insurance”, for example. A “lender of last resort”, another example.
We well know that in Silicon Valley there are many libertarians. And, surely, Silicon Valley Bank had many clients of this political current. Now, I would venture to say that none of them rejected state intervention in this case. Surely, they went to the bank to withdraw their money after the bankruptcy thanks to the State Dad. None decided to lose their money in the name of individual responsibility. And that happens, because we have learned from the past. We know very well the consequences of doing nothing. Nobody wants a banking crisis that can last for years and decades. In these cases, appeals to pragmatism. And intervention measures are accepted as a necessary evil.
This crisis, however, is quite problematic in the context of the fight against inflation. On the one hand, the economic paralysis that a full-scale banking crisis could cause exerts strong deflationary pressures. Panic stops investment. And everything slows down because of the reduction in credit.
On the other hand, hehe injections of liquidity required to protect clients from failed banks and to restore confidence in the system exert inflationary pressures. So much money on the street is not very good for lowering inflation.
What will the Fed do? Here is the dilemma. If, at this point, the Fed takes a pause on raising rates, we could regress in the fight against inflation. On the other hand, if the Fed continues to raise rates just as aggressively, more banks could go under because of it. In other words, the Fed is between a rock and a hard place. Every decision requires a sacrifice.
In theory, the Fed should continue with its policy of monetary tightening. Pain or no pain, the Fed has to do what the Fed has to do. You should focus on the data and that’s it. The banking chaos has to be solved. But it must be solved, in a coordinated manner, with the Treasury and the Federal Deposit Insurance Corporation.
Does this banking chaos benefit Bitcoin? It has already benefited you. There has been a very successful campaign promoting that the bank collapse is good for Bitcoin because it is a better alternative. The bulls are celebrating, because they have managed to convince many people of this anti-establishment narrative. On this occasion, it has been possible to capitalize on the crisis in favor of the libertarian narrative. We cannot deny that. The big question: Is this temporary or permanent?
Retailers get very carried away by campaigns orchestrated from social networks. But it is a mistake to underestimate the power of a narrative. If many buyers believe that Bitcoin is going to go up in price, that may be enough for Bitcoin to go up in price. Because markets tend to fulfill their own prophecies. That is exactly what is happening. The bulls are taking advantage of the crisis, attracting buyers.
In a climate of such uncertainty, volatility is inevitable. Things go up. Things go down. And they do it quite unpredictably. What will the Fed do? We do not know. Before the banking crisis, an increase of 0.25% was expected. Some, in fact, expected an increase of 0.5%. However, now we cannot be so sure. At this moment, optimism is gradually returning to the markets, because the situation seems to have been contained. Everything seems to indicate that the authorities have the matter under control. The panic is behind us. In fact, investors are buying shares in the banking sector again. This optimism, leading up to this week’s meeting, could be interpreted as a sign of confidence for the Fed.
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information presented here should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
It may interest you:
Investments in crypto assets are not regulated. They may not be suitable for retail investors and the entire amount invested may be lost. The services or products offered are not directed or accessible to investors in Spain.