Discussion about this post

User's avatar
MICHAEL  POWER's avatar

Without detracting from this thread, there is another trillion Dollar imbalance hiding in plain sight: the US current account deficit. Cracks in the support mechanism that sustain it are increasingly evident. In trade, the number of countries bypassing US Dollar settlement are growing: Brazil this week indicated a willingness to start receiving Renminbi for at least its exports to China. In capital, Greater Arabia is visibly recycling a larger part of its trade surplus towards capital investment in East Asia.

Currently the US accounts for 60% to 65% of ALL current account deficits being run worldwide...and thus, for the Dollar to 'hold', the US must also run 60% to 65% of the world's capital account surpluses. But for how much longer?

Your column points to a Trillion Dollar imbalance WITHIN the Dollar World. I highlight a Trillion Dollar imbalance BETWEEN the Dollar World and the Rest. The two are not disconnected, especially since your imbalance has brutally highlighted the fact that the so-called RISK FREE RATE is anything but. (Was it ever thus?). The surplus runners of the world have noted the US's Achilles Heel with alarm.

Fragility in one world will exacerbate fragility in the other.

Expand full comment
Arthur Silen's avatar

In regards to Silicon Valley Bank (California) and Signature Bank (New York), getting rid of the bad actors by imposing what amounts to lifetime bans on employment in the financial services industry would be the appropriate response to the moral hazard problem, where CEOs like Gregory Becker were clearly out of their depth. They, and their closest associates and allies within that industry need to find other, less ruminative employment. No working at banks, or businesses that banks rely on. The industry is shot through and through with conflicts of interest. The result will be fewer buccaneers and more people who behave like operators of nuclear power plants.

It's been far too easy for people to enrich themselves by taking on unfathomable risk in which they had virtually no skin in the game. It is a matter of record that Becker and his management team were repeatedly admonished by Fed regulators that they were treading on thin ice, and that their portfolio of long-term maturity dates (read: longer than years) Treasury bonds rendered their reserves vulnerable to a bank run, especially when more than 97 percent of their depositors owned accounts far in excess of the standard $250,000 maximum on deposit that would be guaranteed by the FDIC. SVB managers were using this business model to pad their personal wealth by being the 'go-to' guys in the Silicon Valley startup community. Their quest to build their personal wealth was always their primary concern. The real moral hazard was allowing these people to remain at the helm, knowing that they were indifferent to the risks they were taking.

So I say, don't let them ever get closer to a bank than an ATM machine. The banking system is a de facto public utility, so treat it that way. Scalability counts, and risk increases geometrically with size.

Expand full comment
14 more comments...

No posts