“We could be on tenterhooks all week waiting to see who else is getting taken out,” Breitbart Economics Editor John Carney said in an interview Monday with Fox Business host Larry Kudlow.
Carney highlighted the fears of contagion following the collapse of Silicon Valley Bank (SVB) on Friday and the joint statement on Sunday from the U.S. Treasury Department, the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC) that they were shutting down Signature Bank.
“People are waiting right now to hear if they’re going to announce any more bank seizures,” Carney told Kudlow. “The FDIC does not like to do that in the middle of the week—on a Monday especially. They prefer to wait till Friday. So, we could be on tenterhooks all week waiting to see who else is getting taken out.”
He argued that the FDIC may need to expand their coverage of deposits to quell the panic.
“I think that they’re going to realize that they need to expand the coverage,” he said. “Right now they just guaranteed the deposits at two banks. I think they’re going to pretty quickly learn that that’s not going far enough.”
Kudlow asked if the U.S. government’s announcement that it is guaranteeing all of SVB and Signature Bank’s depositors is a de facto guarantee to cover all bank deposits throughout the financial system.
“It does seem like it [is],” Carney said. “Because if another bank fails, are they going to just tell those guys, ‘Now your deposits aren’t any good. You’re going to lose out, but the Silicon Valley guys were bailed out with their high deposits.’ They can’t do that. So, in essence, they already have guaranteed all the deposits.”
“But I think one of the things we saw in 2008 was that it wasn’t enough to sort of artificially do things. The markets actually demanded that you put the money up—that you actually say the words. So, people aren’t going to assume all the deposits are safe until they see the FDIC and the Fed and Janet Yellen come out and say we’re guaranteeing them,” Carney added.
Kudlow next asked why SVB has yet to find a buyer. Carney identified two possible reasons.
“There could be a problem with [SVB’s] loan book,” he explained. “We don’t know what they had [in their loan book]. On this network, Charlie Gasparino was saying that he has heard that they had a bunch of super risky loans to venture capitalists.”
“We also don’t know who they will allow to buy this bank,” he continued. “This is the sixteenth largest bank. They don’t want JP Morgan, Wells Fargo, and Citigroup getting any bigger. So, who can buy it?”
“The entire regulatory apparatus is standing in the way of letting the banks—the giant, the biggest four banks in the U.S.—buy this. So, who else can buy it? Well, it’s a big bank. It had hundreds of billions of dollars of assets,” Carney explained.
Any buyer of SVB—whether it is a smaller bank or one of the big banks—will inevitably become a big bank because of the acquisition of SVB, Carney noted.
Kudlow asked how all of this will impact the Federal Reserve’s rate-hiking fight against inflation.
“What is the Federal Reserve going to do now? Are they going to pause? Are they’re going to raise a quarter, raise a half, fight inflation? What do you think?” Kudlow asked.
Carney said a 50-basis point hike is now likely “off the table.”
“They’re not doing a half. They were on Thursday afternoon; they were still thinking half. Today, they’re thinking maybe a quarter,” he said. “If this continues all week what we’re seeing happen to banks, [then] I think they’re going to announce that they’re pausing. One thing I think they won’t do is announce an emergency cut because I think that would actually spark an even bigger panic.”
In Monday’s Breitbart Business Digest, Carney noted:
It seems increasingly likely that the banking panic will force the Fed to pause or at least slow down its interest rate hikes at the next meeting. The implied odds of a 50-basis point hike fell to zero on Monday, according to the CME Group’s Fedwatch tool. The odds of no hike at all rose from zero last week to over 20 percent. Some market watchers are calling on the Fed to cut rates in the name of restoring financial stability.
Kudlow recalled former Federal Reserve Chair Alan Greenspan’s decision in 1998 to cut the fed funds rate three times. “You don’t think that’s going to happen now?” he asked Carney.
“I don’t think so,” he said. “That was also a mistake. That helped inflate the tech bubble and made the consequences of that a lot worse. [Greenspan] also had the advantage that he didn’t have nine percent inflation at the time. We have inflation so bad that having the Fed back off now I think would just make inflation worse.”
“I think the Fed should pause,” Kudlow said. “Chill out. Let their powder dry. It’s okay. They can resume the tightening. Let’s see what happens with the contagion.”
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