By Nick Massey
May 2, 2023

The Fed’s snake oil remedies

Learn more about the Federal Reserve's plan for combatting bank failures.

It’s been said by some that, with chemotherapy, there is a fine line between killing the cancer and killing the patient. You could probably say the same about the Fed in their efforts to monitor banking institutions. As you probably know from some of my past columns, I’m not a big fan of the Federal Reserve. I haven’t gone on a good ole fashion rant in a while, so here goes.

On March 9, 2023, Michael Barr, the top bank regulator for the Fed, said, “The banks we regulate, in contrast, are well protected from bank runs through a robust array of supervisory requirements.” Then, the Silicon Valley Bank episode happened, followed by Signature Bank, followed by the “shotgun wedding” between Credit Suisse and UBS Group AG. Oops!

The second-largest and third-largest bank failures in U.S. history dominated the financial headlines in March 2023. From my point of view, the failures were expected. After hearing Fed Chairman Jerome Powell say something like he would raise interest rates until something broke, we took him at his word and were waiting for things to break. Now, they’re breaking. And now, somehow, somewhere, sometime, by someone, the losses must be dealt with. Who will pay them?  

Who is going to get left holding the bag? President Joe Biden said, “No losses will be borne by the taxpayers.” If you believe that, I’ve got some swamp land available for sale. Where were the “fact checkers” and truth seekers on the alert for misinformation and lies? They must have been taking the day off. For if there were one thing you could count on, it is this: Ultimately, the taxpayers will have to bear the losses, probably in the form of inflation. The hope is that as more banks break, the Fed will have to bail them out, and eventually, the Fed will abandon its rate increases or at least pause them. Consumer prices will rise; households will pay. Who else would cover the losses? Who always pays? In my opinion, it’s you and me.

The “zero rate” fantasy of the Fed after 2008 cost U.S. household savers billions. And thanks to the “reform” measures of Barney Frank and Elizabeth Warren in 2010, which were intended to prevent another banking crisis, banks are now saddled with more unrealized losses on their portfolios of government-backed securities. That is not just a “paper” loss. That is a real loss. Someone will have to pay.

Usually, you have to pay to borrow money, which forces you to think carefully about what you’re going to do with it. If the interest rate (after inflation) is 4% (known as the “hurdle rate”), you need to find an investment that will give you more than 4% interest. Otherwise, you will stumble on the hurdle, i.e., lose money and drop in the esteem of your friends, family, and rivals.

In a normal world, there aren’t a lot of investments that will pay off for you for the very obvious reason that when there are a lot of good investments, people borrow to make them, and the hurdle rate rises. The system is normally self-regulating, preventing too much speculation and too much debt. But along comes the Fed with its snake oil remedy and interest rates below the inflation rate. Suddenly, the “hurdle” disappears. Almost any gamble—cryptos, NFTs, new tech, Treasury bonds—could pay off.

And so, it came to pass between 2009 and 2022 that people borrowed wantonly. They invested recklessly. And they lost prodigiously. All fine and good, but what now? Will the deciders decide that they—the ones most responsible for the borrowing mistakes—will pay the losses? Barney Frank, Elizabeth Warren, Joe Biden, Janet Yellen? No, in their infinite wisdom, they will decide that someone else will pay.

But this is the nature of the regulation-rich, responsibility-poor, judgment-free world. No one should have to bear the costs of his own ill health, bad judgment, incompetence, job loss, or bank failures. Whatever the need, the misfortune, or the misconduct, someone else should pay for it. The insurance company, the government, the rich, or someone should bail you out!

This all begs the question, “Where does the money to do this come from?” In the case at hand, the Feds now say the bank’s wealthy shareholders will lose but not the wealthy depositors. Currently, deposits are insured by the FDIC up to $250,000. But 97% of Signature’s deposits were for more than that amount. They were accounts used by hedge funds, corporations, and speculators, not by Mom and Pop savers.

The bank itself no longer has the money to make those depositors whole. So, where will the money come from? The deciders who were supposed to make the banks safe? Or the Wall Street hustlers who used the Fed’s cheap money to make billions or trillions over the last 12 years? Or, the Fed governors, whose ultra-low interest rates created the bubble that is now losing air? Dream on.

President Joe Biden says the taxpayers won’t pay a cent. Whoopee! The losses have vanished. What will happen next? Ray Dalio describes a scenario in his newsletter “Markets Insider.” In his March 2023 newsletter, the Bridgewater Associates founder called the bank turmoil a “very classic event in the very classic bubble-bursting part of the short-term debt cycle.” The cycle lasts roughly seven years, Dalio explained. In the current phase, inflation and curtailed credit growth catalyze a debt contraction, according to Dalio, and that causes contagion until the Federal Reserve returns to a policy of easy money. Gee, I can hardly wait.

Most likely, a few more bank failures and the Feds will take another giant step forward toward a risk-free world. But remember. The Feds cannot make the losses go away. They can only move them around from the people who deserve them to the people who don’t. There, I feel better now. Thanks for reading.

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About Nick Massey

Nick Massey is a retired financial advisor and CFP, and former President of Massey Financial Services. He can be reached at