Opinion Piece: The US Treasury Might Create a New Form of Quantitative Easing
Quantitative Easing: the introduction of new money into the money supply by a central bank.
Towards the end of 2021 and beginning of 2022, the Fed announced they would be ending the quantitative easing they had provided throughout the worst parts of the COVID-19 Pandemic. In addition to providing the stimulus checks, they also purchased securities on the open market. While they can’t pull back the stimulus checks, they started selling the securities they purchased. After a few banks collapsed, the US Treasury is considering a new policy for banks that has implications I do not see people talking about. This potential new policy will probably never be called quantitative easing, and I might be crazy, running wild with hypotheticals but I'll tell you my thoughts and let you decide.
First, lets start with a brief summary:
Within the last month, one US bank entered voluntary liquidation, two US banks were taken over by the FDIC, and one Swiss bank was purchased not so voluntarily. In the US, the three banks “collapsed” within a week. Silvergate (SI) entered voluntary liquidation first, then Silicone Valley Bank (SVB) was taken over by the FDIC, and lastly on a Sunday Signature Bank (SBNY) was taken over by the FDIC as well. Credit Suisse, the Swiss bank, fell shortly after.
Immediately upon the FDIC takeover of SVB, there were questions about the overwhelmingly large number of accounts (roughly 96%) which exceeded the FDIC insurance limit. Also, if you combine SVBs assets with SBNY, they slightly exceed (without accounting for inflation) the assets of Washington Mutual (WaMu), the largest bank that collapsed in 2008. SVB was also the premier bank for most Venture Capitalist, and the businesses the VCs funded. SBNY created Signet, a major on/off ramp for cryptocurrencies (and involved in other things unrelated to the story at hand). And Credit Suisse, hopefully I don’t have to explain how large of an institution that was.
Luckily, when the FDIC took over SBNY on Sunday, they also announced all bank deposits would be fully funded, even those exceeding the FDIC limit. Honestly, I could try my best to explain the whole situation but it would make this blog much longer than it needs to be so I would recommend taking a look at these three resources:
Now that you understand (or already understood) what is going on, lets progress with my thoughts.
Before the FDIC/Fed announcement on Sunday (hours after the SBNY take over) people were genuinely worried about a number of different things, from $3.3bil of USDC reserves being locked in SI to hundreds of small companies not knowing how they would make payroll. While the announcement that all accounts would be fully funded eased the majority of concerns, the impactions from the US Treasuries current and potential future actions scare me.
Over the past two years the Fed has been working on ending their quantitative easing, which in addition to raising interest rates, has put banks in this precarious position with their assets and deposits. As we saw last week, the Fed is still increasing interest rates so this struggle for banks will not end. As the Protos article discussed, the US Treasury is trying to get ahead of everything by potentially creating this multi-trillion dollar fund to provide access to short term loans at favorable rates for banks of all sizes who are struggling to meet withdrawal demands. While the Treasury would be taking assets from the banks as collateral for the loans, as we saw with the bank sales, the banks with struggles usually have losses on their assets.
For example, the UK arm of SI was purchased for $1, UBS is taking a multi-billion euro haircut on the assets of Credit Suisse, SBNY’s loans to NY land lords are reportedly billions underwater, and SI had over $60 billion of long term bonds at ~1.7% interest. If the US Treasury takes assets similar to these in exchange for loans, it would introducing new money into the economy because most of these assets would need to be sold at a loss or held for years (delaying the replacement of the loan cash). Seems like a new form of quantitively easing to me.
The reason I’m scared is because we usually see either quantitative easing or raising interest rates. The first to stimulate an economy, the second to get an economy under control. Having both, together at the same time, would be every problematic, in my opinion. If the US Treasury goes ahead with the creation of this fund, It would allow the Fed to raise interest rates without concerns for banks. While simultaneously not punishing banks for risky asset purchases.
Rising interest rates hurts all of us normal people. The interest rates at which we can borrow money will continue to go up. People who got adjustable rate loans will have a very different repayment experiences once their rate adjusts.
While not punishing banks for risky asset purchases wont immediately hurt anyone and will actually help depositors guarantee their money, in the long run I am scared. As Johnny Harris discussed in his video, we are trusting our banks to lend out 90% of our deposits allowing a multiple effect to 10x our money. These bankers need to be responsible how they handle our money, who they lend our money to, and what they purchase with our money.
I agree, punishing the individual or business for the banks mistakes by making them lose their money is not the move. Yet I do not think the government fully ensuring all bank deposits is the move. Yes, that would remove the risk of depositors losing their money but it also could create an environment of so little risk, the lending practice become horribly unstable.
To conclude I just want to say: Stay safe. Take care of yourself and those you care about. Remember, not everything is about money and we should be thankful we get to exist at all.