During his post-FOMC meeting press conference, Federal Reserve Chairman Jerome Powell insisted that the US banking system is resilient and sound. He said this despite the failure of First Republic Bank just days before the Fed meeting. Peter Schiff appeared on the Claman Countdown on Fox News and argued that Powell and others are wrong. He said the US economy is in a financial crisis worse than in 2008.
Andy Brenner, head of international fixed income at National Alliance Securities, also appeared in the segment. He started things off by saying problems in the banking sector are “not over by a longshot.”
Liz Claman asked Peter why the Fed raised rates another 25 basis points despite the shakiness in the banking sector. Peter said they did it because that’s exactly what the market expected.
That’s what the Fed does — what the markets expect.”
But Peter said the move by the Fed isn’t going to do anything to bring inflation down.
The elephant in the room with respect to inflation is the fiscal policy – the debt, not the ceiling – but the fact that we’re running these massive deficits. But until the Federal government reduces spending, these quarter-point increases are going to be completely ineffective.”
Peter said the problem is Powell refuses to call Congress out and mention that the driving force behind all of the inflation is reckless government spending.
And as long as the government keeps spending, inflation is going to get worse, and so is the current financial crisis. Nobody wants to admit we’re in a financial crisis. It’s worse than the one we had in 2008. It’s just getting started. Ultimately, the Fed is going to cut. But it’s going to cut as inflation is accelerating.”
Liz played a clip of Jerome Powell saying that the Fed is now paying particular attention to tightening credit conditions and its impact on bank lending. She also pointed out that Peter has previously said that the Fed has screwed up everything that is a function of interest rates. So how will these things specifically impact the economy moving forward? Peter said it was going to affect banks in particular.
I have warned for years that the banks could start collapsing for the precise reason that they’re collapsing now. The Fed kept interest rates at zero for so long. That’s what allowed these financial institutions to load up on overpriced, low-yielding Treasuries, mortgage-backed securities, and other loans. Plus, US government auditors from the FDIC encouraged the banks to buy these long-term Treasuries and mortgage-backed securities because they gave them favorable accounting treatment. The banks didn’t have to mark them to market as long as they could pretend they would hold them to maturity. So, the whole house of cards was erected by the Fed and the US government. And now it’s collapsing, and they’re acting like they have nothing to do with it. They’re trying to figure out how to put out a fire that they lit. And of course, they’re not putting out the fire. They’re pouring gasoline on it.”
Brenner noted that there are about $1.9 trillion in unrealized losses on bank books. Liz pointed out that a study from Stanford and Columbia Universities found 186 US banks are in distress. Brenner reiterated, “No question, the banking crisis is not over by a longshot.”
Peter said everybody who has debt is going to feel the pain of rising interest rates.
It makes that debt hard to service. And of course, there’s a lot of debt that is still low because it hasn’t matured yet. A lot of corporations, a lot of people in the real estate market, particularly commercial real estate, borrowed money two, three, four, five years ago at a really low rate. And the higher rates are when those loans mature, it’s going to be that much harder for them to get the financing to roll them over. And then you have the prospect of very disorderly bankruptcies throughout the economy.”
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Originally Posted at schiffgold.com