Transcript:

In 2022, certain analysts expected the Federal Reserve to tighten financial conditions until they broke something.

In its efforts to engineer some kind of credit constraint after years of financial hubris. It was unlikely a balance sheet demolition of its smaller banking network would have been the Fed’s objective in this breaking something scenario. When Silicon Valley Bank got into trouble, it seemed, on paper, to be just an unfortunate collateral damage. Please excuse the pun in their monetary policy equation.

Unfortunately, the potential chaos in the flapping of the Silicon Valley default wings was set to cause a more dangerous chain reaction in the industry. For now, the problem seems to have been contained, addressed and nipped in the bud.

However, the authorities’ reaction to this bank failure reveals which toy effectively got crushed by their tightening of monetary conditions rolled out in 2022.

And the answer looks to be their own rules put in place after the great financial crisis of 2008. This last weekend’s proposed save the system mechanisms, which involve ring fencing of bank deposits and bank collateral, is looking to bring us right back to the good old bailout years.

Under the guise of a limited facility, which we all know it can’t be, the message sent to the banking industry is clear. We will now make up the banking rules as we go along. After all these years of efforts to comply, in just two days the authorities have made a complete farce of their own regulations put in place since 2008.

As the French would say: “Tout ça pour ça” (All that fuss for nothing!).

This podcast is for information only. It should not be considered as investment advice. We would recommend seeking professional investment advice when allocating to any asset.