Federal Debt Limit

bwilson4web

bwilson4web

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Heard on Public Radio news, SVB got in trouble because they had too much of their assets in long term, low interest rate, USA bonds. A conservative, low risk investment until ... one political party started talking up 'not extending the debt limit.' Suddenly these SVB investments did not look so good. Trying to sell them to stay liquid ... necessary but bad idea.

Who else is invested in US Government bonds?

Bob Wilson
 
This explains it pretty well.
https://www.npr.org/2023/03/19/1164...nt-bonds-turned-toxic-for-silicon-valley-bank
Basically poor risk management. They bought a bunch of long term low yielding govt bonds to lend out money to venture capitalists. Very profitable at first, but when interest rates rose, they failed to sell those bonds before they lost their value. Long term interest rates are less than short term. So bond holders were dumping them in favour of shorter term bonds which have gone up with the higher interest rates, leaving SVB with reduced capital. When depositors figured this out ahead of the bank, they pulled their deposits which then forced SVB to sell those long bonds at even more reduced value. Eventually they ran out of capital (liquidity crisis) to pay out the remaining depositors who wanted out.

They should never have been bailed out. The depositors were all millionaire and billionaire individuals and venture corporations. Once that precedent is set, who is next. Banks can now gamble with risky assets without concern of going under. They could hit it lucky, or as in this case, rack up big losses. But if they are bailed out, they lose nothing for their high risk gambles. That is called "moral hazard".
 
If the debt limit fails: first default the high interest rate bonds.

BTW, I like a progressive income tax but don't fault 'millionaire and billionaire' wealth. So I would prefer the FICA limit be eliminated and all FICA rates reduced.

Bob Wilson
 
R P said:
They should never have been bailed out. The depositors were all millionaire and billionaire individuals and venture corporations. Once that precedent is set, who is next. Banks can now gamble with risky assets without concern of going under. They could hit it lucky, or as in this case, rack up big losses. But if they are bailed out, they lose nothing for their high risk gambles. That is called "moral hazard".
Click to expand...

Couldn't agree more
 
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I don't think congress is going to allow the government to default. All of the Democrats will vote to raise the debit ceiling, and I'm sure at least 9 Republicans will vote to increase the debit ceiling too.

R P said:
They should never have been bailed out. The depositors were all millionaire and billionaire individuals and venture corporations. Once that precedent is set, who is next. Banks can now gamble with risky assets without concern of going under. They could hit it lucky, or as in this case, rack up big losses. But if they are bailed out, they lose nothing for their high risk gambles. That is called "moral hazard".
Click to expand...

The bank shareholders lost all of their money. If you want to fix this issue, then you need to accept more government regulation.

One option is the charge large depositors an additional insurance premium over and above to the money the banks pay for FDIC insurance.

US Treasuries are not normally considered risky investments. They do have interest and inflation risk, so the risk isn't zero.
 
marshall said:
The bank shareholders lost all of their money. If you want to fix this issue, then you need to accept more government regulation.
Click to expand...
That part was OK. Govts should never bail out shareholders of any company (like in the past). When you invest, you need to do your own due diligence. More risk could equal more profit, but you could also lose big. That is your choice and decision.

A big problem with SVB was the lack of oversight by the local San Francisco Fed President, Mary Daly.
https://nypost.com/2023/03/17/why-woke-frisco-fed-chief-missed-silicon-valley-banks-warning-signs/

https://www.bloomberg.com/news/articles/2023-03-29/us-regulators-grilled-on-preparations-for-digital-bank-run?leadSource=uverify wall
 
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