A 2008 Banking Crisis?

Let’s start off with my definition for a “macro-economic distortion”. I have seen a few “definitions” around the ol’ interwebs, that sort of make me chuckle. Some of these definitions are flat out wrong.

A distortion can come in a few ‘varieties’. Allow me to focus on Policy Distortions for a moment. Let’s put this in a non-technical manner, in a way that a layperson could understand.

A macro-economic distortion that is the result of policies by a Government or a Central Bank; is one which creates an environment that causes a change to the underlying economy; and that change could not otherwise exist in the absense of that policy enactment. There is more to it, but that is one way to think about it. As I said, I want to keep this simple. I do not want to ‘geek out’ too much here and start talking about ‘models’, but there is a component of a Policy Distortion that has to do with τ (tau), or time of which we need to always be aware.

I want to keep this brief. And I am going to circle back to the above concept of time and a macro-economic distortion as the result of Policy.

I was there, and I was trading in 2008. In 2008 … due to the leverage that was permitted due to the kinds of OTC products that were being traded? That risk became systemic and nearly brought about an end to the financial world. I’m not being hyperbolic, or metaphoric. To this day, I don’t think people really understand just how close we came to the end of everything. That overleverage on usually safe MBS’s, became systemic risk. A risk to the entire financial system.

So let me just say that when I look at the current problem in Banking? (And to be sure, it is a serious problem) I could be wrong .. but I do not see a repeat of the 2008 Banking Crisis. I do not see a collapse of the financial system. Let’s look at some data. I pulled up the Credit Default Swaps, total history (including 2008) of various financial institutions.

Bank of America (BAC) CDS – Total Max years

Citigroup (C) CDS – Total Max years

Simon Property Group, L.P. (SPG) CDS – Total Max years

The Goldman Sachs Group, Inc (GS) CDS – Total Max years

Wells Fargo & Company (WFC) CDS – Total Max years

Ally Financial, Inc. (ALLY) CDS – Total Max years

Is there some stress among some banks? Sure.

Is it a problem that is systemic to the entire financial system as we experienced in 2008? As I said, I could be wrong? But I’m just not seeing it.

Now very obviously, we have a problem in banking.

Why?

Let me circle back to what I mentioned at the outset.

Nearly a decade of ZIRP (A zero Interest rate policy), and the preponderance of the Central Bank and Fiscal Policy makers to rush to ‘free money’ as a means of liquidity provision has created severe macroeconomic distortions. And what is interesting to me, is (again, circling back to what I mentioned at the outset) … is the τ involved. Not only was there a rush to ZIRP, but there was a rush to ZIRP and to stay at 0% for an extended period of time. I will get into this in a future entry, but from 2008 until 2016, we heard of the absolutely necessity of keeping the Federal Funds Target rate at 0%.

Eight … years.

As early as 2013, many commentators such as Stanley Druckenmiller … “The Big D”, and others ( 1 ) were warning that while there was perhaps a case to drop the Target Rate in 2008 to zero? That it was dangerous to continue to do so, because macro-economic policy distortions would enter the economy as a whole, causing problems later in time.

And here we are.

In 2020, there was a rush, not to lower the interest rate by a bit, and examine the data. But to rush immediately to ZIRP, and stay there. While at the same time, Fiscal Policy makers flooded consumers with free money. Time and time again. As I stated in the Inflation article.

This policy bias towards immediate ZIRP for longer periods of time, has created macro-economic distortions as a result of policy. This policy bias … over time, created an environment and behavior that could not have existed otherwise if that bias had not been present. Distortions have a way of building upon one another, and creating larger problems. And the poor behavior we see in the Banking example; is such a distortion making itself manifest.

Further? I would go on to say, that it is merely one example of such distortions that have crept into the Financial system, over a long period of time.

But more about that in the future ….

1 ) Institutional Investor: Stanley Druckenmiller: https://www.institutionalinvestor.com/article/b14zbjyzkgjd5b/stanley-druckenmiller-quantitative-easing-is-a-major-mistake