Danny Blanchflower and I have released this press release this afternoon:
Too little, too late,
Central bank reaction to the growing global banking crisis
is too timid to save us from a meltdown
Prof David Blanchflower[1]
Prof Richard Murphy[2]
20 March 2023
For immediate release
Professors Danny Blanchflower and Richard Murphy issued their report to the House of Commons Treasury Select Committee on the future of UK central bank monetary policy on 17 March 2023[3]. Events have already overtaken their recommendations.
In the USA:
- Silicon Valley Bank has failed weeks after a clean audit report on its accounts.
- Signature Bank has failed.
- First Republic Bank has needed $30bn of financial support. Its share prices have continued to fall and it has been downgraded by S&P.
- The Federal Reserve has been forced to guarantee all deposits in banks under threat to prevent runs on banks.
- There are calls to guarantee all deposits in the unregulated regional banks to prevent them moving to the safer, regulated big banks.
In Switzerland:
- Credit Suisse (CS) has failed weeks after auditors failed to warn of the possibility.
- UBS has taken over Credit Suisse, wiping out the sums owed to SFr16bn of bondholders in the process.
- UBS has been offered guarantees of SFr10bn for unknown losses on the Credit Suisse balance sheet.
More broadly:
- Central banks have been forced to coordinate the provision of dollar credit lines to those banks who need them to meet their dollar obligations.
- Six central banks acted together as they did in October 2008.
Professors Blanchflower and Murphy say in response that:
- It is now apparent that there is significant downside risks in many bank balance sheets, as there was in 2008. This is because of the failure of banks to provide for losses on:
- Treasury and other bonds are now overvalued because of still rising interest rates.
- Mortgages where the mortgagee can no longer afford the debt.
- Non-performing car loans.
- Corporate loans to companies hit by economic downturns.
- The problem is no one knows who has that risk, and in what amount. But we do know it exists and the risks are to the downside. The fact that UBS had to be given Sfr9bn to cover risks on the Credit Suisse balance sheet proves this. This is likely repeated on other bank's balance sheets, and especially those with relationships with Credit Suisse, as many will have.
- The result will be a flight of cash to security. In the US small bank depositors will flee to JP Morgan Chase, Bank of America, and other big banks. In the UK there will be a rush to government savings accounts. In Europe there will be a flight to ECB backed bonds. Banks could suffer runs as a result.
- This problem is already being solved in the US by the Fed offering unlimited depositor guarantees. These will soon be universal. The UK, Eurozone and others will be forced to offer similar guarantees or there will be a flight into US banks if they offer bigger guarantees than those offered domestically.
- Systemic risk in banking has increased dramatically. So big is that risk that the impact of measures already seen over the last month is likely the equivalent of a 150bp to 200bp monetary tightening within financial markets.
- The point of rate rises was to tighten financial conditions. That approach has now backfired. That means that central banks have to reverse course now to prevent deep recessions developing.
Blanchflower and Murphy note that US financial markets are already pricing in three interest cuts totalling 75bp by December 2023[4]. This is too little, too late.
It is essential that at their meetings this week the US Federal Open Market Committee and the Bank of England Monetary Policy Committee cut rates by at least 150bp to get ahead of the impending financial and economic disaster looming. They also halt their quantitative tightening programmes that withdraw liquidity from financial markets when that is now very obviously counterproductive.
Professor Danny Blanchflower said “The time for prevarication is over: central banks have to show that they can rise to the challenge of the moment now. Nothing less than a radical reappraisal of market risk can do that, and cutting rates and cancelling quantitative tightening is to the way to show that they understand that.”
Professor Richard Murphy said “There is a new systemic crisis in banking and, as ever, the cause is hidden losses within bank balance sheets. We need short term market reactions from central banks, but in the long term we need systemic change. That failed after 2008. It cannot this time.”
ENDS
[1] David Blanchflower Is Bruce V. Rauner Professor of Economics, Dartmouth College, USA; Research Associate, National Bureau of Economic Research; and Professor of Economics, Adam Smith Business School, University of Glasgow. He blogs at https://sites.dartmouth.edu/blanchflower/ and tweets @D_Blanchflower
[2] Richard Murphy is Professor of Accounting Practice, Sheffield University Management School, a chartered accountant and economic justice campaigner. He blogs at http://www.taxresearch.org.uk/Blog/ and tweets @RichardJMurphy.
[3] https://www.taxresearch.org.uk/Blog/2023/03/19/the-bank-of-england-needs-an-urgent-change-of-strategy-on-interest-rates-quantitative-easing-and-quantitative-tightening-if-they-are-not-to-crash-the-economy/
[4] https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
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This crisis has been on the cards for some time, as you (and others) have noted.
As background reading, I found Radihika Desai’s book illuminating
(free pdf found here: https://www.taylorfrancis.com/books/oa-mono/10.4324/9781003200000/capitalism-coronavirus-war-radhika-desai )
and in the context of that, saw this piece by Jem Bendell
(see here https://jembendell.com/2023/03/20/evidence-and-theory-for-how-monetary-collapse-has-been-made-inevitable/)
arguing (I think I’ve read that right) that “… monetary collapse has been made inevitable” and that what we are seeing and living through is precisely that. Not sure that I agree with Mr Bendell’s view of what money is, or the inability of governments to do anything about it though.
I hope this is of some interest to your (expanding) readership.
Bendell’s views on deep adaptation to climate change are also worth studying.
I wouldn’t ever suggest that you shouldn’t advocate for the policy that you consider most economically sound. But your analysis of the current situation suggests that panic might be the main problem. You don’t provide (so far as I can see) any new real evidence that the problems at Credit Suisse are actually more widespread. Don’t you think that the psychological impact of sudden and dramatic rate cuts might outweigh their substantive economic validity — so far as the balance between confidence and panic is concerned? Much like the immediate reaction to the Truss / Kwarteng budget?
Aside: Looks like the auditors are going to get a hammering again. Probably rightly so. Any thoughts on systemic reasons why that profession should apparently so consistently fail?
Have you not noticed that central banks are panicking?
Don’t you think they might know they have reason to do so?
And the most recent bailout in the USA is failing?
How much evidence is needed
No. What I have noticed is that they seem to be very nervous. And no doubt with good reason to be.
But seems to me that its you who are advocating they turn that nervousness into panic.
Slow and steady ought, I think, to be the order of the day. Perhaps a modest or even token rate cut of 0.25 or 0.5%.
But I’m aware that you believe rates rates are much too high, anyway. Credit Suisse == confirmation bias?
Ah, slow and steady, which has failed every time in the past
This sounds ridiculous, and I expect it to be shot down.
It starts from reading Richard and the merits of double entry accounting.
Then asking: Where is the money?
While interest rates are at rock bottom, the government issues a bond for £1,000
The BoE raises interest rates to 4% and the value of the bond falls to £800. (arbitrary figures)
Where is the £200?
I think it no longer exists.
If I am wrong, where is the money?
If I am right, it is even more peculiar.
It means that every time a central bank increases the base rate, billions of £s, $s or €s disappear into thin air, or reappear when the base rate goes down.
Yes there has been bad risk management, but if that is all, who now has the money that SVB Credit Suisse et al. have lost?
The money still exists
The government owes it on redemption of the bond
The debt is real
So the money still exists
Markets have just devalued it fir the time being
There still seems to be something rather puzzling going on here.
If the BofE bought back the bond at its current market value of £800 then the £200 would still exist in the sense that it would, in effect. be recorded as a debt owed by the government to itself.
However the government would have traded a promise to pay £1000 when the bond matures for a promise to pay £800 now. The money would seem to have, in effect, disappeared.
It is negative interest
What I find so baffling about the interest rate hikes is the ASSUMPTION that the banks were all in rude health and would not be affected by them?
What do the central banks actually know about the private banking sector?
Do they care?
And just how misleading is the external audit system and internal accounting systems? Or has this been done on purpose to reduce the amount of banks in the system?
This whole show is one that cannot be trusted at all. And yet it is still here.
“There is a new systemic crisis in banking”…I really don’t think there is. What exactly are you referring to?
Ok you disagree
Why?
Danny and I reckon we have the ability to spot it. Danny has the best possible track record on this. What is your track record, and argument
Richard, a note.
From Democracy Now: Senator Elizabeth Warren called on Sunday for an independent investigation into the collapse of Signature and Silicon Valley Bank. Warren also called for Biden to fire Fed Chair Jerome Powell, whom she blames for helping undo financial regulations and for continuing to raise interest rates despite forecasts it could cost 2 million people their jobs.