“The 10-year note yield is where it was in mid-October [2022] when the funds rate was barely north of 3 percent. Bond market is saying recession/disinflation is in our future,” said economist David Rosenberg, on Mar. 9.
This statement was issued before Silicon Valley Bank (SVB), Silvergate Bank, and Signature bank had their collective meltdowns.
When I began writing this article—last Monday—these banks were still in operation. Then they collapsed. At the time, Silicon Valley Bank was the sixteenth largest bank in the United States, and the failure of Silicon Valley Bank and Signature Bank now rank as the second- and third-largest failures in U.S. banking history, just behind Washington Mutual in 2008.
In very short order, the Federal Reserve, the Federal Deposit Insurance Corp. (FDIC), and the Treasury Department stepped in to stave off a debatable contagion. This undoubtedly changes the approach of the Federal Reserve at the next rate-setting meeting of the Federal Open Market Committee (FOMC), on Mar. 21–22.
While a U.S. bank collapsing in 48 hours is shocking, no one knows how bad the contagion would have been.
While other banks clearly suffered—San Francisco’s First Republic; PacWest Bancorp; Western Alliance Bancorp; and Zions Bancorporation, for example—these are all West Coast market banks (almost exclusively).
The West Coast wields hefty economic power, but its vast land mass and unconnected cities create a separate economy of sorts, often limited in influence to its interstate trading partners and bordering states. Simply put, whatever happens economically in California does not necessarily reverberate throughout America.
The politics are also different. While I do not know the intricacies of California’s financial regulators, The Wall Street Journal ran a very important piece on the meltdown of Silicon Valley Bank, pointing out that the bank was too focused on promoting diversity, underestimating customer withdrawals, and hiring the wrong people. There’s also a chance banking regulators were asleep at the wheel.
On the bank bailout, many were conflicted. Countless venture capitalists called for Silicon Valley Bank’s demise. Meanwhile, PayPal co-founder and venture capitalist David Sacks took to Twitter blasting the Fed and forecasting that the U.S. startup ecosystem was in danger of evaporating.
Even New York tycoon Bill Ackman sounded the alarms, stressing that our regional banking system was at risk of losing autonomy, with bank bailout risk permanently shifting to taxpayers.
Is the West Coast banking disaster a harbinger of what’s to come? Not in my opinion. I think SVB’s demise was due to mismanagement and negligence, while Signature and Silvergate imploded from the crypto/FTX collapse.
Prior to the collapse of Silicon Valley Bank and Signature, most financiers and economists expected the Fed to raise rates by 50 basis points, to 4.75 percent at the FOMC meeting on Mar. 21–22.
The planned increase continued despite facing a 20 percent plunge in shipping container imports the past two months, and record inflation. Inflation is currently at 6.0 percent from January, lower than the four-decade high of 9.1 percent last June, but still very much away from the Fed’s target of 2 percent inflation.
Last week’s job numbers caused even more confusion, as The Guardian reported: “The number was sharply lower than the revised 504,000 new jobs the Labor Department announced were added in January, following months of slowed job growth. But it was far higher than the 220,000 economists had been expecting and comes as inflation has remained stubbornly high.”
- Chad Hagan
