Thought For The Day - 1 May 2023

So, what have we learned from 3 (or so) bank failures? The main issue is that the globe is awash in capital. All three went belly up, due to runs by all accounts, and the not so proximate cause was their collective pile of Treasuries. What does this portend, you may ask? Well, here it is.

The real purpose of banks is to get money from those who have more than they can spend, and give it to bidnezzmen who have spiffy ideas to make stuff at a profit. Now, if there are plenty of bidnezzmen in the country with such ideas, they soak up the banks' moolah and go off to make spiffy things for a profit. They make money and the bankers make money. And, hopefully, we of the consumer class get spiffy new things we find useful. Starship not included.

When there isn't a supply of bidnezzmen with spiffy ideas for making money, what's a scardey cat banker to do? Buy Treasuries!! No risk, some reward, and no analytics need be done as is the case with bidnezzmen with spiffy ideas that may not be so spiffy.

What's even more depressing: for all those years with very low interest rates, even then bankers apparently couldn't find enough bidnezzmen with spiffy ideas to soak up the surplus savings, aka capital. Capital, aka moolah, was cheap but bidnezzmen just couldn't come up with spiffy ideas to employ all that moolah. A failure of imagination. Where were all those RRW bidnezzmen promising that they would make America great again with their nucular powered entrepreneurship? In Cancun with Ted taking in the sun and tequila, it seems like.

As we of the clear headed Left have been saying - look at the data, there's a truckload of capital that lenders can't find uses for, so they load up on Treasuries. Of course, once the Fed goes all Volker 2.0 and puts the Fed rates in a Starship well, balance sheets start looking a little moldy. Some of the RRW claim that valuing Treasuries (really, any asset) at mark-to-market would have kept the current kerfuffule from happening. Riiiiiiiiiight. Rather than a 3 day run, we would have 3 month runs as the balance sheets shrunk day by goddamned day. Volker 2.0 had to hit holders of Treasuries more faster than holders of commercial paper (and Jerry had to know that, or at least his quants did; Jerry isn't an econ or MBA it turns out); at least the latter is tied, more or less, to real economic activity. Well... unless your real economic activity is commercial real estate in big cities like the Big Apple. That may be for a later episode.

It is tough to blame only the bankers; after all, they're just in an intangibles business, so any asset looks as good as its asserted return. Until it isn't when it's all just moolah. Real returns happen from real economic activity, and Treasuries aren't in that ballpark. Not even on the same planet.