Discover more from Peter St Onge, Ph.D.
Next Step in the Bank Crisis: Locking you into a Failing Bank
When the Fed's out of Options, You are the Last Man Standing
A growing chorus is warning the next stage in the bank crisis could be freezing your bank account to save dying banks. As Luke Gromen put it, they “chain the threater doors shut before lighting it on fire.”
A few weeks ago, flamboyant money manager Hugh Hendry was on Bloomberg warning that continuing floods of money out of bank deposits and into money markets could drive the Treasury and the Fed to *lock* people into their banks, adding, “I would recommend you panic.”
Meanwhile, Izabella Kaminska, a former editor at the Financial Times, tweeted that since we've now discovered banks apparently don’t hedge interest rate risk at all -- which is now killing them -- regulators may conclude the only way to stabilize the banking system is to “bring back bank frictions” — "frictions" as in make it difficult or impossible to withdraw your money.
Kaminska wrote, “the next big thing in fintech will no doubt be "FrictionTech" or "smart liquidity" or whatever dumb thing they decide to rebrand lock-ups as.”
In fact, since the bank collapses the Fed has become obsessed with such "friction," putting out paper after paper worrying how fast bank runs have become — what took weeks even in 2008 now takes days or even hours. The subtext is they'd very much like to slow down or stop withdrawals.
A CBDC, naturally, would make this much easier. While the only monetary escape would either be moving assets abroad, parking in physical gold, or Bitcoin self-custody.
What’s Next for the Bank Crisis
At this point, by assets the 2023 bank collapse has now officially exceeded the 2008 collapse. What’s scary is that, going by 2008, the early collapses are only the beginning, the prelude to a mass culling of banks crawling off to die. In raw numbers, the 25 US banks that collapsed in 2008 were followed by a flood totalling 440 banks in the following 4 years — that’s 110 per year. Compared to 2 bank failures per year pre-crisis.
So we haven’t even begun to see what’s coming for us. Interest rate hikes typically take 12 to 18 months to really hit the economy, and we’re barely 8 months in. Lining up against the 2008 timeline implies the real storm isn’t even hitting for another 6 months to a year — these are the first breezes of the coming hurricane. And yet here we are.
The problem is we're already in the largest bailout in American history, consisting of trillions in deposit guarantees paired with cheap loans on hidden bank assets that lost value. But all those bailouts don’t actually solve the problem, which is that depositors are fleeing 0.2% bank accounts for 5% money markets. That literally drains the money from the bank, which forces them to sell those crap assets, which breaks the game.
Meaning the *only* solution is to cut rates, in fact to slash them towards 0.2%. But the Fed is incapable of doing this since inflation would soar, which would drive Congress to take away it's independence: the one thing it holds most dear.
So the Fed is out of options and the last man standing is you.
Final point on de-dollarization: capital controls or locking bank accounts would obviously also hit foreigners, who would lose access to their dollars. A supposed global reserve asset you can’t withdraw would be catastrophic for the US dollar’s already draining reserve status.
Sign up to my free email list to get weekly posts on the most important news in economics and freedom.
See you next week!
Subscribe for free to receive new posts and support my work.