On Thursday, Federal Reserve Chair Powell delivered a speech titled Financial Stability and Economic Developments, in which he drew comparisons between the current economic situation and the last two recessions. His first comparison was to the Great Recession of 2007-09, stating that it required:
… extraordinary interventions by governments around the world … including $700 billion in taxpayer funds to recapitalize banks, a suite of Fed emergency liquidity facilities, as well as government guarantees on bank transaction accounts and money market mutual funds.
He then acknowledged that despite this great intervention, the recession “brought misery to countless millions.”
The 2020 recession was then cited, although specific figures on the level of support provided by the Government or Federal Reserve were not mentioned. However, he did emphasize that:
Ultimately, the authorities had to support financial markets again as part of the extremely forceful monetary and fiscal response to the public health emergency. The banking system, however, was now far more resilient than it had been before the reforms and thus well positioned to absorb the shock.
According to the Washington Post, Congress authorized $4 trillion in spending, highlighting:
The $4 trillion total of government grants and loans exceeded the cost of 18 years of war in Afghanistan.
As for the Fed, its balance sheet grew by nearly $5 trillion during the 2020 “crisis.” While this chart may be second nature by now, it is still worth referencing to observe the comparison between the 2007-09 recession and the 2020 recession.
It remains crucial to emphasize that we have yet to see any indication from policy makers, Federal Reserve members, or Chair Powell that suggests a departure from their strategy in response to the next crisis. Whether the response involves another $10 trillion in monetary expansion, give or take $5 trillion, is anyone’s guess, but it would be a tough sell to say the Fed will take no action of its own accord after a century of intervention.
Powell concludes by discussing the collapse of Silicon Valley Bank (SVB), two other undisclosed banks, and the failure of Credit Suisse, which was a globally systemic important bank until it collapsed. This is the point where the true nature of the situation is revealed, as we are presented with nothing but excuses and corporate missteps, which facilitated the need for government intervention.
Powell offers some explanations:
… SVB’s vulnerability came not from credit risk, but from excessive interest rate risk exposure and a business model that was vulnerable in ways its management did not fully appreciate, including a heavy reliance on uninsured deposits.
And
When SVB failed it was clear that a number of standard assumptions, even though they were informed by hard experience, were wrong.
Even though it’s impossible to predict the future with certainty, what should be clear is the recurring pattern in the Fed’s crisis playbook. When something inevitably goes wrong, the Fed avoids taking responsibility and shifts the blame to factors such as corporate greed, oversight, or unforeseen errors. They then argue that the only solution is to implement unprecedented levels of intervention. Policy makers will swear that many lessons were learned, and it won’t happen again, but that’s only to buy them time until the following crisis.
