In early March, U.S. banks faced substantial unrealized losses, ominous figures hinting at potential disaster. At the end of 2022, these losses hit $1.7 trillion, nearly matching the total equity of U.S. banks, which stood at $2.1 trillion. Rising interest rates slashed the value of assets like U.S. Treasuries and mortgage-backed securities, mainstays in bank portfolios.
What happened was a relentless rise in interest rates, causing fixed-income securities to plummet in value. Banks, heavily invested in government bonds and mortgage-backed securities, saw their holdings battered. Unrealized losses aren’t immediate disasters, but they loom ominously. If market conditions worsen or banks sell assets at depressed prices, these paper losses could become crushing realized losses. Compounding this peril, nearly $7 trillion of U.S. bank deposits are uninsured by the FDIC. A panic-induced withdrawal spree by uninsured depositors could jeopardize hundreds of billions in deposits, pushing the banking system to the brink.
Regulators like the Federal Reserve and the Treasury scrambled to maintain stability. They guaranteed all deposits, both insured and uninsured, at teetering banks like Silicon Valley Bank and Signature Bank. Treasury Secretary Janet Yellen and business leaders have sought to calm the waters, reassuring consumers about the safety of their deposits.
The banking sector stands at a critical juncture. These unrealized losses, while dormant, pose a looming threat that could erupt into a full-blown crisis if market dynamics worsen or depositor confidence falters. The need for vigilance and robust regulatory oversight has never been more paramount.
Rates will need to come down soon. Commercial real estate is crashing, the federal budget can’t handle the interest payments from rampant spending, and the residential real estate market is on the verge of a harsh correction. Many homeowners, misled by the “marry the house and date the rate” advice, are struggling to pay their bills as they wait for a chance to refinance. Long-term treasuries held at massive losses by banks will only correct with lowered rates. But because the Fed let inflation spiral out of control by calling it transitory for over two years and pausing too early last year, they risk letting inflation skyrocket if they cut rates now.
The Fed has backed itself into an inescapable corner with idiotic monetary policy. Now, they must let a recession curb inflation before drastically lowering rates in response. If they cut rates without a recession, inflation will surge again. The Fed has consistently failed at its job. It should be dismantled.
They will need to bring rates down at some point pretty quickly, because commercial real estate is going tits-up in a major way, the federal budget can’t sustain these interest payments on Joe’s $1T-every-100-days spending spree, the residential real estate market will harshly…
— Uncle Milty’s Ghost (@his_eminence_j) June 4, 2024