Welcome to our Friday mailbag edition!
Every week, we receive great questions from readers. And every Friday, I answer as many as I can.
This week, the conversation turns back to the national debt and concerns I shared in the March 8 mailbag edition…
Nomi, I agree with your assessment of our national debt. The issue that can’t be resolved is the excessive debt everywhere (household, corporate) with no TRUE economic expansion. When the next economic calamity occurs, the Fed will be in no condition to mitigate its effects.
I read that the banks with Congressional support have forced the Fed to back off proposed increases in capital requirements for banks. Why does the overnight lending market exist? We have unintentionally built a house of cards.
– Steven K.
Hi Steven, thank you for your thoughtful questions and observations.
Banks have many ways to game the system, including access to overnight and one-month loans and inadequate capital requirements.
Plus, the more debt we have as a country and society, the greater the financial burden on the banking system.
Excessive debt has severe consequences, including financial instability and slowing economic growth.
Escalating debt creates a vicious cycle, where high debt levels eventually reduce consumer spending and business investment, further stifling economic expansion.
The next financial crisis – one caused by problems in the commercial real estate (CRE) market – would be amplified by high debt levels.
As we saw with the Silicon Valley and other banks crisis last March, it could force the Federal Reserve to step in and print money. And that would intensify the distortion between markets and the real economy.
That makes the Fed more subservient to Wall Street and less to taxpayers. I wrote more about how that situation impacts your money earlier this week (read it here).
That’s because the Fed’s traditional tools, such as lowering interest rates or quantitative easing (QE), might not be effective enough at stimulating the economy if it first has to deal with supporting bank bailouts.
That could result in an economic downturn, increasing hardship for individuals and businesses. And yet, as you note, the Fed backed away from proposed capital requirements increases.
Fed Chairman Jerome Powell said he is aware of Congressional concerns that U.S. banks might have to set aside more capital to absorb losses under a new set of proposed global bank capital regulations called Basel III.
Powell intimated he would fight to reduce those requirements.
This concerns me. It shows that for all the Fed’s talk about wanting to preserve stability and fight price inflation, it’s less worried about maintaining financial stability if that upsets the big Wall Street banks.
Inadequate bank capital requirements could lead to higher bank failures and financial instability. With less capital set aside to absorb potential losses, banks are more vulnerable to credit problems.
This can harm the overall economy, resulting in a credit crunch, reduced lending, and a slowdown in economic growth.
Higher bank failure and financial instability risk can have far-reaching economic consequences. It can lead to confidence loss in the banking system.
Then, as we saw last March, depositors could withdraw their funds, exacerbating a crisis. This can trigger a domino effect. As banks fail or become more cautious about lending, they reduce credit access for businesses and individuals.
Contraction can further exacerbate the financial crisis. That’s because reduced spending and investment can result in job losses, decreased income, and a downward spiral in the overall economy.
And there’s another problem aside from long-term debt.
The Fed’s overnight lending or repo market has created a house of cards. Short-term Fed funding encourages banks to take risks.
Wall Street’s reliance on this short-term funding – during a liquidity crisis or just because it can access it – make the system more fragile.
On the other hand, implementing stricter bank capital requirements would foster greater financial stability. This would make it less necessary for the Fed to save banks, preventing the next financial crisis from spiraling out of control.
Meanwhile, it’s critical to remain wary of the banking system and the Fed’s support of it.
To all my readers, I can’t stress enough how crucial it is for you to divide funds in the banking system between banks to reduce your own bank concentration risk. In other words, don’t put all your money in one bank basket.
I also encourage all my readers to own a little Bitcoin and tangible assets that hold value even if the financial system crumbles.
Growing your wealth by buying gold is essential. It has already hit the first of my two targets for this year of $2,400.
And that’s all for this week’s mailbag. Thanks to everyone who wrote in!
If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition.
I do my best to respond to as many of your questions and comments as I can. Just remember, I can’t give personal investment advice.
And if there are any other topics you’d like me to write about, I’d love to hear from you. You can write me at [email protected].
In the meantime, happy investing… and have a fantastic weekend!
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins