A Bank Liquidity Crisis Has Been Triggered By The Fed’s Balance Sheet Contraction | Dan Neilson

Does the ongoing turmoil in the banking world constitute a “Minksy moment”? Daniel Neilson, assistant professor of monetary economic at Bard College at Simon’s Rock and author of “Minsky” (2019), argues yes. Neilson explores the potential of contagion within the banking world, and he makes the case that the Federal Reserve’s Bank Term Funding Program (BTFP) as well as the FDIC backstop might make this banking crisis short-lived. Neilson shares with Jack Farley several in-depth charts on the Fed’s balance sheet that might indicate a turning point and the pair share their views on the Federal Reserve’s meeting on March 22, 2023.

Filmed the afternoon of March 21, 2023.
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Timestamps:
00:00 Intro
05:08 "This Is A Minksy Moment"
18:04 The Takeover of Credit Suisse
28:30 Permissionless
29:33 The Fed's Bank Term Funding Program (BTFP) vs. The Fed's Discount Window
39:32 Can The Banking Panic Be Stopped In Its Tracks?
43:33 Blockworks Research
44:37 First Republic Bank ($FRC) and Bank Profitability
49:32 The Fed Readies Its Dollar Swap Lines
55:43 The Federal Reserve's New Hiking Path
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Disclaimer: Nothing discussed on Forward Guidance should be considered as investment advice. Please always do your own research & speak to a financial advisor before thinking about, thinking about putting your money into these crazy markets.

[BlueWaterSTAX]

This episode was AWESOME. Thanks guys. Blockworks rocks

[andrew.alonzo]

Some economists have projected that both the U.S. and parts of Europe could slip into a recession for a portion of 2023. A global recession, defined as a contraction in annual global per capita income, is more rare because China and emerging markets often grow faster than more developed economies. Essentially the world economy is considered to be in recession if economic growth falls behind population growth.

[greenspand]

The Minsky Moment is actually a phenomenon in Physics called entropic effects. Means a dynamic system becomes more chaotic and entropic. FIAT systems are inherently unstable and fragile because entropic effects are hidden or pushed by printing money.

[LumpsIsHigh]

This is all good stuff, but how did we not touch on CRE and that regional banks have done the most lending on these? Vacant office space, strip malls, etc all over. Also, the Fed stopped buying MBS 8 months ago. The biggest buyer of these has left the market. Now whenever they make loans, it's sitting on the regional banks balance sheets. Credit is going to dry up RAPIDLY.

[brainkill]

Excellent interview, thank you for sharing.

[unitedstatesdale]

After I spoke to my financial adviser I slept like a baby. I woke up every hour and cried.

[detectiveofmoneypolitics]

Economic investigator Frank G Melbourne Australia is still watching this very informative content cheers Frank 🇦🇺

[TrendzSA]

Great to see Matt Damon on Blockworks 👌

[ashwinaditi]

its all good, only couple hundred billion lost . There might be an economical turmoil but there is no doubt that this is still the best time to invest.

[theodoreboosalis]

It took hardly 1T to roll off and now we have a crisis - invented or not. This monetary regime sucks.

[dankurth]

As it had been said before the financial crisis up to now is mainly a liquidity crisis, more precisely a crisis caused by liquidity shortage, and as long as it stays so it also will stay contained, but if it will spill over to become a credit crisis, for example via the Commercial real estate and/or the housing market, it very rapidly can initiate a domino effect, which then would be an imminent Minsky moment in the making.
The very potential for that to happen is real and the cause of it is the extreme imbalance of local and global debt to local and global assets including capital, liquidity and collateral

[josephfdunphymba]

For some reason, the mainstream press is not making a big deal about the 7 insurance companies that went under in Florida. But insurance companies are big investors too, so the loss if additional investors to the markets adds to centralization.

[GenXstacker]

Summary: Oh yeah, this is definitely a Minsky moment. Oh no, everything's fine. Definitely not a Minsky moment.

[pathcoinfirst]

Minsky moment: insufficient fund flow to service debt.

[PhilipWong]

The US national debt is more than $31 trillion, with roughly 28% of it held by foreign countries. The US also has $38 trillion in unfunded Medicare liabilities and $17 trillion in unfunded Social Security liabilities.

The US dollar is the dominant reserve currency, backed by its perceived strength, allowing the US to print unlimited dollars as long as the world maintains trust in it. The US dollar is the backbone of US power, and any actions that undermine confidence in the currency threaten to destabilize its position of dominance. Each unilateral sanction imposed by the US risk damaging the stability and credibility of the US dollar, leading to dire consequences for the nation's power and influence. The US is the only country actively undermining the strength of the US dollar. The freezing of Russia's $300 billion currency reserve by Western governments may lead countries to reconsider investing their funds in US Treasury bonds.

A significant portion of US dollars is held outside the US, estimated at 60-70% of all US dollars in circulation, due to its status as the dominant reserve currency and wide use in international trade and finance. The one trillion dollar trade deficit of the US is a consequence of being the reserve currency, as a strong dollar makes it difficult for US businesses to export goods and services while simultaneously making it easier for other countries to sell to the US. Countries are shipping goods to the US in exchange for green pieces of paper.

The US budget deficit is $1.38 trillion in 2022 which must be paid for by selling more Treasury bonds. The interest on this debt is greater than the military budget. To pay the interest on its debt, the government sells more Treasury bonds, leading to a cycle of increasing debt. The US printing of dollars has been exporting inflation in other countries for decades, but will eventually increase US inflation. Raising interest rates to fight inflation decreases consumer and business spending, increases the trade deficit, and higher interest payments on government debt. Other countries will respond to the US raising of interest rate by raising their interest rate, risking global recession. The Plaza Accord addressed this issue in the past, but it will be challenging to implement such measures now.

A well-run country collects taxes to fund essential services and infrastructure. In the US political system, wealthy corporations and individuals can lobby for tax breaks. The shortfall in funding for the US government has reached $31 trillion. Instead of collecting taxes from wealthy corporations and individuals, the government pays interest to them.

Banks hold Treasury bonds for their safety, liquidity, regulatory compliance, and potential profitability. When interest rates on Treasury bonds rise sharply, the decrease in bond values reduces liquidity and makes it harder for banks to raise cash quickly. This causes depositors to lose confidence, triggering a bank run. In response to the current bank run, the government is issuing Treasury bonds to raise funds to compensate depositors for any lost funds.

The new Bank Term Funding Program (BTFP) help prevents discounted bondholders from taking losses when they have to sell them urgently. The BTFP accepts discounted bonds at face value to be used as pledges for loans to inject more money into the economy. More inflation.

It's a Ponzi scheme. A Minsky moment?

[Uofmdoc]

My head is hurting after listening to this guy.

[personalfreedom]

At the very beginning of the GFC it was caused by a sudden credit contraction due to raising interest rates too quickly. Markets still rallied hard after the first few major bank collapses. Denial was very strong. Everything else that happened was a result of that liquidity drain, as every time you have a rapid credit contraction you will suddenly find all sorts of weird and unstable things in the markets being revealed…. Such as dodgy mortgage back securities in 2008, and this time it was be a dodgy something else.

[WillieFungo]

The content is a little bit backwards looking. How many times do we have to rehash this banking liquidity issue?

[comment]

Rising rates don't automatically translate into making money for the banks. Rising rates mean borrowers will pull back on their borrowing, particularly when rates have risen too fast as they have.

[FirstLast-mlyf]

It seems that rates must go down for banks to survive. The higher they go the worse it gets. And the FED is playing with fire.