Friday
The banking crisis is not finished; it has only just begun.
The problem that brought it on is ‘mismatch of duration’. Banks borrowed short (deposits) at low interest rates, and lent out long at high interest rates. Excellent business – unless there is a run.
Then it is a recipe for disaster.
Which is where we are now.
The banks cannot pony up their depositors’ funds that they borrowed for the short term, because they lent they out for a longer term.
But that is not all – far from it. The next problem to surface will be the tumbling value of commercial properties. These represent the asset side of the banks’ ledger. This problem will become more serious as the economy continues its collapse.
Then there is the problem of rising rates causing residential mortgage delinquencies. This allied threat to the asset side of the banks’ ledgers has also only just begun.
When the pain becomes a serious threat to the solvency of banks then interest rates will be lowered. But it will be too little too late. Job losses will see this problem continue to grow.
The solution?
Good question for which I have no comforting answer.
We are living in an inside-out, upside-down and back-to-front world where there are only problem, no solutions.
Other than the unthinkable.
At a foundational level, the banks, all banks, are insolvent. Technically, they have been for years.
“If something cannot go on forever, it will stop” Herbert Stein
I suspect that the road, along which the can was being kicked, has reached a dead end.
I pray that I am wrong and that it can continue for a while longer.