In 2020, as the Pandemic began and the stock market crashed in mid-March, and was followed by massive quantitative easing (printing money), UK economist, Frances Coppola, had begun discussing in public the problem of inflation that could be expected.
Today, with war raging in eastern Ukraine and the Covid-19 pandemic continuing, we are on the verge of recession as banks begin to fail. We cover the previous six months as the U.S. and Europe went into winter with war, and then we discuss the current banking crisis.
Coppola writes on her blog, [Silicon Valley Bank accounting] “released in February revealed that it was backing highly volatile uninsured deposits with long-dated government securities that were falling in value and, as a result, becoming increasingly illiquid.
To make matters worse, it was flattering its capital position by classing most of these securities as held-to-maturity even though it was obvious that in the event of a bank run it would have to raise cash by selling or pledging them at fair value.
SVB was desperately short of liquidity and, on a fair value basis, had negative equity. But management sat on its hands - until Silvergate failed. ”Already warned by BlackRock, SVB apparently did not listen and when the bank took action it was far too late and nowhere near enough.”
In the wake of Silvergate came the panic and collapse of SVB, once again bringing financial crisis in front of the public and requiring public assistance.
Between the time I contacted Frances for this interview and a couple of days, Credit Suisse, "a Globally Systemically Important Bank" already having troubles, began to go into collapse only to be saved by the Swiss National Bank, though at a massive loss.
Last week could have been far more devastating than it was, however, with the response there is still the dilemma facing the U.S. Fed, which is to continue to increase interest rates and risk more bank failures or to see rising inflation. Either way is systemic risk as Quarter 2 looms in the near future.
Frances Coppola, MBA says she: “used to work for banks. Now I write about them, and about finance and economics generally. Although I originally trained as a musician and singer, I worked in banking for 17 years and did an MBA at Cass Business School in London, where I specialized in financial risk management. I’m the author of the Coppola Comment finance & economics blog, which is a regular feature on the Financial Times's Alphaville blog and has been quoted in The Economist, the Wall Street Journal, The New York Times and The Guardian. I am also a frequent commentator on financial matters for the BBC. And I still sing, and teach. After all, there is more to life than finance.” Forbes
Layne Hartsell, MSc, PhD is a board member at the Korea IT Times and is a research professor at the Asia Institute, Berlin/Tokyo in energy, economy, environment (3E).
