by Michael

The widespread panic that we simply witnessed is unquestionably not what the bureaucrats on the Federal Reserve have been anticipating.  Following the second largest financial institution collapse in U.S. historical past on Friday and the third largest financial institution collapse in U.S. historical past on Sunday, the Federal Reserve unveiled an unprecedented rescue plan that was supposed to finish the banking panic.  In case you have not seen it but, you possibly can view the small print on the official web site of the Federal Reserve proper right here.  Crucial a part of the plan is the Fed’s resolution to totally assure all the deposits at Silicon Valley Financial institution and Signature Financial institution.  As Goldman Sachs CEO Lloyd Blankfein defined on Twitter, this daring plan of action was imagined to have “eliminated causes for financial institution runs”…

A number of banks might have points like SVB, however just a few. Govt actions eliminated causes for financial institution runs.   Largest banks have a lot more durable regulation and stress testing. Nervousness and volatility excessive, however sharply decrease rates of interest, fed probably on maintain, are sturdy positives for markets.

— Lloyd Blankfein (@lloydblankfein) March 13, 2023

However there was only one drawback.

It didn’t work.

Proper now, social media is being flooded with messages from peculiar People that withdrew cash from their financial institution accounts on Monday.

Right here is only one instance…

This morning I started withdrawing my cash out of my checking account at Wells Fargo it may take a number of days due to the massive sum of money I’ll take the cash and purchase gold bullion and put the gold into my very safe gun secure #BankRuns #WellsFargo #bankrun

— Johnny7 (@stachowia1) March 13, 2023

When the Fed introduced their plan, I understood that they have been implicitly guaranteeing all the deposits in the complete system.

However that’s solely as a result of I’m always writing about these items.

For sure, most People didn’t get the message, and so now Invoice Ackman is asking on officers “to explicitly assure” all the deposits in the complete system…

‘Our financial system won’t operate successfully with out our neighborhood and regional banking system. Due to this fact, the Federal Deposit Insurance coverage Company must explicitly assure all deposits now. Hours matter,’ Ackman stated.

‘We have to hear from our gov’t that it’s explicitly dedicated to preserving our system of smaller banks. Whereas every small financial institution isn’t “systemically necessary” like @jpmorgan or @Citi, collectively they’re as, if no more, systemically necessary.’

Will an express assure work?

Perhaps.

However what our leaders have tried to date has positively not labored.

On Monday, Joe Biden publicly declared that the American individuals “can trust that the banking system is secure”, however that actually didn’t reassure anybody.

As an alternative, regional financial institution shares plummeted so dramatically that buying and selling in dozens of them needed to be briefly halted…

Buying and selling was briefly halted in dozens of regional banks this morning as shares fell by as much as 75 p.c when the market opened after Joe Biden claimed ‘US banking is secure.’

The Biden administration has made it very clear that traders usually are not going to be bailed out when any of those banks fail, and the carnage that we witnessed on Monday was completely staggering…

San Francisco’s First Republic shares misplaced 61.8% on Monday after declining 33% final week. PacWest Bancorp dropped 45%, and Western Alliance Bancorp misplaced greater than 47% as regional financial institution shares fell sharply. Zions Bancorporation shed about 26%, whereas KeyCorp fell 27%. Different monetary companies have been additionally underneath strain, as Financial institution of America slipped 5.8%, whereas Charles Schwab tumbled greater than 11%.

Until federal officers explicitly assure all the deposits in the complete system, individuals are going to maintain pulling cash out of small and mid-size banks, and inventory costs will proceed to fall.

At this level, even CNBC’s Jim Cramer can see that this disaster is unquestionably “not over”…

“It’s really easy to switch cash to the banks which might be ‘not in hassle,’ that we’ve got to cope with one thing which says you can not transfer, interval, finish of story,” Cramer stated. “So it’s not over. I do wish to warning that you probably have cash in a few of these banks, effectively, they’re clearly going to punish you. We don’t know which of them are which, clearly, and I don’t wish to trigger any run. It’s straightforward for any of us to trigger a run at this second.”

Because of quickly rising rates of interest, Treasury bonds value a whole bunch of billions of {dollars} which might be owned by U.S. banks have declined in worth dramatically.

This has left a 620 billion greenback gap that won’t be stuffed any time quickly…

Fallout from the Silicon Valley Financial institution collapse has directed consideration to a $620 billion ticking time bomb within the banking system that has the potential to spell doom for the monetary system.

SVB’s meltdown was partly brought on by a chasm between its belongings and what they have been value out there. Ultimately, SVB bought a few of these belongings, spooking traders and triggering a run on the financial institution. However SVB isn’t alone, as banks throughout the USA have been sitting on $620 billion in unrealized potential losses on the finish of final yr, per the Federal Deposit Insurance coverage Company.

In the meantime, there’s a a lot larger drawback that’s looming.

As Michael Hudson has astutely noticed, a serious derivatives disaster is probably brewing…

There may be an excellent bigger elephant within the room: derivatives. Volatility elevated final Thursday and Friday. The turmoil has reached huge magnitudes past what characterised the 2008 crash of AIG and different speculators. Right this moment, JP Morgan Chase and different New York banks have tens of trillions of greenback valuations of derivatives – on line casino bets on which method rates of interest, bond costs, inventory costs and different measures will change.

For each successful guess, there’s a loser. When trillions of {dollars} are wager on, some financial institution dealer is sure to wind up with a loss that may simply wipe out the financial institution’s total internet fairness.

If the present chaos within the monetary world causes the derivatives bubble to lastly implode, it might doubtlessly be an “extinction degree occasion” for our deeply flawed monetary system.

I’ve not written concerning the derivatives bubble shortly, however it really is an existential risk to our total society.  In accordance to Investopedia, the entire dimension of the derivatives market has been estimated to be “over $1 quadrillion on the excessive finish”…

The derivatives market is, in a phrase, gigantic—usually estimated at over $1 quadrillion on the excessive finish. How can that be? Largely as a result of there are quite a few derivatives in existence, out there on just about each attainable kind of funding asset, together with equities, commodities, bonds, and forex. Some market analysts even place the dimensions of the market at greater than 10 instances that of the entire world gross home product (GDP).

When this mountain of danger lastly comes undone, there gained’t be sufficient cash in the complete world to repair it.

Anybody that tells you that our monetary system is “basically sound” is mendacity to you.

We actually are on the verge of the unthinkable, and so that you higher hope that our leaders are capable of finding a option to rescue the system earlier than it’s too late.