Short and concise analysis on concepts or recent events in the financial markets from the ASG Capital Team.
After the collapse of the Silicon Valley Bank and the organized takeover of Credit Suisse by UBS under the protection of the Swiss Central Bank, financial authorities, both sides of the Atlantic have finally taken the plunge.
Through a list of various liquidity programs and subsidies of all kinds, they have in effect backstopped the banking system, just as their Japanese counterparts did in the 1990s.
If the experiment in Japan is anything to go by: at that time, local private banking institutions were ring fenced and protected by the authorities and not allowed to fail.
Japanese banks were encouraged to merge, forming what turned out to be massive zombie conglomerates.
Interest rates were driven down close to zero to accommodate the funding costs over the long term of this reorganization of the banking sector.
New credit expansion was initially constrained, while old loans gone bad were being amortized away. Less lending creation meant less economic growth and a weak expansion of the economy running into the last decades.
As a result, the Japanese Central Bank became the main backstop of its own capital markets, accommodating its own ailing banking industry through a QE forever program which is still ongoing today. 30 years on, the Bank of Japan now owns large parts of its own country’s debt and even chunks of its own local stock market.
Could Western central banks be engineering a similar kind of capital market and banking takeover? Could they in effect be turning Japanese? Quite possibly.
The reaction to the debacle of Credit Suisse certainly seems to be a move in this direction. If at the end of the day, the responsibility for administering the financial system ends up squarely in the lap of Western central banks, this would be the final stake in the heart of free market capitalism.
After the end of the Soviet Union, we would be welcoming in a state-run administered financial economic system 2.0.
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.